August should be a slow month for real estate commentary as people take time off to relax, assuming they are not melting as the sun seems to be crashing to earth. Matrix readers however, have been cranking up their air condtioners and reflecting on housing related economic changes.

Throwing caution to the electric power grid, here’s a few notable comments from the Matrix Zeppelin:

* When housing prices were going through the roof, the FED kept interest rates low, based on the fact that “inflation,” which uses rents as the basis of housing costs, was low. Greenspan and then Bernanke made the case that the FED should focus on inflation, not asset prices (like the price of owner-occupied housing). How that housing prices are softening, but rents are rising, it appears the measure of inflation is shifting to the former. Bottom line: policy is inflationary. Governments, households, and (if you include pension liabilities) businesses are deep in more debt than they can service. Those debts cannot be paid in today’s dollars. The options are a reduction in the value of the dollar, which is to say inflation, or mass default. The hope appears to be that inflation will bring nominal income up to the level required to support today’s housing prices and credit card debts. The problem: lots of the debt is variable rate. But someone seems willing to lend for 30 years for no more than the return on cash. Amazing.

* …allowing for inflation and a weakening dollar just to rescue those who got into real estate over their heads. I’m not certain why anyone should feel responsible for their behavior anymore, if the government is just going to come in and clean up their messes for them.

* I wonder if any meaningful proportion of the residential listings currently on the market are sellers who are not serious and/or are “trolling” for a crazy price. I know several people personally who have their apartments listed but whose selling is strictly optional (meaning, they don’t have to relocate, don’t need a larger space for more kids, etc.), and their pricing reflects their flexibility. They offer what they consider to be a “score” price, meaning if they sold it at that they’d be very happy with their returns. That might be one of several contributing explanations to the reduction in sales volume without a related reduction in prices, a phenomenon you’ve mentioned several times and [this article [CNN/Money]](http://money.cnn.com/2006/08/07/realestate/vulturebuyersinvademarket/) reminded me of again.

* One could hypothesize that there is currently a greater proportion of such listings in the total, due to the widespread perception over the past year that the “bubble” was peaking. That might account for a bit of “phantom” inventory in comparison to previous eras. One could then extrapolate that the inventory growth or level was somewhat exaggerated.

* The WSJ journal incorrectly states that the boom began in 1991. However, prices in many places were in decline for several years after that. Their chart shows that the decline in sales activity stopped getting worse in 1991, but remained below the long term trend until 1998. I would pick that point as the start of the “boom.” Until then it was merely a weak recovery.

* Your use of the term “stagflation”, two days in a row make me want to go out and find a used AMC Pacer to buy.

* I believe between 2002-2004 we were all playing in a market that never really existed. With the correction of compliance over appraisals we are now starting to see who we can start pointing fingers at.

* Low rates and exotic loans allowed people who could not purchase in the past the chance to buy a home. But eventually, prices (in certain areas) ran much higher than median incomes could afford.
And now we have the market slow down and eventual correction. How the correction will play out… I really don’t know. I think many like to point to RISING mortgage rates (and will do so more and more) as the cause of the housing slow down, but I think it was the low rates (and exotic loans) that ACTUALLY caused it.


One Comment

  1. John K August 9, 2006 at 1:30 pm

    It’s always a good day when one of my comments is quoted on Matrix.

    Two things I wonder about.

    First, like you said, there seems to be a lot of inventory out there – everyone keeps talking about the (in Boston) historically high number of condos and homes on the market. I haven’t had the time or energy to figure out if this is true. There is currently around 3,000 condos for sale in the city of Boston, whereas, last year, in a healthy market, there were 2,000. Is the 1,000 additional listings an accumulation of properties adding up, each month, that didn’t sell, or are more people putting their homes up for sale, than did, previously?

    By which I mean this – if, in a typical month, 360 units sell, in the city, but now only 300 units sell, that means there are 60 more units listed, per month. So, after a year, there’d be 720 more listings (assuming everyone kept their properties on the market).

    Yet, the inventory has gone up by 1,000 units. Why are there 300 more units on the market than what you’d expect?

    Did some people panic, and figure they had to list now, even though they aren’t expecting a sale, for awhile? Are they testing the market?

    I honestly don’t know.

    Second, I have to agree with the commenter who says the Wall Street Journal is totally off on the start date of the current run-up in home prices. 1991??? That was like, three cycles ago! I assume they know better than I, but it just doesn’t seem right.

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