In Praise of the Housing Bust

Isn't it time for the market to cool?

Steve Chapman | September 27, 2007

Back in the 17th century in the Netherlands, there was a mass rage for, of all things, tulip bulbs. Prices got bid way up, and speculators jumped in to bid them up higher still. By the peak of the tulip fever, a single bulb was going for the equivalent of thousands of dollars. But eventually the market fizzled and prices plunged.

If I had been one of the people who invested in flowers during the frenzy, I would have felt bad to lose my money. But I like to imagine I would also have taken great comfort in seeing the triumph of rationality -- to find that there was indeed a connection between the real usefulness of tulip bulbs and the price they would fetch.

Actually, I don't have to imagine how I would feel, because I've been a participant in the closest modern equivalent. I'm a homeowner. Not only that, but I bought my current house in 2005, which now looks to have been pretty close to the top of the real estate boom. And I paid more than I really thought it was worth, in the firm expectation that someday, I could sell it at an even more ridiculous premium.

With home prices dropping, that no longer appears to be a plausible forecast. When I sell, I may even take a loss. So I should be weeping. But somehow, I just can't feel that bad. The boom in prices has long been disconnected from the actual utility of a single-family dwelling, and it's satisfying to see reality assert itself for a change.

Back in 2005, you could hardly hear a word about real estate without wondering who repealed the law of gravity. That year, the National Association of Realtors reported that in the previous 12 months, the median price of a home in Phoenix had risen 55 percent. In Orlando, the increase was 45 percent; in the Washington, D.C., area, 26 percent. Nationally, prices climbed nearly 15 percent.

More amazing, this jump was not that far out of line with what had gone before. At the peak last year, home prices in this country were up 134 percent over the previous decade.

They are not rising anymore. According to a report this week, they fell by 4.5 percent in July, the biggest decline since 1991. This will cause some disruption to the economy as a whole, and maybe even a recession. But in truth, the great majority of us will be better off in the long run if the housing bubble has finally burst.

Most homeowners, after all, don't face foreclosure even if their houses are suddenly worth less than before. Not until they sell will they take a hit. But even then, the pain should usually be mostly theoretical. That's because while the house they are selling will command a lower price, the house they are buying will also cost less. The average person will come out even on the deal.

It's true that some people of modest means who have stretched to afford subprime mortgages will lose their homes. But other people, of equally modest means, will gain. Someone who couldn't afford to buy at the height of the boom may find that a house is now within reach. Young people who were priced out of the market will be priced in.

Falling home values will also mean downward pressure on rents. Just as cheaper cars, clothes and computers are a good thing, so is cheaper housing. For every loser, there is a winner.

One group that will pay a price consists of older people who counted on selling their homes and using the accumulated equity to finance a comfortable retirement. But these are the fortunate souls who have profited most from the ceaseless escalation of real estate prices over the last 30 years. If they end up doing very well instead of amazingly well, we don't really need to cue the violins.

Of course, speculators who sunk money into second homes and investment properties, figuring they could flip them in a year or two for a handsome profit, will also get the short end of the stick. But that's why it's called speculation, not certainty. No one said they couldn't buy Treasury bills.

Like many events in a dynamic capitalist economy, the overdue cooling of an absurdly overheated housing market will inflict some pain. But that doesn't make it a bad thing.

COPYRIGHT 2007 CREATORS SYNDICATE, INC.

Comments

M|9.27.07 @ 6:40AM|#

Actually, it's likely to push rental prices upward. Rents have been sorely depressed due to the ease of home purchase. Now some of those marginal buyers will be forced back into the rental market. Rents started going up in my area last year-- for the first time since 2002.

|9.27.07 @ 7:13AM|#

man's going to get into trouble appying logic to economics like that...isn't it more fun to just get hysterical

"when in danger, when in doubt...run in circles, scream and shout"

Jennifer|9.27.07 @ 8:05AM|#

I've been saving since 2004, waiting for the bubble to pop. And I'm even more annoyed than usual with those folks in government who talk about "bailouts" and "wanting to prop up the market." Why in the world would you think it's BAD for housing prices to drop back to levels that ordinary people can afford without either taking on ruinous debt or gambling on the assumption that affordability doesn't matter because when things get too costly to handle they can just sell the house for a profit?

Hmmph. There are places so bubble-inflated that only people in the top ten or twenty percentile of income earners can afford the median home price. How is that supposed to be sustainable, and more importantly, why would anyone outside of a commission-hungry realtor* WANT to sustain it?
.
.
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*I know, "Realtor" is supposed to be capitalized. I refuse.

|9.27.07 @ 8:22AM|#

Please help. How is a 4.5% drop after a 45% increase a big deal?

|9.27.07 @ 8:23AM|#

When times are tough for the poor and middle class, any talk of help is derided as socialism. But as soon as the banks are taking a hit, it's as if capitalism doesn't matter: let the Fed and the Congress help the poor folks at our banks and investment houses!

