I cannot help but notice the unending stream of repetitive news reports commenting about how housing prices are falling and sales are declining. Every time I read one of these reports I find myself asking, “Who writes these things? Are they serious?
Ok, let’s start with the basics:
Home prices on average across the U.S. have risen too fast over the last decade. There are many factors that are attributed to this unsustainable rise. Some include banks offering easy money to anyone with a heartbeat (or credit report), the Media portraying real estate as an easy low-risk and high reward endeavor, the Federal Reserve doling out low interest rates to banks like water, oh and lets not forget the average Jane and John Doe making poor, irresponsible and sometimes downright stupid financial decisions.
Thanks to Careless & Company mentioned above there was too much purchasing activity going on with little regard or consideration for actual value. The end result being a market that has strayed far from its sustainable position.
What Goes Up Must Come Down
Perhaps some people are not familiar with the concept of what the media and others call a “market correction” but let me shed some light on this. When you hear one of these talking heads or news reporters talk about a market correction they are referencing the notion that when the price of a good gets away from reality (what the market is willing to bear for that product) then the inevitable result is that price will make its way back to reality.
The reason for this is that if something gets too expensive then buyers will stop buying. When that happens the only way to move additional product is to lower the price to make it attractive for buyers again. Going back to the housing situation there is an apparent need for a market correction.
Home prices have departed from reality. So what am I getting at? Why am I complaining about these news reports? See examples below:
From the New York Times, Click to read the article
“There were some signs that the decline has started to abate. Prices in seven regions, including Boston, Dallas and Charlotte, improved in May, some for the second straight month. Boston, for example, was up 1.05 percent in May, though values are still 6.2 percent below where they were a year prior.”
It almost sounds like the author is disappointed that prices are 6.2 percent below last year’s. What do you expect?
From the USA Today, Click to read the article
“The steepest decline in the index is in Las Vegas, where prices were down 28.4% from a year ago. Miami is a close second, with prices down 28.3% from last year.”
Wow, now that is something I did not know; no wait, the A/C repair man told me how Las Vegas and Florida are getting hit the hardest several months ago.