The psychology behind the idea that a 50% reduction in bubble-era housing prices constitutes a "bargain" is flawed for a number of reasons.
I recently saw a few minutes of a Nightly Business Report program on PBS in which a Florida broker was observing that homes which once commanded $350,000 at the bubble top were selling briskly now at $169,000 to investors from every part of the globe.
In other words: "These homes are half off! They're screaming bargains! They can't get any cheaper than this!"
The psychology behind this euphoria is accessible to us all. It's easy to forget where housing prices were before the bubble and focus instead on how much they've dropped from the bubble peak. The same is true in any bubble, be it collectables, real estate, stocks, or tulip bulbs.
But valuation realities have no relation to bubble top pricing. Thus we should ground our analysis of housing valuations and what constitutes a "bottom" in metrics other than "it's 50% off it's top price."
Let's start by considering just how high the bubble took housing valuations:
Can a 10-year bubble reach this "ultimate bottom" in a mere two years? History suggests not.
Then there's the preponderance of other evidence that the underpinnings of the housing bubble have irrevocably shifted. Let's review some charts:
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I'm really quite glad this massive market correction has taken place. Prices are approaching affordability for many people now, right where they should be. Investors hoping to flip these and make a buck thinking the market is going to come right back up are going to be very disappointed.
ReplyDeleteThat's correct. If you want to put more people into houses, the very best thing is for house prices to drop.
ReplyDeleteI cannot state I am glad the housing bubble burst, it will destroy the dreams and faith of untold millions of citizens.
ReplyDeleteHowever, the bubble breaking continues to be completely predicatble. For many families the single greatest investment of a lifetime is home ownership. Mistakenly, home ownership became viewed as a retirement vehicle.
Sadly, a continuous rise in the cost or valuation of housing is not an indication of wise investing. Rather it is the signpost pointing to continuous inflation of currency supply coming home to rest in the housing sector.
Therefore, a crashing housing market will be a windfall for the few with cash on hand to purchase, and yet a heartbreak for most homeowners.