Housing Bubble

[Joe]

I am curious to get some opinions on whether or not we are in a housing bubble and how long you think the crazy real estate market is sustainable.



Some interesting points...



--A NAR report found that investors accounted for 23 percent of the nation's 2004 home sale transactions, with second-home buyers taking an additional 13 percent of all sales transactions.



--Home prices have become far out of line with wages.



--The current buy/flip rage in the housing market is all too reminiscent of the run-up in the NASDAQ before it burst. If the NAR report is correct then almost ¼ of all buying is speculative investments.



Personally I have no idea what is going to happen especially in areas like South Walton. Vacation home markets are much different than primary resident markets. It just seems to me that things are becoming borderline unrealistic.

[Just_In_Thyme]

I used to own property on Hilton Head Island, SC. I thought the same thing about a bubble over there when ocean front homes starting selling for $3M. They are now going for up to $7M. We sold and came over to Seagrove and are seeing the same run up. I have never seen home prices in resort areas decrease. Sometimes they stop increasing but in the 10 years we have owned beach property we have never seen a decrease. Of course I can't speak for the condo market that I believe is much more specultive. There is a limit to homesites and homes, but condos can be built up.

[Rather B. Paddlin]

There are several factors to consider about the increasing price of vacation homes in South Walton county that will prevent a bubble for at least the near future.

1. Eventhough the prices of beach homes are high, they are still less than many other beach resort areas.

2. People have shown a tolerance for large negative cash flow situations (>$25,000) on vacation investments in high rise condos for years at Sandestin.

3. The people from the midwest are just beginning to discover and enjoy the white sand beaches. The drive is just a tad bit longer than the drive to Myrtle Beach or Hilton Head. Beaches are no comparison. There is a large population base with the financial resources to fuel the demand for vacation property here .

4. People want to control their financial future. Past loses in the stock market will have lingering effects on future investments. The economy is coming back. People are going to have investment cash.

5. Here come the baby boomers.

6. Less overseas travel, means more domestic travel.

7. :confused: Only bad news is everything goes in cycles.

[beachmouse]

Also:

We're going to see strong population growth coupled with a shrinking amount of developable land close to the coast- Walton's been one of the 100 fastest growing counties in the country since 2000. Redevelopment options are limited compared to places like PCB- no high rises, generally lower density. And there are huge chunks of land that are more or less permanently off the table because of the state forest, Eglin Reservation up by Freeport, and NW Florida Greenway (http://nature.org/wherewework/northamerica/states/florida/preserves/art12820.html) conservation easements. (with more conservation easements apparently in the works)

I think Eglin is going to come through the latest round of BRAC with additional mission responsibilities that will also play a role in curbing further development on the FL 20 corridor. There's been talk of a new urban combat training area east of Villa Tasso. More land will be restricted from development by the Greenway.

Yeah, buyers could go elsewhere in the region, but PCB is probably a good ten years out in terms of getting the kinds of upscale amenities you get on 30-A, the Big Bend has some negatives to it, and Mississippi's beaches just aren't as nice.

So I can see a plateau, but not a serious contraction in prices any time soon.

[Buckhead Rick]

A client/friend who has been investing in R/E for 30 years (St. George area) and talked me into investing in the panhandle had the same thing to say about beach property as those above, it moves up, goes sideways, then goes up again, seldom goes down because it is a tangible asset and most buyers realise time will bail them out. The OTC market had companies with no sales going up in value. Now condos are another matter since sooo many more can be build quickly in a small area, they do go down when over speculation takes hold. P/C smells like that now.

[FoX]

The market in general you have to wonder about. The stock crash and scare, low interest rates, liberal lending, and no interest loans have fueled a boom. If rates hit double digits it could pose a problem.

I believe SoWal is unique for some of the reasons we all know well. It will become more and more exlusive, similar to, but prettier than other southern resorts like Marco, Amelia, Sea Island, etc. But SoWal is so unique and beautiful that it may surpass all those and become an international destination like the Riviera, the Caribbean, etc.

