Friday, January 22, 2010

A couple of thoughts on real estate and markets...

Not long ago, a friend and I were talking about the current housing market.

Around here, there was a season of rapid growth and building in the residential housing market, with new homes going up all around; that ended right around the time when we moved here, about two and a half years ago. This "slump" has only very recently begun to show signs (to my eyes, at least) of a rebound, with some new homes being built and signs up for plans of new development. It's probably about the same where you are.

My friend happens to be active in one of the area chambers of commerce, and I mentioned how I had noticed that the real estate market seemed to be coming back a bit.

"Not according to the folks in the chamber, it's not," he replied quickly.

As we explored this further, he offered more information on this assertion: his fellow chamber members involved in real estate maintain that the current market, though showing signs of slight improvement, is still far off of what it was a few years ago.

But let's think back to what we've learned about the real estate market over the last couple of years, while we've been in the midst of an economic recession: as many have tried to analyze and diagnose what the cause of our economic struggles have been, one of the main contributors to the recessive climate was the way that real estate was handled over the past decade or so.

Here are a few of the factors at play that caused the real estate "bubble" that eventually burst a couple of years ago:
People were being "qualified" for loans who had no real means of repaying the loans they were given.
Those who were in a position to repay them were being "qualified" for loans that would require a higher-than-normal percentage of income to be devoted to home-loan repayment.
Loans were being granted for 100% of the value of a home, and sometimes even more-- 115%, 120%, 150%!-- assuming that homes would appreciate rapidly, as they had been.
"Private Mortgage Insurance" or PMI-- once commonly required for most or all loans where the downpayment represented less than, say, 20% of the total amount borrowed-- became an optional additional expense.
New home construction was growing at an enormous pace, far outpacing the rates of previous decades.

The net result of this is the climate that we found ourselves in two years ago: people who couldn't afford their loans (either because they simply didn't have the income or because too much of their income was required), unsurprisingly, weren't able to repay them. They also had no PMI (not that they would have qualified for that under normal circumstances, either) and therefore the loans defaulted, leaving banks with enormous amounts of property unpaid-for. That property was sold at a huge loss, because the rapid construction of new homes meant a lack of demand that drove values down, not up-- and a home financed at 125% of its market value a year or two earlier wasn't worth 80% of that value at present-day.

And here's the bottom line: all of that was the result of a system that was vulnerable to greed, fraud, and usury. All three showed up, and crashed the system.

So back to the current conditions, and here's my big question: should today's real estate market be measured against the markets of three or five years ago, when those markets were inherently based on greed, fraud, and deception?

Wouldn't it be far better to take some sort of market average-- say, the average of the past 25 years-- and measure today's market against that instead? Wouldn't that give us a much clearer picture of how well the real estate market really is doing today?

It might not look as good on paper, and it might not make the builders, bankers, and real estate agents happy. But it might actually represent a sustainable and ethical market-- and that's what I'm interested in seeing established. Aren't you?

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