To the Point: Penn State professor discusses U.S. housing market

September 15, 2008

University Park, Pa. -- Across the nation, an increasing number of stories are surfacing about people owing more money than their houses are worth. The real estate market is still in a turmoil and even people with good credit histories are having financial problems. How could this be?

From the mid-1990s until 2006, housing prices increased dramatically in parts of the United States, including Southern California, Florida, Phoenix and Las Vegas. The rest of the country also experienced increases but not to the same extent. In 2006 sales slowed down and prices began to decline -- substantially in some markets. Sub-prime mortgage borrowers with adjustable rate provisions faced serious rate increases that were coming due, and many of those homeowners could not afford higher mortgage payments. Because housing prices were plummeting, selling or remortgaging was not a reasonable option. Many owners defaulted on their loans, causing banks to foreclose on their homes.

This difficult cycle is still under way today and falling housing prices are also affecting those who have good credit histories. In general, the real estate market in every community has an enlarged inventory of houses for sale.

According to Austin Jaffe, chair of Penn State's Department of Insurance and Real Estate and the Philip H. Sieg Professor of Business Administration in the Smeal College of Business, many observers say prices will continue to fall until inventories are no longer increasing. He says it would help if there were fewer new homes coming on the market from new construction and fewer homes in foreclosure. Jaffe discusses the current market and the pros and cons of renting out homes instead of selling.

What used to be considered the normal length of time for a house to be on the market, and how does that compare today?

There are numbers for this, which vary from place to place, but there's no question that "time on the market" is now a lot longer -- two to three times longer even in healthier markets like State College. Here, it used to take an average of 30 to 40 days to sell but now it takes twice as long. In some communities there is such a big inventory that houses won't sell for months and just sit for a long time without any buyer interest.

How is the house rental business right now?

In some markets in big cities, market rents have increased because there is more interest on the renter's side to rent until housing prices stop falling.

Do you think people looking to sell their homes should consider renting it out rather than trying to sell it?

This is one response to the difficult real estate market -- convert homes into rental properties. People think this is easy, but houses don't rent themselves out and owners have to wear property management hats. Some people have the tendency to think houses manage themselves, but property managers know otherwise.

It's costly to own your house if you don't live there -- you still have mortgage payments and property taxes due. It's tempting to strategize to rent out the space to cover such costs, but on the other hand, the concept of selling it is to get more money than you paid originally. You don't have that by renting; you decide to postpone the sale and hope for higher prices in the future. Right now, though, selling at a capital gain is hard to do. If you can't sell and want to rent out your home, there are firms that perform the property management function for you but they charge a significant fee, which may take away from the cash flow advantage of renting it out.

What if a person gets a new job and moves out of state -- should they rent or try to sell from out of state?

If owners move out of town and intend to rent out their homes, they need to seriously consider hiring an experienced firm to do maintenance and management, because they will be too far away to do it themselves.

How has all of this changed Americans' interest in real estate?

The housing market is a lot different now; there has always been a love affair in this country with real estate. There was this belief that has since been shattered -- "housing prices will always go up." People with a little extra time and limited money used to make real estate purchases with a large mortgage, but I think that has now stopped, at least for the time being. Buying real estate is much less attractive when prices are not rising and may not increase for a few years.

More and more stories are surfacing about people owing more money than their houses are worth. How can this happen?

If you buy a house and borrow a large percentage of the value of the house – 90 percent or more – and if prices begin to fall quickly, suddenly you can owe more than the value of your house. There are many markets where prices have fallen 10 percent or more so that an “upside down” mortgage situation is a reality today. There's no equity left, and homeowners wouldn't be able to get as much as they owe if they tried to sell their home in this situation. 

  • Austin Jaffe

    IMAGE: Penn State
Last Updated November 18, 2010