Yeah, because if those guys aren't around to help us we might have to find some other guys to help us. Which would be terrible, since no other country has such a thing as bankers or investors.

Doctor Duck|9.27.07 @ 8:25AM|#

@Lamar:

T-T-Timing.

The 4.5% drop doesn't necessarily affect the same people who saw the 45% gain.

Not that I care, but that's the reason.

|9.27.07 @ 8:29AM|#

Just curious, 'cause everybody keeps saying "ain't it great?" at how younger people can afford houses now, and the poor will benefit. It seems like a house that was $150,000 a few years ago went up to $225,000, and is now down to $215,000. Should I be excited about this? If so, I'm going to have to fake it.

|9.27.07 @ 8:41AM|#

Lamar,

I think they're saying that, to the extent that this is bad for current homeowners who were looking to sell, it's good for those looking to buy. Given that the 24-hour news cabal is painting this as the biggest tragedy since Black Tuesday, it's an important thing to keep in mind.

|9.27.07 @ 8:43AM|#

jon,

Nice strawman. When has reason advocated bailouts for banks that made bad loans?

We libertarians may be heartless, but we're pretty consistent in our heartlessness.

Rhywun|9.27.07 @ 8:46AM|#

Rents in NYC only move in one direction--it's just a matter of how quickly. The last few years the speed was unheard of. And the rock-bottom dollar doesn't help things, either, when you're competing against foreign trust-fund kids. When I was priced out of my place in Manhattan last year, that's all that came to view my apartment.

|9.27.07 @ 8:55AM|#

Crimething, when did I say Reason did that? I was just commenting on what has been said, mostly by talking heads on talkshows, politicians, and others. It does include some libertarians, but not many. Most libertarians aren't powerful enough for their business interests to mess with their political compasses.

|9.27.07 @ 8:57AM|#

Didn't the Fed infuse the market with cash, and hasn't Bush been talking about a Fannie Mae (or something) bailout?

|9.27.07 @ 8:58AM|#

Sorry jon, I thought you were another "You people don't care about the poor!" interloper.

|9.27.07 @ 9:02AM|#

Lamar,

Yes, the Fed did "inject liquidity" (ie, crank up the printing presses) and I wouldn't be surprised by any stultified move made by Bush at this point.

|9.27.07 @ 9:09AM|#

If you bought your house for the reasons of wanting to live in it, then you thought it was worth it at the time. You should be happy about a depressed market because as he assessed value of your hose decreases, your property taxes go down. If you bought the house as an investment, well thats pretty much how investments go, you win some, you lose some. Sorry, too bad, tough luck, oh well, better luck next time... Do you detect a complete lack of sypathy for the buyers here? For the mortgage holders it's, I'm not really sorry, too damn bad, tough fucking luck, you made your bed... Do you detect a note of hostility here? I'm a capitalist thru and thru. Losers have to suck it up and ought to quit whinging.

|9.27.07 @ 9:18AM|#

"If you bought your house for the reasons of wanting to live in it, then you thought it was worth it at the time."

Or, as is the case with many, you thought that your neighborhood would be filled with families. Instead, you were mislead and bought into a ghost town...or better yet, a flipper's graveyard. You still live there, but you kind of got hosed.

|9.27.07 @ 9:23AM|#

Me too, Crimethink. I saw "jon" and thought it said "joe" and ASSumed he was bustin' "our" chops.

CB

|9.27.07 @ 9:26AM|#

J sub D: I should clarify that I am glad, oh so glad, that house flippers got nailed.

robc|9.27.07 @ 9:30AM|#

Or, as is the case with many, you thought that your neighborhood would be filled with families.

People need to understand that they dont have control over what other people do with their properties (subject to some limits).

A funny incident happened near me. Farmer sells 1/2 his farm, it gets rezoned to residence, nice homes gets built. A few people in the area tried to fight the rezoning, but not many and not hard, it was going to happen. A few years later, repeat with 2nd half of farm. Who tried to stop it this time? The people who lived on the 1st half. Did they think growth/sprawl was going to stop with them? What did they think was going to happen to that big field next door located inside a city?

cb|9.27.07 @ 9:45AM|#

For every loser, there is a winner.

No.

|9.27.07 @ 9:51AM|#

Saying, on aggregate, that benefits outweigh costs? That's cruel and heartless. Why not just say a falling tide makes it easier to walk to shore?

In my part of the world, the pinkos have been weeping and wailing about "affordable housing." Now that housing is getting more affordable every day, I don't see them dancing in the streets. Why is that?

|9.27.07 @ 10:07AM|#

"Now that housing is getting more affordable every day, I don't see them dancing in the streets."

