Yesterday I wrote a blog called, "Home Ownership Is Too Important To Do Nothing" where I outlined some of my thoughts on the current housing and mortgage banking mess. Today I'd like to expand on why I feel that those who say that we should simply wait for the markets to correct themselves are, if not wrong, then at least asking for some unnecessary pain for our whole economy. In order to not run too long, I've broken this post into two posts.
NOTE: Please bear with the econ lesson here, but I felt that it was necessary background in order to make my point. That said, here goes;
Markets, be they stock markets, fish markets or real estate markets are basically systems designed to balance themselves out. When they get out of balance, they are self correcting in that the further in one direction they tend to move, the more likely that counter balancing forces will enter the market and in doing so start the market moving back towards where it had just came from.
As these counter balancing forces take hold and turn the market back, they build momentum and while there might be fits and starts along the way, they establish a trend line towards where they were before. More times than not, the first oscillation will over shoot the previous point where the market had been balanced (the equilibrium point).
When they over extend in the opposite direction, counter balancing forces on the other side enter the market and the process is repeated. As in the first oscillation this one will also tend to over shoot the equilibrium point, forcing it back around again. With each oscillation the market comes closer and closer to being in equilibrium. That is, there are an equal number of buyers and sellers in the markets and prices tend to stabilize.
Now if I haven't taken you back to your freshman year in college to the point where you fell asleep in Econ 101, you might be thinking that I was making the argument for the free marketers and to a certain degree I am. If left alone the housing and mortgage markets will indeed correct themselves. My argument isn't that the markets won't correct themselves, it's all of the unnecessary pain and suffering that we will go through as the markets make these adjustments.
You can think of it in terms of getting an infection in your body. Most times, if left alone, our bodies will fight the infection off. Depending upon the severity of the infection and where the infection is located in your body your doctor will decide if it's necessary to administer antibiotics; an in-grown toenail might not warrant treatment whereas an infection in a heart valve probably would.
Well, in terms of our economy, the housing market being out of kilter is equivalent to having an infection in a heart valve. Will the economy survive if we don't treat it? Probably. Do we want to see how painful it will be if we leave it untreated? I doubt it.
R. B. Mitchell is the president of ValueList Real Estate Services, St. Louis' largest discount/full-service real estate and mortgage company. To read more of Bob's writings or to find out more about ValueList and our flat-fee listing program, please feel free to visit our web site, valuelistre.com