Christian

Getting the Real Estate Crisis Right

We all know real estate is cyclical, and most know that this cycle is nothing anyone has seen before. I'll agree with Malkiel - magic has been rampant (I'm here in SoCal), and right now (and always has been), it is governed by simple SUPPLY AND DEMAND.

Fundamentally, what changed to cause the big run up? I don't think there was a massive "religous revolution" that 5-6% of the population all decided within a few years time that being in a house was the place to be. Something that this nominal percentage (4 million households?) hasn't even devoted a passing thought to in the last several decades. Low interest rates, and the classic: I gotta buy - housing's going nowhere but up. Supply was ramping up, but demand was enormous, the "next big thing."

In its nascent stages, it was quite fun. But as the prices ascended out of reach of pretty much everyone, more people had to resort to adjustables, so-called "liar loans", and (gasp!) option loans. I'm not sure why the comment was made about the U.S. being "different" with regards to adjustables. Many of my relatives still can't fathom why I'm planning to put 20% down (on a 30yr fixed) on my next home purchase (it won't be anytime soon).

Now the party's over, foreclosures are up, interest rates are up, and lending has pretty much ground to a standstill. Add to this mix people who we expect HAVE to sell their home (relocation, job loss, illness, etc.), we've got a very different supply/demand relationship.

What I submit is that we do have a correction, and this is in absence of an outright recession. Home values are coming down, and yup, it'll take some time. I don't think we'll reach huge levels of depreciation (maybe in some of the "bubble" markets), but there needs to be a reckoning between what's available, and what people want or can buy.

One more thing: a house shouldn't be considered an investment - maybe a commercial building is. In the past several years, yes - plunking down several thousand a month on a vacant place for 10-20% annual growth may be a nice "investment." But in the "norm" of recent decades past, a couple of thousand a month for an ROI that keeps in line with inflation ain't an investment - it a place you call "home."