Owning a home, it is predicted, will not soon, if ever, yield enough inflationary growth in the home’s price to be considered a lifetime investment. The financial nest eggs built up in home equities during the last quarter of the 20th century, solely by asset price inflation, catalyzed the mindset of homeowners during the Millennium Boom to believe in the long-standing myth that homes never go down in value and always create enough wealth to provide for a comfortable retirement.

California’s homeowners have now learned the housing market is merely part of the broader economy, and fully subject to business recessions as well as fluctuations in the purchasing power of the dollar. Today, cash is king. It now takes double the housing amenities (square footage) to attract the same amount of dollars from a buyer as they were willing to lay out just five years ago. Economists estimate that the $6 trillion deflation in the nation’s real estate prices since 2005, as the dollar became more powerful, will take upwards of 20 years to recover.

Still, recent California homebuyers are strangely optimistic about home price inflation. In a survey of Orange County and Alameda County, recent homebuyers believed prices would rise 10% each year for the next decade — a doubling in price over the next 10 years. Inflation and housing tax policies from the late 1970s through the mid 2000s, followed by the Federal Reserve-engineered decline in mortgage rates since the early 1980s and a 4% annual increase in asset (real estate) prices during the late 1990s, kept homeowners confident, if not realistic, about the eventual build-up of real estate wealth simply through asset inflation.

Most expert opinions describe the odds of the market regaining enough momentum to produce a profit during the next 20 years as bleak at best. Some industry experts continue to hold onto the notion that real estate is special in that it is used, unlike stocks and bonds. Inflation optimists argue that people will always need somewhere to live, and this dark period of history is just another scar that too will someday heal — much like the Great Depression. But even then, it took more than 30 years before homes started turning a profit beyond the rate of consumer inflation.

first tuesday take: The vast California inventory of vacant residential property (apartments and single family residences (SFRs)), zero consumer price inflation but massive asset price deflation and a fast declining percentage of homeownership will prevent a financial return from homeownership by way of a rise in prices beyond the rate of consumer inflation for a decade or two, except for the home’s implicit rental value.

Due to the cyclical nature of economies, the market will eventually recover all the ground lost in prices, but not for far more than a decade this time. first tuesday’s prediction is that real estate prices throughout will peak again around 2017.

However, prices won’t then reach the 2005 level of the Millennium Boom until at least 2025 for mid-tier housing — sooner for high-tier coastal homes, but even longer for low-tier housing in the central valleys. A brief review of Japan’s reduced prices (Tokyo) after its 1990 financial crisis and two lost decades of property values would be helpful. When volume eventually picks up and sustains itself at an accelerating pace over a 12-month period, prices will then begin to rise. This won’t occur until, at earliest, 2013. For those waiting for the coming boom years, home price increases will be agonizingly slow once they become apparent.  [For more information regarding the eventual market recovery, see the May 2010 first tuesday article, Cleaning up after the ruptured housing bubble.]

In the meantime, serious ARM mortgage and cramdown regulations must be put in place to prevent another anomalous real estate bubble. A commendable start has been made by putting the Federal Reserve in charge of lender mortgage arrangements with the job of protecting the home-buying public. The Truth in Lending Act is currently being amended to require first-time homebuyers to attend financial counseling before obtaining a loan, and provide a scam-free consumer protection hotline where borrowers are advised and educated about unfair lending practices. [For more information on amendments to the Truth in Lending Act, see the September 2010 Legislative Watch.]

When homebuyers understand lending fundamentals, such as the prudence of a 20% down payment and a fixed-rate mortgage (FRM), and selling agents grasp their gatekeeper obligation to advise the buyer they are duty-bound to protect on the risk of small downpayment arrangements and ARM financing, a relapse of the recent speculative real estate pricing and present jolting return to historic price levels will not recur.

Re: “Housing fades as a means to build wealth, analysts say” from the New York Times