Orthodoxy and the Housing Market

My title reminds me of the well-known joke about ‘Elephants and the Jewish problem.’ Nevertheless, the connection between real estate and Orthodoxy is not far-fetched at all. In fact, I’m going to argue that the most important event in the last year for Orthodox Jewry has been the decline in housing prices around the country.

As everyone who has not been asleep for the last thirty years knows, housing prices have had an incredible surge, and have been one of the best investments anyone could have made during the period. People have been saying for quite sometime that real estate is a “bubble” and will eventually burst. I think it was sometime before my bar mitzvah when I first heard this remark and I’ve been waiting ever since. It looks like this time it might be for real.

The best evidence is what the housing stocks are doing. To use a technical term from stock market analysis, they are all in “drerd.” The declines have been greater than fifty percent in every housing stock on the big board, and only a brave man would say there isn’t going to be another twenty percent decline in the coming year. Many of these stocks are even trading below book value, which they are wont to do during severe declines in housing activity. Housing starts are down, the inventory of unsold existing homes is at a thirteen year high, and builders’ confidence is at a fifteen year low.

The optimists think it will be a “soft landing.” The pessimists think it will be a bust. Many people bought houses as investment properties speculating that the price will keep on going up. Now that the market has turned many are trying to get out with a profit, however small. Others panicked and bought homes they couldn’t afford because they were worried they would be priced out of the market. It’s important to recognize the market has turned without a major increase of interest rates. Those of us old enough can remember the days under Jimmy Carter when Fed Funds were over 13+ percent. A five percent rate on Treasury notes is not very high by recent historical standards.

The soft landing people are not worried by the fact that housing prices are 3.8 times median income, which is quite high by historical standards. They say since mortgage rates are low, the real cost of owning homes has not increased that much. Basic to the soft landing view are two big ifs, interest rates will remain stable at this level and there won’t be a recession. The bust people think that all it would take for a big increase in interest rates is for foreign investors to cut down on their purchases of Treasury paper. Second, if the housing market continues to decline, there is every chance of a recession since housing plays such a big role in our economy. If there is a recession, housing demand will soften and marginal owners will be incapable of making their mortgage payments. I could go and talk about the role of ARMs , the cashing out of equity via home improvement loans, the role of subprime lenders and much more….but none of these wrinkles changes the basic possibilities.

If it is a bust, it’s not going to be over in a short period of time. It will take a couple of years for the market to begin going up again. The prices that will go down the most are presumably the prices of homes that have gone up the most. So if you live in South Dakota, you’re in pretty good shape. However, if you live in New York, Florida, or in California, where prices have more than doubled in the past five years, it is reasonable to expect a more serious decline. All of this is good news for Orthodox Jews. They are “long children, short houses”…they have as a family unit many more young children who have yet to buy a home relative to the rest of the population. Liberal Jews being on average older with fewer children can be said to be ‘’long houses, short children’’. A decline of $100,000 in a home saves a person, say, $120,000 on interest plus the principal plus the extra money that he can now earn elsewhere. It’s a tidy quarter of a million dollars, or more… times four children is a million dollars. In the last year, most Orthodox families became wealthier by a million dollars, even if they can’t bank it.

I think it’s important for every person who is in the market for homes for themselves or their children to form a considered judgment as to whether housing prices are going to stabilize in the next year or two or continue to go south. One good way to start is to pick a town or neighborhood of choice and begin observing the changes in the number of ‘For Sale’ signs. The situation in heavily Orthodox areas is more complex. Here there is such an unsatisfied demand for homes because of the extraordinarily large increase in the frum population; buyers might be willing to pay up even during a general housing decline. It is a much harder call. Despite this caveat Orthodox families can still reap major benefits in newer and up and coming Ultra Orthodox neighborhoods. (Like Evanston. LOL.)