Friday, December 12, 2008

Home values could take decades to recover


Today, Friday Dec. 12, 2008, USA Today has a story by Dennis Cauchon, which online appears as a white paper in PDF format, “Why Home Prices May Take Decades to Recover,” link here. The theme of this piece sounds like very bad news for anyone with an upsidedown mortgage.

One basic problem is that home prices were relatively stable in real terms until it lurched forward with the inflation of the 1970s, then stumbled with the oil price drops in the late 80s (in some parts of the country) and then lurched again after 2002 with the low interest rates, partly as a result of Fed post 9/11 policy.

Another problem this time is that the financial crisis seems to be driven in large part by the real estate collapse, but it was also brought on by perverse short-term incentives (partly by the bottom-line mentality of market fundamentalism) by traders in investment banks that rewarded reckless behavior.

One problem has always been, what is the intrinsic value of a home? In 1984, I purchased a townhome (legally a condo) in the Pleasant Grove section of Dallas for $39990, from Pulte, a solid builder. I wondered, what is intrinsic about this two-story cube of space with its timber, sheetrock, utilities, insulation, etc that is really worth even that much as a consumer item? That’s a multiple of a car price, and a car “does” more. And a new car depreciates as you drive it out of the lot. I found out the hard way. I had to sell and leave Dallas and come back East in 1988. I sold for a $10000 loss in 1991 after renting it.

So it shocks me to see condos in New York City for “Five million dollars”, etc. (Many a lot more, still.) Of course, there is a lot of value in certain features: location (convenient access to work and culture), and security, especially, as well as view, space, “interior geography”, etc. But anything that justifies the Bubble?

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