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by Luke Mullins
After its historic decline brought the global economy to its knees, the U.S. housing market is gearing up for a long-awaited recovery. Real estate experts expect home prices to hit bottom in late 2010 or early 2011 before -- finally! -- heading north again. But what shape will the rebound take? Are we in for another boom? Or will we have to settle for sluggish growth? Here's the outlook for home price appreciation through 2020.
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The trajectory of real estate values will vary a great deal from one market to the next. But home prices at the national level should appreciate at "pre-bubble" rates once the market re-establishes its equilibrium, says Kenneth Rosen, chairman of the
Modest increases in home prices will be supported by larger paychecks, says Mark Fleming, chief economist of First American CoreLogic. "In the long run, house prices basically go in lock step with wage growth," he says. With the unemployment rate holding near double digits, that might not seem encouraging. But Fleming says that while the labor market is a late arrival in modern-day economic recoveries, jobs always return in some form. This time around, he expects high-tech companies and research-based industries like biotechnology to lead a resurgence that eventually sparks employment and wage growth throughout the economy. Inflation-adjusted personal incomes should increase roughly 2 percent a year from 2010 to 2020, according to Moody's Economy.com.
The "echo boomers." Meanwhile, demographic forces should boost demand for housing over the next decade, according to
A more restricted flow of credit should prevent another housing bubble from forming anytime soon, says former Fed governor Lyle Gramley. Banks, hammered by souring loans, have raised their lending standards for even well-qualified borrowers. And federal regulators have taken steps to eliminate some of the reckless lending practices that precipitated the crash, such as banning lenders from making a higher-priced mortgage loan without first scrutinizing a borrower's ability to repay it. Tight mortgage credit "is going to persist for quite some time," Gramley says.
Still, housing bubbles haven't been driven to extinction. That's because the real estate market is cyclical. Regional housing markets have gone from boom to bust for as long as people have had mortgages. And because the booms generate so much wealth for homeowners, investors, and influential industries -- like home builders -- it's unlikely that Congress can work up the courage to snuff them out with tough regulation, says Mark Calabria, a former senior
So what's the best way to play an asset that will appreciate 1 or 2 percentage points above inflation during periods of stability but can swing wildly in times of imbalance? Simple: Buy a house because you'd enjoy living in it, not because you expect blowout returns. Then you'll never be disappointed by its quarterly statements.
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The Future of Home-Price Appreciation | Luke Mullins