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.

In a side note, former Treasury Secretary Hank Paulson took a bath on his Washington, D.C. home, bought in August of 2006 for $4.3M.  Seems that he was no better at timing the housing market than anyone else.  The house sold December 21st for $3.25M, for a loss of over $1M.  I do find this mildly surprising since the DC metro area has one of the strongest housing markets in the country thanks to presence of the federal government.  But what's $1M to an ex-Goldman exec?  It's like lunch money to you and I.


  1. Hank Paulson losing a bit of equity on his house? Now there's something that I won't lose any sleep over.

  2. With Paulson an ex-Goldmanite $1 million is barely noticeable. I'm not sure that the "long-term landlords" period will last that long. The easiest way to juice the economy is via the real estate market. It easy to train real estate brokers, mortgage clerks and even construction workers. Not so easy to educate workers in the information/technology arena. This isn't lost on our policy wonks.
    Education has too long of a payoff - vote getter when talked about but not a policy action item.

  3. 101 Centavos-- I'm not losing any sleep over Hank Paulson's loss either. I doubt it mattered much to him.

    DIY Investor-- working in the information/tech area, it is darn hard to find good people. I can find plenty of not so good tech types. I already think we are doing just about everything we can to stimulate demand with low(er) prices and historically low interest rates. Banks have tightened standard after almost melting down and high unemployment is sapping demand.

  4. Not surprising! If we had real economists instead of speculators like Paulson as Treasury Secretaries we wouldn't be in the mess we are in today.