There are a couple of recent and very good posts out there that discuss home values. Both make the point that home values are gone forever and well......I guess Tough Luck. One was even, and probably rightfully so, recommended for a feature.
The problem I have with both analysis is that they use an overly simplified economic model. Post One uses data from the Case Shiller Index to support his conclusion. Sorry, not a Case Shiller fan here...I can't go into it, just have to trust me on that one.
Post Two uses simple analogies to support his theory, which, assuming a vacuum, are correct.
The issue I take with both posts are that they forgo any of the traditional economic models.
Followers of the Real Business Cycle (RBC) Theory are watching this economic downturn or housing crisis and saying....Hey, we told you guys this was going to happen. It's a cycle and there is nothing that you can do about it.
Followers of Kenesian Economics are sitting on the sidelines hollering, the Government should have stopped this. If the government had stepped in, this crap would have happened.....Hey, what's on MSNBC.....
The problem is that both are right.....(Well kenenisists are pretty left....but right on this issue)
It is a cycle and the government COULD have stepped in....but the government stepping in is HUGELY responsible for the fiasco in the first place. If the Jimmy Carter invented and Bill Clinton Implemented law "The Community Reinvestment Act" had never been born, we likely would not be where we are now....so there is your Government intervention theory.....
(Not to say that Bush should not have stepped in and stopped Barny Frank from running Fannie Mae into the ground, he failed us greatly there)
Again, the Gov COULD have stepped in, but done what?
Repeal the CRA?....it was already out of control, the CRA was only responsible for CRA loans, it was all of the other banks trying to compete with the availability of CRA loans that were making bad loans to people who could afford the overpriced houses that they were buying.
Appeal to REALTORS? Tell us what, stop selling. Explain counter-intuitive economic models to us? We wouldn't have listened......
Freeze lending? That is what the Fed does and they were raising interest rates, but there is that economic model again......and Newtons 3rd law. While Raising the interest rate will slow buying....it will also cause several other things to happen, all pretty bad things considering we needed strong economic growth to continue the State interests.
What about the Free Market.......why didn't it take effect? Hey Skippy.....It did...that is exactly what has happened. Every one who whines about the failure of the free market is not realizing that it didn't fail....this is what happens.
Now you are saying to yourselves, So Gary, what happens next? (Which is a funny thing to say to yourself unless your name also happens to be Gary)
I think the best answer can be found in the writings of Robert Lucas whom the Lucas Critique is named for. to keep you from running out to Barnes and Noble and trying to find his works, (but if you do go, get a double tall Venti Chocolatte. Best $9, 4,500 calories in a cup you will ever have)
Lucas believed that you MUST look at HISTORY to best predict the future. Well History dictates hat prices rise in tune with inflation, but it also shows brief periods of rapid economic growth in which property values rise a a faster rate than inflationary in-dices.
These periods seem to become more and more frequent at the world shrinks (Communication...Sailing ships to steam, steam to railroad, rail to aircraft, telephone, Internet.....Yes...SKYPE!)
As Lines of Communication becomes more and more effective, the rules of MacroEconomics don't change, but they do bend and become more efficient and speed up the growth. As this happens, there will be more costs bursts that will again make Real Estate one of the best investments in the world....as long as people are responsible about it. Which is not going to happen...so the alternate plan is to make lending more responsible.....
1) Repeal the CRA Accept the catcalls of Racism and elite-ism, and then repeal it anyway.
2) Make Makes responsible for horrible loans. No more Bailouts by the secondary market.
3) Criminalize Stupidity. Can't do that...OK, well we have a good start with the recent elections.
Then wait....allow the Free Market to work. Home prices will grow consistent with inflation for a while, there will be brief periods of growth and then some other investment vehicle will fail, like the stock market did in the late 90's (which has rebounded by the way when many said it never would) Who knows...maybe GOLD?????? If there is enough money in it, and it fails, every one in America will know someone who "Lost their A$$ in Gold" and then the guy who knows the guy who has the cousin who's baby sitters rich uncle lost his A$$ will then say.....Yea, Real Estate.....that is the secure item.
It will take time.....but even Grade School Teachers knew to never say never.
In conclusion, I believe that values will return eventually, but more importantly, the feeling of security that a Family gets, NEEDS, when they return to their homes in the evening. That is going to return and in full force.
Now folks, in a former life, and I don't mean like when I was Cleopatra's cat or something, I mean before Real Estate, I did something else....something very cool, with special badges and funny hats in underground buildings...............
And I've read a book or two, but that doesn't mean I am right about this.
So if you agree or disagree, please let me know....I want to hear your input on this. And if this makes the legendary FEATURE column, I hope I am right next to the other post, adding kind of a Fair and Balanced, we'll report, you decide thingy.
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