See my 8:29 post. I call bullshit on the bust. The market stopped smoking crack, but that doesn't mean it's sober.

|9.27.07 @ 10:12AM|#

Who tried to stop it this time? The people who lived on the 1st half. Did they think growth/sprawl was going to stop with them? What did they think was going to happen to that big field next door located inside a city?

Kind of like all of Portland OR. IOW, I've got mine, fuck you, cloaked in environmental, intelligent growth, sheep's clothing. That is so clever, transparent, nobody everybody can see through their smokescreen. bullshit.

|9.27.07 @ 10:21AM|#

"IOW, I've got mine, fuck you"

Or, in the words of Cool Hand Luke, "Stop feeding off me. Get out of here, I can't breathe."

|9.27.07 @ 10:27AM|#

Lamar-

You're absolutely right; there is still a ton of froth in the market. My point, such as it is, is that the City Commissars are utterly convinced they must step in and "fix" the problem; the idea that market fluctuations might be self-correcting (or that people will makes rational alternative choices) flies in the face of their collectivist mentality. No doubt, when people start taking advantage of buying opportunities, they will be vilified as "vultures."

Rhywun|9.27.07 @ 10:33AM|#

I am glad, oh so glad, that house flippers got nailed

Hell yeah. "Flip" is one of those words that now makes me cringe a little inside, kinda like "surge" and "homeland".

JBinMO|9.27.07 @ 10:39AM|#

I was talking to a builder yesterday, he told me the gut at a bank in Kansas City who he deals with receantly moved from Detroit to KC. He had bought his house a few years ago at $400,000, the best offer he has gotten $150,000. Evidentally 53% of the homes in Detroit city limits are empty. Don't know how much of the story is true. I work in the mortgage businedd. I deal with people in Michigan. All arounf the state, if you bought a home last year for $250,000 it is now worth about $200,000 to $220,000. On the other hand in Wyoming they are still seeing crazy appreation.

|9.27.07 @ 10:43AM|#

Actaully, this is just foreshadowing of what is to come in the housing market. As the boomer generation retires the housing market is going to go through a massive correction. The boomers are by far the least prepared generation for retirement in US history. Many didn't have kids, few have pensions and according to some economic estimates their overall wealth comes in at about $100,000 USD per capita. In other words, 2 to 3 years after retirement they are going to be selling their homes in droves. If you want a real bargain just wait 2 to 5 five years.

Somehow I find it fitting that the generation that never wanted to grow up is finally going to face some pain for 70 years of pawning off all of their responsibilities on the rest of us.

JBinMO|9.27.07 @ 10:48AM|#

Those old people will be going to vote in droves. Higher taxes and handouts all around.

robc|9.27.07 @ 10:58AM|#

If you want a real bargain just wait 2 to 5 five years.

Which is why I am "wisely" closing on a house next month. I would have moved into it over the summer, but while it is easy to find a good house cheap, it is hard to sell a condo at close to a reasonable price. Im on the 2nd extension of my contingency deal. But, things have now happened, so its all going forward. Im not worried about what the price may do over the next 2-5 years, I have been in my condo for 9 years and plan to be in this house much longer than that.

If I hadnt sold my condo during this extension, I was pulling off the market and just going to wait 2 more years and try to buy a nice house even cheaper.

|9.27.07 @ 12:20PM|#

Please help. How is a 4.5% drop after a 45% increase a big deal?

That's just the first part of the drop. The housing crash is likely to continue for several more years. California housing prices in the last bubble peaked in 1989 and dropped for about seven years.

These are just averages, by the way. Some markets rose much more than 45% (more like 200%) and will probably lose 50% or more. Often, markets "over-correct" for a period, particularly if a recession or prolonged credit crunch is involved. Americans are so heavily in personal debt that I think things could get a bit ugly in the next several years. Housing may go down a lot.

|9.27.07 @ 12:23PM|#

Actually, it's likely to push rental prices upward.

In some areas, perhaps. On the other hand, a lot of unsellable housing enters the rental market also, helping to keep rents reasonable.

|9.27.07 @ 12:31PM|#

My two cents worth: Caution to those who advise "waiting" two years to get an even bigger bargain.

Perfect timing is extraordinarily difficult in any market, especially one as illiquid as real estate.

Further, previous real estate busts generally didn't last two years. Real Estate, perhaps uniquely, can't fall forever. When prices drop dramatically, sellers take their properties off the market and the newly illiquid market makes a comeback. It might not happen this time but it might. Watch for it!

Bill Walsh

|9.27.07 @ 12:57PM|#

Good point on timeing of real estate purchases and the issue of rents.

However, the real 800lb gorilla in the room is still the issue that we have an entire generation (that is numerically quite large) retiring in the near term that has effectively not planned for retirement.