Do you think the new airport might change the whole panhandle?

[SoWalSally]

I think we're going to have a bigger frenzy this Summer than last.

[Buckhead Rick]

Fridays NY times had a balanced article about a housing bubble, what stricks me is as long as the popular press "talks" about a bubble, it has not arrived yet. The articles are keeping some potential buyers out of the market and tops occur when all the buyers have arrived and bought. At some time the specutive part of the market will get soft, i.e. the prices of the PC condo's will not only not go up but will come down as the multi unit owners lighten up, but as far as the blue chip side , you and I will continue to wait for the call that will never come for your chance to buy in Ayls beach.

[fisher]

Interesting posts from about 3 years ago.

[30A Skunkape]

:lolabove:

Nostradami they were not! Up...sideways...never down...right

[TooFarTampa]

Where did Fox go? :idontno:

[Geo]

When did SHELLY (and any others who spoke up) first start predicting the "economic meltdown"? I saw his (her) posts when I joined in Dec 2006...

Oh SHEL-LY?

When did you know and when did you start saying so?

When I first read SHELLY's posts I thought I was reading something written by Chicken Little and although there was incredible wit, smarts and humor in them- I didn't take them seriously...

Until everything (s)he said came true...

:shock:

GW

[elgordoboy]

Shelly = The Seer of Sowal. Lookout Oracle of Omaha :wave:

[RB1]

I think the upcoming Panama City International Airport will certainly have an effect on the growth of our area, making investments in our area more solid than other resort destinations. Not only do we have the most beautiful beaches, but the airport will bring in European visitors, as well as those from the northeast, who never before were offered a direct flight into our area. In addition, the airport will serve as a hub, bringing in many who might never have thought about vacationing here. I believe a boom is more likely than a bubble because of the future airport.;-)

[fisher]

I think the upcoming Panama City International Airport will certainly have an effect on the growth of our area, making investments in our area more solid than other resort destinations. Not only do we have the most beautiful beaches, but the airport will bring in European visitors, as well as those from the northeast, who never before were offered a direct flight into our area. In addition, the airport will serve as a hub, bringing in many who might never have thought about vacationing here. I believe a boom is more likely than a bubble because of the future airport.;-)

Direct flights to PCB (the redneck Riviera with cool winter temps compared to South Florida) from Europe and the NE??? Orlando and Miami for sure--PCB not too likely.

[30A Skunkape]

How many times will the dreaded ARMs adjust before the first load of speedo wearing Euros is delivered?;-)

[TreeFrog]

How many times will the dreaded ARMs adjust before the first load of speedo wearing Euros is delivered?;-)

:lolabove: :clap: :funn:

[Miss Kitty]

How many times will the dreaded ARMs adjust before the first load of speedo wearing Euros is delivered?;-)

:lolabove:...I am going to gather up the boatload of Euros in Mr. K's drawer and come buy some beach property!

[beachmouse]

I've been watching House Hunters International, and they've been showing a lot of Spanish and Portugese vacation homes lately. Not sure how the weather is there in winter, but that area looks like it would be awesome in the summer- all kinds of charming coastal villages, beaches, interesting architecture, wonderful places to explore...

And that part of the world seemed very reasonably priced, even with the current exchange rate. Far more so than France or Italy would be.

[RB1]

More likely than you think - for Europeans our winter temps are very mild. And they get a lot more bang for their buck on our beach verses South Beach, etc. And Europeans are not necessarily snowbirds - France, for example, celebrates their "summer break" in August and for an entire month. If you go to Paris in August, you'll find it feels empty, other than the tourists. In October, schools are let out for a few weeks and families head out - perfect weather in our area for those Europeans who can't take the August heat. Believe it or not, the Panhandle doesn't have a "redneck" reputation in France. Most of them haven't even heard of our beach - but they will. I think of Field of Dreams when I think of the new airport - build it and they will come!

