Light at End of Housing Market Tunnel?

Consulting firm MDA DataQuick of San Diego has reported that Southern California home sales jumped a whopping 65% in September over the September 2007 figure.

The leap was spurred by a big drop in the median home price in the region which fell 33.2% to $308,500 in September from $462,000 a year before, and 38.9% below the median peak of $505,000 in Spring 2007.

The return of large numbers of foreclosed homes to the market (increase in supply) as credit eases is said to be the primary reason for downward pressure on prices, spurring sales.

Or as the old adage goes, when the price goes down, sales go up.

While the September figures generally represent decisions made during the summer, before the big financial crisis… and the save-the-world bailout… the recent stock market drop may spur more investment in real estate going forward.

So what does all this mean?

It means that – as usual – if you allow a market to right itself, it will. It means that markets are highly rational economic entities that react to excesses and correct them. And that after all the caterwauling of the past year, the housing market correction will be of long-term benefit for the majority.

It is interesting to compare the housing situation to the events of July 12, 2008 when the price of oil peaked at more than $147 a barrel. Rational people knew that there was an oil price ‘bubble’ that resulted from a so-called perfect storm of factors, and that the price eventually would come down. And so they have And by the way, the only intervening factor from the government side was that government said it would stop thwarting oil exploration.

Free markets anyone?

On July 12, gasoline was easily over $4 a gallon and today it is below $3 in many places around the nation. This drop was achieved by two simple rules: Don’t panic. And keep a sharp eye on the economics.

On July 12, panic was everywhere, just as there has been panic everywhere for the last year in the housing market, multiplied a hundred-fold in the last five weeks.

On July 12, the enviro movement, along with the worldwide media pronounced the Western industrialized economies doomed, that man was on the verge of extinction and that oil soon would be $300 a barrel and gasoline $8 a gallon.

What a difference 100 days makes.

Naturally one of the most powerful forces in the oil market was that high prices stifled demand, causing prices to fall. Those media wonks who never heard of “supply and demand” – or believe in their academic hearts that it is just a counterfeit theory dreamed up by conservatives – could never admit that gasoline could never go to $8 a gallon without a major catastrophe.

Because after $4 a gallon, many people simply stopped buying the stuff. Remember all those airlines parking their jets because fuel had become too expensive? That caused downward pressure on jet-fuel prices as well.

Today in the housing market we are seeing the same forces at work. Housing today is in the midst of what could be called a major correction. Like oil on July 12, housing by late 2006 had become unsustainably expensive and there were too many housing units being built, just as there was too much office space built in go-go New York City during the 1980s, requiring years to absorb it. But eventually all that supply, along with reduced demand because of credit woes, has caused prices to fall.

So now rather than homeowners panicking and envisioning their life investment drying up, they should be looking rationally at what has happened and feel confident of a future rebound.

For two decades now, Americans have been experiencing what Federal Reserve chairman Alan Greenspan once called “irrational exuberance”. In other words, housing and stock portfolio values were increasing at such rates as to induce euphoria. And like a drinker of the devil’s absinthe, you need to be really, really careful when things look that good.

With housing prices almost doubling in some locales over the 10 years from 1996 until 2006, few seemed interested in when the other shoe might drop. And now that it has, we are all looking back and trying to see where we failed to notice the predictors.

There were plenty: Lots of easy credit; too much credit-card debt; too-easy loans to poor people, egged on by the government; too-easy loans to middle-class people, often with teaser rates; too many house flippers and speculators adding too many housing units to the supply; and too many buyers flocking into the market not to buy a home, but to get in on the action.

The housing market collapse thus has proven to us that housing is not some invincible force, but just another commodity; that we shouldn’t be spending our family budgets into oblivion to get in on a hot market like the tulip bulb mania of the 19th century; that we shouldn’t be seeing ‘flipper’ dollar signs in every derelict property; that we should see our houses as a legitimate long-term investment, not a short sprint to fortune; and that we should stop lending money to people who cannot pay it back.

And while we are at it, how about cutting hundreds of billions in federal government spending instead of putting all that on our national credit card?

The housing crisis is going to solve itself, possibly beginning in the next few months and into the Spring. The Southern California figures are encouraging. Once credit eases and all those bargain properties look like pleasant hallucinations for people once priced out of the market, we may see a genuine home-buying boom. And for once, prices too good to be true will actually be true.

No, no, the doomsayers say. Our housing recession is the precursor of a deep worldwide depression.

Right, and these same nitwits predicted $300 a barrel oil and now need to explain why 3 months later OPEC is cutting production to keep petroleum prices from falling through the floor.

There are millions of people who scurried into an overheated, overpriced housing market and got nailed in the process. Today, on the other hand, millions are preparing to enter a much more reasonable market with total confidence in their pending investment. Those in between who have lost equity will see it regained over time, but in a methodical and incremental way. And all in all this is not the greatest outcome, but then again, a lot of people made not-so-great decisions.

In sum, this a decent and rational outcome brought to us by the working of free markets and their coherent behavior on which man has eternally relied.

Please visit my website at www.nikitas3.com for more common sense.

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