Krugman Predicts U.S. Housing Market Bottom…Someday

Paul Krugman, the Nobel Prize-winning  New York Times op-ed columnist and Professor of Economic and International Affairs at Princeton University, said in today’s column that in regard to the housing slump and the general economic downturn in the U.S., “…the seeds of eventual recovery are already being planted.”

That’s the good news.

The bad news is, it could take awhile.

Krugman explains it this way:

“Consider housing starts, which have fallen to their lowest level in 50 years. That’s bad news for the near term. It means that spending on construction will fall even more. But it also means that the supply of houses is lagging behind population growth, which will eventually prompt a housing revival. Or consider the plunge in auto sales. Again, that’s bad news for the near term. But at current sales rates, as the finance blog Calculated Risk points out, it would take about 27 years to replace the existing stock of vehicles. Most cars will be junked long before that, either because they’ve worn out or because they’ve become obsolete, so we’re building up a pent-up demand for cars.”

Yes, yes! The law of supply and demand! Now there’s something an ordinary person can get his or her teeth into!

The down side of course is that it could be years before this pent up demand actually stimulates a recovery.  Japan lost a decade. The Great Depression was only halted by a World War, and we certainly don’t want another one of those given the state of modern weaponry. The closest thing Krugman could find that resembles the current downturn was a recession that followed market panic in 1873. That recession lasted five years, and after a brief recovery was followed by another that lasted three years. Any way you slice it, the consensus seems to be that the housing market, while seeded for rebound, might well lie dormant for another decade give or take a couple of years.

A recovery has to come from somewhere. If people need houses and cars but have no money to buy them, then pent up demand is just an echo of better days. From a foreign investment perspective, two questions ought to present themselves immediately:

1) When should I jump in?

2) How long am I prepared to hold this property?

In Michigan and other states where the foreclosure rates are very high, government agencies are scrambling to advise people who just lost their homes on how best to reenter the rental market. While such advice may seem obvious (um, go rent something?), the situation is actually more complex and difficult that you might imagine.

The reasons are many.

Most apartment complexes require good credit histories, which people who have just lost a home do not have. Most houses owned by private individuals rent for more than what they would be mortgaged for, which puts them outside the range of what these folks can afford.  Federally-subsidized housing is scarce and waiting lists are typically two years long or longer. And finally, many people who are losing their homes to foreclosure have also lost jobs or simply have inadequate income to meet the actual cost of putting a roof over their heads.

What this means is that, while the seeds of a housing recovery may take years to sprout, the need for affordable rental properties is already critical. Such a need can be good news for a foreign investor with the caveat that wading into the waters of low income rental housing can be treacherous. Still, it’s something to keep in mind when looking at property right now. Can it be rented? Can it be rented profitably? What kind of help will be needed to maintain the property, collect the rent, and stay above water until such time that the place can be put back on the market and resold?

The foreign investor who can take current trends into account and answer these questions correctly, could stand to make quite a lot of money down the road.  Five years, ten years, who can say how long it will take? But imagine the return if it all falls into place. The opportunity is there now. It’s just not an easy or low-risk opportunity.