October 9th, 2008


Housing Crisis

I saw an interesting story on the news last night. Since it was network news, I should probably sprinkle it with many grains of salt, but I have a feeling that there must be a little truth there. People are starting to buy houses again! Why? Because the prices have dropped so much in some markets that houses are actually affordable again! *gasp* Imagine that! Can someone say "Laws of supply and demand?" Any idiot could see what was happening 2-3 years ago. When Kitty was living in Garden Grove, CA she showed me some new houses going up near her house. They were selling for $900,000! WTF?!? There was nothing spectacular about them. In ABQ they would probably go for $300-400,000. Why would they be double the price. Oh right. It was California! Everyone wants to live in CA! Demand up therefore price up. But it got taken to the nth degree of insanity. I had heard that frame houses in the ghetto-est part of Compton were also going for $100,000+. That's nuts! The market as a whole seemed to be getting to a point where the average Joe had no possibility in hell of ever affording a house. That would just fuel the whole concept of sub-prime loans. Buy a house with nothing down. The price would of course go up 10% or more every year. You can then sell it 3 years later and still make a profit. Shit! This is a no brainer! When the market collapsed, you had people who were essentially renters. Hey! I didn't put anything down! No loss to me! *picks up and runs leaving the bank to deal with it*

There are certain fixed costs in determining the value of a house. The bricks, mortar, wood, fixtures, etc. all have a fixed cost associated with them. The biggest variable is the cost of land. What is a piece of ground actually worth? Beach front property is worth more than swamp land or desert. A nice view of a valley below is worth more than a view of an industrial park. There seemed to be a huge disconnect as the housing bubble grew. Why should land be so expensive in Phoenix or Las Vegas?!? Well, guess which markets are being hit the hardest.

In order to get this crisis over with quickly I think banks need to just suck it up and start pricing/valuing houses more realistically. I know you want to get back as much of that foreclosed loan as possible, but the longer that house sits vacant, the longer you're keeping that "junk" on your books. Don't sell to slumlords. Don't sell to speculators. Sell to people with jobs who just want an affordable roof over their heads. Make sure they want to put down roots and take care of the property. If prices/values increase 5% a year, that's fine. We don't need prices to rise %20-50/year. It's nice for the owner, but bad for all of us in the long run. I guess the overall solution is to curb greed. Good luck with that one.