Housing headlines are dominating the news these days in the same way the Nasdaq did in the late 1990s.
And no wonder. Successive years of sizzling sales and spectacular price appreciation have given way to falling sales and starts, record inventories of unsold homes (new and existing), a plunge in housing affordability and a flattening out of prices on a nationwide basis. The residential real estate market may never match the Nasdaq’s vertiginous 78 percent decline from the 2000 top to the 2002 bottom, but it is captivating potential sellers, late-to-the-party speculative buyers and analysts looking to assess the impact on the overall economy.
The big debate is whether housing will a) stabilize at a lower level; b) slide for an extended period; or c) sink fast and take the economy down with it. Each option carries its own flow chart of possibilities.
Greenspan never believed in the intangible aspect of the wealth effect: the idea that a homeowner could feel richer, and spend more from earned income or borrow to finance spending, because the price of an asset had appreciated on paper. For him, it was the actual dollars in consumers’ pockets that mattered. (Maybe that’s why he never grasped the stock market bubble in real time.)
Well MEW and HEE may soon become HEE HAW, for “Home Equity Extraction or House As Wager.” When prices stop rising, as they have in many previously hot areas of the country, the game is up for all but the savviest speculators who know the real estate market in a particular area and can spot undervalued properties.
That endgame is contributing to the practice of “short sales,” according to an Aug. 21 story in the Sacramento (California) Bee. Homeowners who owe the bank more than the house is currently worth try to convince the lender to accept less than the loan value to avoid the costs of foreclosing on the property.