Their only real assets are their homes. They will sell. This should go a long way to correcting the frankly unrealistic prices in housing we are seeing today.

|9.27.07 @ 1:32PM|#

William Walsh, it's not a question of timing the market (which is often futile), but of waiting until housing prices come back in line with incomes. Things are so out of whack now that it will take a huge drop for it to make financial sense to buy a house. Personal income is always the bottom line.

Rhywun|9.27.07 @ 2:06PM|#

On the other hand, a lot of unsellable housing enters the rental market also, helping to keep rents reasonable.

Interesting point. So many rentals being converted to co-ops probably helps explain why rents in NYC have skyrocketed just like mortgages.

Edward|9.27.07 @ 2:34PM|#

What does the sinking dollar mean (real question)?

|9.27.07 @ 2:36PM|#

P Brooks:

"Vultures" you said? Already started... : http://money.cnn.com/2007/09/24/real_estate/vultures_circling/index.htm?cnn=yes

|9.27.07 @ 3:16PM|#

Edward: the "sinking dollar" means that dollars buy fewer units of a given foreign currency. That is, our fiat money is being printed faster than the rate of growth of our economy, and is being devalued and inflated, relative to other countries.

The Fed's move to bail out housing by dropping interest rates means inflation will be going up, which resulted in investors in other countries taking that into account almost immediately and devaluing our fiat money compared to their fiat money.

|9.27.07 @ 10:25PM|#

Kind of like all of [Howard County, MD]. IOW, I've got mine, fuck you, cloaked in environmental, intelligent growth, sheep's clothing. That is so clever, transparent, nobody everybody can see through their smokescreen.,/i>

|9.28.07 @ 1:08AM|#

The sinking dollar means that you're going to be renting your apartment/condo/house from some guy who lives in France.

|9.28.07 @ 8:07AM|#

Keep in mind that lower prices mean less capital gain taxes for governments and lower property taxes. This is why governments will build a floor under falling prices. It's not YOU they care about.

|9.28.07 @ 2:13PM|#

I'm glad I stayed away from houses and decided to only flip more lucrative property like websites and domain names.

|9.28.07 @ 2:20PM|#

Since my property taxes are tied to the public school system, I seriously doubt any price decreases will result in actual lower property taxes. For one thing assessments are always lower than appraisal/sale value, anyway. Then the % will just be raised in many places. I already have a ballot issue twice a year for expiring property tax hikes that need to be expanded. They will just keep pushing and increasing the bases and % used, and so on. Somehow the revenue supposedly decreases as the population increases.

|9.30.07 @ 1:26PM|#

"The boomers are by far the least prepared generation for retirement in US history."

I thought the boomers were only the second generation to even encounter 'retirement' -- before the Greatest Generation didn't everybody work until they died (or were taken care of by their family)?

Retirement, as we've come to know it (rather, as the government and the financial services industries have sold it), is a relatively new concept.

|9.30.07 @ 9:01PM|#

Ha ha all...As a boomer,my house...read, home, is paid off. I my not be able to sell it or rent it but I'll always have a home and you ungrateful young-in's are going to be paying the oil and electric bill for poor retired old me. Please take care of those bills while I'm sailing off Baja will ya?
HA HA HA......... suckers

|9.30.07 @ 9:10PM|#

Ha Ha HA suckers
You all voted for the the old republicans that are going to take your money and give it to me and my freinds. gotta go...My house is paid off but I'm old and need to fill out my application for food stamps....can't work any more because of a bad back he he he...where did I put my passport? Don't forget to pay for our wars while your paying my electric and oil bills.....
HA HA...my house is paid off and you kids will get to pay me for my "sacrifices"
SUCKERS

|10.1.07 @ 6:02PM|#

Further, previous real estate busts generally didn't last two years. Real Estate, perhaps uniquely, can't fall forever.

ああ、実際にか。

The US may very well be staring down the barrel of its own "Lost Decade"...

|10.1.07 @ 6:16PM|#

BTW, rents are limited by the ability of folks to pay, and you can't fake paying rent like you can qualifying for a NINJA loan. Rents may very well rise (especially if underwater "landlords" need to cover a HELOC-stuffed neg-am mortgage that just turned into a huge, stinking, expensive pumpkin) but if renters' incomes don't rise along with them, then those residences will not be rented.. And what happens to all those unsold or foreclosed condos? Into the rental pool..

|10.1.07 @ 6:22PM|#

My house is paid off but I'm old and need to fill out my application for food stamps....can't work any more because of a bad back he he he...where did I put my passport? Don't forget to pay for our wars while your paying my electric and oil bills.....
HA HA...my house is paid off and you kids will get to pay me for my "sacrifices"
SUCKERS

Oh that's OK Gramps, there's plenty of room in the Mandatory Euthanasia centre, since National Health has determined that you are no longer economically viable.