There is a veritable geyser of data tracking housing today. From existing-home sales, to house prices, to new-home permits, to starts—housing metrics abound. We know more now about home building activity than we ever have before. The crash of the housing market six years ago only served to heighten the coverage of this data and underline the importance of the housing industry with respect to the overall economy. But with the increased volume of data, we may have lost some perspective. We cannot see the forest for the trees.
I have the great privilege of working for a magazine that has been around for a long time. I also have the great fortune of housing all of the bound galleys from our 78-year history in my office. Looking at them on the office shelves, the volumes are like the rings of a tree. The fat years were really good years for advertising. The skinny years, like the last several, were periods when the market was smaller. I can, therefore, see at a glance the ebb and flow of the health of the housing market over time. So here is a question whose answer seems easy but is not readily apparent: What is a “normal” housing market?
I have seen and heard economic data suggesting that 1.6 million new homes per year is a normal level of activity going back to the 1960s. This year we will climb back to a level approaching 1 million new homes—so we are still below normal. But the concept of normal becomes more elusive when you consider that homeownership has been supported by the government since 1954. The mortgage-interest deduction and the creation of government-sponsored entities Fannie Mae and Freddie Mac as a means to enhance liquidity in the market are just two examples of support for homeownership that we take for granted because we have enjoyed them for so long. For the record, this magazine will be the first in line to clearly annunciate why these supports are valuable and worthwhile now and into the future, but if the Washington watchers are right, a housing policy overhaul is coming, potentially as soon as this spring.
This overhaul may include the following: a reduction in the amount of a mortgage-interest deduction that can be claimed; an elimination of mortgage-interest deductions on second homes; and the elimination of government-sponsored entities, just to name a few of the changes being considered. If some or all of these changes are made, will the result then constitute a normal market for new homes? Would a less-supported housing market be less susceptible to cyclicality? Would more people rent than own a home?
When we look at the housing market from 1995 to 2006, we obviously cannot call that normal. It was a bubble. But what about the boom-bust cycles we saw in the ‘70s and ‘80s? Clearly, housing activity in those decades experienced higher highs and lower lows as a result of underlying market support. As housing policy reform takes center stage in Washington over the next six to 12 months, I think it is worthwhile for us to consider the possibility of a new normal, one that is every bit as vibrant as past cycle peaks, even though the levels may be slightly lower.