Monday, January 3, 2011
Bubble Burst: Housing Prices Approach Their Historical Trend Line
The 2000's saw a perfect storm of political meddling in free markets (George Bush's "ownership society" and the financial genius of Dodd and Frank in dumbing down lending standards at Fannie and Freddie) and artificially low interest rates via the Federal Reserve following the economic blow of 9/11. These factors served to create an unsustainable level of demand for housing as well as an artificial boom in building throughout the early and mid-part of this decade only to see the bubble burst in 2008 - 2009. As housing prices work their way down to an equilibrium point, it should be noted that historically the price of housing has roughly followed the rate of inflation. In my opinion this means there still may be some slight downside in the housing market, but the serious blood-letting is over. Those purchasing houses at the current time are not getting raging bargains that will recover back to pre-bubble levels anytime soon. They are buying houses at close to historical "fair value." Given the market's expectation of low inflation and low economic growth, significant price appreciation will be years away. The days of "flip this house" are over for the foreseeable future. Time to be a long-term landlords.
It is also interesting to see how the housing bubble was concentrated in a few large states known for booms and busts.