Tuesday, December 20, 2011

Were Home Prices the Next "Bubble"? We have a second chance to make a difference.

Real estate leaders  waiving reports claiming home prices are stable to rising might want to pause and read the  December 2004 report titled Are Home Prices The Next "Bubble"?. Authored by Jonathan McCarthy and Richard W. Peach, a VP of the Federal Reserve Bank of New York, this report took apart the warnings of analysts who saw a problem and tried to raise attention to it. McCarthy and Peach used their  credible analytical skills and resources to produce a 17 page document published in the December 2004 edition of the Economic Policy Review which concluded, "Our analysis indicates that a home price bubble does not exist." Nice work fellas.

Unfortunately for America their paper provided the talking points for politicians and real estate leaders.  Here's Barney Frank who in the Spring of 2005 said there was no bubble because the housing business didn't look like the dotcom bubble business. The Chief Economist of the National Association of Realtors gave us this quote in 2005,  "There is virtually no risk of a national housing price bubble based on the fundamental demand for housing and predictable economic factors." When everyone is reading from the same script and the voices of reason are being drowned out by the marching band of brothers in banking, real estate, and government, we might want to proceed with caution.

Maybe we should turn the volume down and take a look at what it took for the real estate prices to run up to their peak,  and see if it's more probable that prices could be moving sideways or even down for a while longer.  Without complex formulas we can see the volume of buyers can not equal what existed in the first decade of the 21st century because (a) the real estate consuming  population has changed from massive Baby Boomers to much smaller Generation X andY, and (b) the lending rules have changed shrinking the pool of eligible people who might qualify for loans.

In Dane County, the consumer demand has changed. Condominiums, built to absorb the people who we assumed wanted apartment kind of living with the apparent advantage of real estate ownership, are being converted to rental units. And instead of building new condominiums, developers are constructing apartments.  The apartments are  being filled faster than they can be built. The "condominium buyer" has turned their backs on ownership and will remain renters indefinitely. Quality farm land was developed into low quality housing. This housing stock built in 2001-08 and sold at 100%+ financing has already been undermined by the houses built by the same developers who unloaded their land by selling new construction houses at a loss.

Housing prices will recover some of the loss in some areas of our market regardless of what mantras are are touted. But broader progress will be made when we let go of  short term profit strategies and spend our energy collecting resources to create solutions to upside down mortgages, foreclosures, empty homes, and unsustainable property tax rates.  The real estate industry, bankers, politicians, lawyers, economists have the talent pool to do whatever we value most. We can lead, or we can follow the past.