We’re Not There, Yet

June 2012Articles In the Zone

Any careful reader of the daily business news will have noticed that, at long last, the residential market is showing signs of a strong recovery. That’s on Monday. By Tuesday, average home prices have again dipped across the major markets. By Wednesday building permits are up. Thursday brings news that the banks are planning to flood the market with foreclosed houses just as soon as prices firm up a bit. On Friday, prices are firming! Or not, as Saturday brings yet more bad news. On Sunday, we just avoid the business press altogether.

Can this be the new normal? It has, at least, been the norm long enough to seem very familiar. Given the traditional role of residential construction as a major driver of previous recoveries, it is hard to exaggerate the importance of guessing right about where the market will ultimately head. After nearly half a decade of recession, it is natural to assume that there is tremendous pent-up demand for homes, and that releasing that demand could drive a powerful upward spiral of increased sales, development, employment and pricing — benefiting just about everyone. However, the trigger for this rebirth has remained elusive.

Complicating the analysis further is the real possibility that we are living through a long-term change in social expectations regarding housing. It is notoriously difficult to distinguish a long-term change from the ups and downs common to any economy, especially in unsettled times like these. Moreover, an extended recession in itself will, over time, re-shape expectations. We naturally tend to assume that the suburban, single-family home (whether attached or detached) will always remain an essential part of the “American Dream,” because that model has prevailed for so many years. If this recession is essentially the same as the last few only bigger — a quantitative, rather than a qualitative change — then the eventual recovery of the traditional home building industry should be inevitable. It may be, however, that larger forces in the economy — the aging of the Baby Boomers, structural changes in employment opportunities, evolving preferences for urban living arrangements, etc. — are eroding the lure of the suburban home, especially for first-time home buyers living in urban areas after graduation.

From my office window in downtown Philadelphia, I can see two cranes: a tower crane for a large new apartment tower on Chestnut Street and a smaller portable crane adding stories to the former AAA office building next door, which is being converted to apartments as well. If the young people who will be moving into those units, and who have filled so many other buildings in Philadelphia, decide to stay in Philadelphia long-term, the new normal, when it arrives, may look quite different than the market that endured for so many years.