Is the economy recovering?

An interesting article in the LA Times today (click!)  about buyers in the Southern California housing market waiting until the market hits bottom before buying again.

They quote one guy who sold in 2006 at the market’s peak because he saw the crash coming. He’ll buy in again, he says, when he can buy for 50 cents on the dollar compared to prices three years ago.

That sound like it ought to be cheap, but keep in mind, three years ago everyone who owned a house was staggered by the paper value of their property, and not just in California. People on Ogden’s east bench, and in Ogden Valley, were slapping “Make me sell” prices on their homes, hoping to strike it rich. Some did, others got burned when those few homes pushed up everyone’s appraisal and tripled their property taxes, or worse.

The LA Times story pairs nicely with a story in one of  the Salt Lake papers (go find it yourself) about banks being stuck with abandoned housing developments that never got developed. The tone of the article, similar to the one in the LA paper, is that all these falling prices sure are a disaster, but are creating some bargains.

I think the real key, though, is made deep down in the LA Times story where the guy who wants to buy a house for 50 cents on the dollar says that prices still aren’t down far enough for incomes of people who live in the area to sustain them.

That’s the real key, and why I’m impatient with anyone who says these falling housing prices are such a disaster.

Houses are a commodity like any other. The law of supply and demand applies — that law got tossed out of kilter when loan sharks started pushing subprime loans with no-income verification clauses on anthing that could breath (and in some cases on people who couldn’t) creating an inflationary backed by hot air loans that could never be paid off. What we’re seeing now is the market coming back to reality, and a darn good thing it is, too.

Sadly, people keep hoping the economy as a whole will go back to where it was in 2006. Sorry folks, ain’t gonna  happen. The entire economy was driven by that housing value inflationary sprial. We have to hope that spiral never happens again, but what that means is that future economic growth will depend on people saving money and then buying stuff, or qualifying for credit under much more stringent criteria, just like in the good old days.

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One Response to Is the economy recovering?

  1. craig41 says:

    supply and demand didn’t get tossed, sub primers just pushed demand beyond what it really was. it was a cycle of bubble inflating by extending credit to those who didn’t qualify, thus driving prices up with the new found demand.

    and you’re right, we shouldn’t replace one bubble with another (the .com bubble was replaced with the housing bubble, that didn’t work too well for us) though there have been some suggestions along those lines (search atrios’s posts – http://www.eschatonblog.com – for reinflate the bubble)

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