Housing Stinks, Hooray!

Housing prices supposedly dropped in February 3.1%, prompting the doomers to predict the dreaded double dip recession. Yahoo! and the New York Times trumpeted the news like it was Armageddon. But I see it as good news for the economy and for America.

The losses that are being taken now on housing mean that sellers are starting to accept the drop in values, which actually took place two years ago. The market is begging for the inventory of unsold homes to reprice to the level that will unlock the wallets of real buyers, be they speculators, renters, or buyer-occupants.

I believe many people would sell their homes if they could land in a better or comparable housing situation. Instead they languish with underwater mortgages, hoping for a miracle in the market that will lift their value vis-a`-vis other homes they might covet.

The drop in selling prices is a signal that lenders and occupants are getting realistic about the housing market. When housing prices drop to their fair return rental value—the price people will accept to lease their house to make a reasonable return on investment—houses will sell.

For many years Americans have paid way too much for housing in relation to their incomes compared to the rest of the world. In China people pay more for tutoring their children outside of school than they do on average for housing. The same is true in Korea.

The housing industry has convinced Americans that their home is the best investment they can make. Historically homes have been awful investments, falling in value as often as rising.

The drop in February home selling prices means we are finally coming to grips with an inflated asset class which was overdue for a sustained fall.

Question: Are you happy to see housing prices fall?

businessinsider.com

businessinsider.com

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3 thoughts on “Housing Stinks, Hooray!

  1. Kim

    I’m not sure that “happy” is the right word – but I do think Americans need to wake up and realize that what we consider “normal” isn’t – that we’ve been living beyond our means for too long and it’s time to face the harsh reality that we can’t have it all. I see this as a part of that. A far cry from what’s needed, but a start.

     
  2. Stephen W. Baranyk

    Lloyd (former three point shooter et al),

    In his seminal treatise, “The Theory of Price”, the late, great George Stigler describes how the “prices” at which a willing buyer will buy and at which a willing seller will sell are the key quantitative signals driving an economy based upon Free Enterprise.

    If we assume ours is still a Free Enterprise economy then the drop in the prices of housing at which sellers are willing to sell and buyers are willing to buy is in fact the key mechanism to clear the inventory of unsold homes offered for sale. Clearing this inventory will lead to a more efficient allocation of resources (materials, labor, land and money in the form of borrowings) enabling everyone to benefit.

    You saw this (and may still be experiencing this) in your business of buying and selling used machinery. You are always willing to sell your inventory at that price which you perceive to be in your best interest under then prevailing circumstances. And you are willing to buy machinery at that price which you perceive to be in your best interest under then prevailing circumstances.

    It is good for everyone to have a housing market driven by prices which will clear the market of available inventory to permit the appropriate allocation of future resources. Same for the used machinery market.

    Has your home reached price equilibrium relative to the supply of and demand for coconut cream pie?

    Steve Baranyk

     
  3. Lloyd GraffLloyd Graff

    Stephen,
    I figure my 3000 square foot home in the lovely suburb of Olympia Fields is worth a 12 station Hydromat 1995, three coconut cream pies two tickets to the Cubs vs Red Sox at Fenway in May,and twelve pounds of dried apricots. And I am definitely not budging without those tickets.

     

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