by Gary H. London

The recent Case-Shiller housing price index shows that prices fell in the first quarter to the lowest levels since the crash began. The drop of 4.2 percent, on top of last quarter’s 3.6 percent drop caused Standard & Poor’s, the owner of the index, to label this a “double dip” drop in home prices across much of the nation. The percentage of homeowners, meanwhile, has fallen to 66.4 percent, on par with levels in 1998. That’s down from 69.2 percent in 2004.

“The emotional scars left by the collapse are changing the American psyche,” said Pete Flint, chief executive of Trulia Inc., a housing website, in The New York Times. “There was a time when owning a home was a symbol you had made it. Now, it’s OK not to own.”

This is just a lot of baloney.

This is not a sign of any such “psyche” change. If there are more people who desire to rent versus owning, it is because they should be renters based on who they are. It is demographics and lifestyle. Gen Y people, born between 1979 and 1999, are dictating the housing patterns.

The 82 million of that generation are just now entering their early 30s, starting — or now settling — into their careers. Many must be mobile to accommodate new job opportunities. They must spend the beginning of their adult lives saving money so they can actually place a down payment on a new home. They are temporary renters. They are causing a boom in new rental construction and a current run up in rental rates across the nation.

Their parents are from the baby boom generation, born roughly from 1949 to 1964. There are about 78 million baby boomers. When baby boomers were at roughly the same age as today’s Gen Y population — from 1976 through the 1980s — they similarly fueled a rental renaissance for the same reasons.

Here Is the Pattern

Guess what happened? Next, the boomers fueled a condominium revolution (preceded by a rush to convert rental apartments to condominiums — sound familiar).

This evolved into a move-up market to single family homes. I expect that this will happen all over again.

Interest rates are cheap right now. It is hard to qualify. The pendulum of home lending — which once swung so far to one side that anyone who could fog a mirror could get a loan — is currently in a very restrictive spot. However, people can qualify, particularly if they have down payment money, a good job and proven income.

Those factors, coupled with historically low interest rates and very low housing prices, make this is a magical home purchasing market for some. As the economic recovery builds steam, lenders will establish more reasonable underwriting guidelines. They just won’t “go stupid” as they did during the run up to the bubble of 2005.

So what does it all mean?

It depends on a few factors.

For instance, we don’t know how many foreclosures are still out there. My sense is that the market is still clearing, and that some banks still have a fair number of real estate assets; including homes that they have been holding off the market hoping against hope that the market will recover some value before they put the homes back on the market. However, the numbers seem to show that most of this clearing has already occurred and what remains should have less market impact on pricing going forward.

The part of the country you are from matters greatly. Phoenix and San Diego are two very different places. In Phoenix, they have a growing economy and strong demand, but they also have way too many lots and homes available. In San Diego, we also have strong demand and a growing economy again but very limited new supply.

The outlook for price stability and then price increases are much better in San Diego than Phoenix. They are much better for coastal California than inland, Midwest and much of Sunbelt America. Even in Southern California, the pain is not equal. In Riverside, 66 percent of all listings are distressed compared with only 27 percent in San Diego. Within the San Diego region, most of this distress is in outlying areas or in South County.

Who you are also matters. Are you a “have-to” or a “want-to” seller? The Case Shiller “paired housing sale” methodologically is good, but it can only measure actual sales. Most of the sales over the past five years have been distressed sales. Of course, they reflect price deflation.

But people have a choice, and they exercise that choice. If you are now distressed, most of you have sat on the market sidelines. You are waiting out the bad housing market because you can. There are no signs — none — that these people have come back into the market just yet.

Creating a ‘Bad News Bubble’

This leads me to a very big factor: your state of mind. Ultimately, the collective mindset of the market dictates the flow of the market. I am not faulting Case-Shiller, but let’s face it: if media uses the information that they put out to foster a collective pessimism about the market than of course the market will remain in the doldrums. Just the opposite was at work during the run up to 2005: Too many people got caught up in the irrational exuberance of the bubbling market.

This behavior played out on a grand scale and the results speak for themselves.

The market is actually clearing. The Case-Shiller research is what economists term a “lagging indicator” reporting stats and events that reflect sales that were recorded in January, February and March. These sales were negotiated earlier, so we’re getting a report of market conditions from late 2010 and the first two months of 2011.

In fact, the housing market is doing exactly as we expected. We hit the bottom in April 2009 (42.3 percent below the peak). We bounced off the bottom in 2009 and then some more in 2010 due to the government tax breaks in the first part of the year. While the market has slowed in 2011, it is not at an alarming pace like in 2008 and 2009.

We anticipated the market bottom and the bouncing over the past couple of years. Any movement in the housing index of 2 percent in either direction is not newsworthy. Nor can you track the strength of the housing market in short-term increments. You have to look at it with long-term perspective.

While people are quick to point their fingers at foreclosures, it depends on the market. The most important determinant right now is jobs and getting money flowing through the economy. This is why home sales are at a slow pace and home values have not seen traction. We are not creating enough income or jobs to compel people to buy homes.

The impact of foreclosures on the market is a paragraph, not the story.

There is a silver lining: Homes are cheap, but rents have been rising. While homeownership rates have dropped, as they should have, this is not the time to be walking away from homeownership. It is actually an increasingly perfect time to become a homeowner, if your means, motivations and circumstances line up correctly.