Stabilized Home Prices The Last Thing We Need

I think Mick Jagger might actually know a bit more about the housing market than our politicians. In case you can’t already see where this is going let me spell it out for you: “You can’t always get what you want but if you try sometimes you just might find you get what you need.” In this case what we need is for the housing market to clear and, unfortunately, that is not consistent with stabilized home prices, which is what everyone wants. And in this highly charged political season politicians want to give people what they want, not what they need. So we hear endless lamentation about how we are not going to solve our economic problems until we stop the decline of home prices and everyone is floating ideas about how to prop up the housing market.

No surprise that the NAR is also getting in on the action with their 4 point plan for government handouts to the real estate industry. More on that another day.

Unfortunately, all this is a bit like trying to build a city below sea level in the path of numerous hurricanes. Wait a second…don’t we do that also? The fact of the matter is that sooner or later nature has to take its course. Home prices have to seek their natural level. They expanded at above-trend rates and now they need to return to the trend line, which is a bit below where they are now. Driving this was an unnatural growth in home ownership levels above the norm of the last 40 years as demonstrated in the chart below from the Federal Reserve Bank of St. Louis.

It should be no surprise that during this period the affordability of homes declined.

Now, as the real estate market attempts to cope with these imbalances, we find buyers and sellers at a stalemate and transaction volume has dried up. Politicians can pull all the rabbits out of the hat that they want: tax credits for homebuyers, Fannie and Freddie support for the mortgage market, government purchases of mortgages, etc… However, they can’t stop the ocean from seeking the lowest level. Nothing will return to normal until prices return to normal. And normal prices will be a good thing. For instance, homes can once again be affordable for people with good paying jobs.

During the last 10 years or so the country made poor financial decisions to put too many people in their own homes and to build bigger homes than people really needed. Instead of investing in our infrastructure we invested in granite countertops and marble showers. So today we find ourselves with vacant homes, collapsing bridges, and roads full of potholes. If the government wants to stimulate our economy they would be better off investing in our infrastructure than in more homes.

Speaking Of Potholes

While perusing David Dalka’s Internet Marketing Blog the other day I noticed several links to sites for reporting potholes and even filing a claim for vehicle damage from potholes. Sounds like a great idea. However, I attempted to file a claim about 6 months ago using the process outlined on one of those sites after my car was nearly swallowed by a giant sinkhole. OK, maybe I’m exaggerating a little bit but I did blow a tire. After dutifully taking my pictures, attaching a receipt, filling out the form, and sending it in I’m still waiting. However, I wouldn’t let that discourage you. Maybe if they get enough forms in the mail they’ll have to do something about it.