[fisher]

More likely than you think - for Europeans our winter temps are very mild. And they get a lot more bang for their buck on our beach verses South Beach, etc. And Europeans are not necessarily snowbirds - France, for example, celebrates their "summer break" in August and for an entire month. If you go to Paris in August, you'll find it feels empty, other than the tourists. In October, schools are let out for a few weeks and families head out - perfect weather in our area for those Europeans who can't take the August heat. Believe it or not, the Panhandle doesn't have a "redneck" reputation in France. Most of them haven't even heard of our beach - but they will. I think of Field of Dreams when I think of the new airport - build it and they will come!

If airlines thought direct flights to the panhandle would be profitable, they would already be flying into Pensacola or maybe Ft. Walton. Either place can handle the big jets. PCB is dreaming if they think direct flights from Europe are a possibility. Field of Dreams was a fantasy movie--just like direct flights into PCB from Europe are a fantasy.

In a couple of years when the airport is complete, let's check back on this thread to see the true outcome versus our current speculation.:D

[SHELLY]

I've been watching House Hunters International, and they've been showing a lot of Spanish and Portugese vacation homes lately. Not sure how the weather is there in winter, but that area looks like it would be awesome in the summer- all kinds of charming coastal villages, beaches, interesting architecture, wonderful places to explore...

And that part of the world seemed very reasonably priced, even with the current exchange rate. Far more so than France or Italy would be.

The weather along the southern coast of Spain is very much like the panhandle--cooler in the fall and winter, warm in the Spring, HOT in the summer. IMO, Spanish beaches aren't all that great, but the Brits don't seem to care--they're used to going to their beaches bundling up to their necks; drinking hot tea out of a flask and surrounding themselves with windbreaks (fabric and sticks that wall them off from the wind--much like our beach umbrellas block the sun)--the water in Britain is ice cold, even in the summer. Once upon a time, the lodging, food and booze in Spain was cheap, cheap, cheap. Then the European Union/Euros happened and it all started to change.

A speculative housing bubble emerged in Spain and it, and its economy, is presently mirroring the same downward course as the US.

http://www.bloomberg.com/apps/news?pid=20601109&sid=ar3L878k5YM4&refer=home

http://www.wsws.org/articles/2008/feb2008/spai-f12.shtml

The latest in warm-weather RE "investment" for the Brits is Brazil--touted as being warm, sunny and inexpensive. And the beat goes on.

.

[RB1]

It's a matter of organizing what the Panhandle is willing to spend on marketing to Europe. Ok, I grant you, Field of Dreams was a fantasy, but so was (is) Disney - a total creation of man in the middle of nowhere - and look what happened. I agree, let's re-evaluate this in a few years, but I stick to my bet. Hey, didn't I hear something about a theme park (Wild Kingdom / Disney) being planned for somewhere in our surrounding area? hmmmm

[SHELLY]

Hey, didn't I hear something about a theme park (Wild Kingdom / Disney) being planned for somewhere in our surrounding area? hmmmm


Cue 00seer00!

.

[flyguy]

This European flights to the Panhandle have already been covered in depth in other posts. Ain't gonna happen.

The new PCB airport is not being built to handle any plane that can fly directly to or from Europe.

And you can connect from Atlanta to all major cities in Europe right now. The new airport will change nothing. The current PCB airport is very underutilized. Airlines add flights when passenger demand increases, not when a new airport is built.

The panhandle will grow, but not overnight with a new airport. I have no doubt that in 20 years the new airport will be very busy, but not any time soon.

JMHO,
Flyguy

[SHELLY]

This European flights to the Panhandle have already been covered in depth in other posts. Ain't gonna happen.

The new PCB airport is not being built to handle any plane that can fly directly to or from Europe.

And you can connect from Atlanta to all major cities in Europe right now. The new airport will change nothing. The current PCB airport is very underutilized. Airlines add flights when passenger demand increases, not when a new airport is built.

The panhandle will grow, but not overnight with a new airport. I have no doubt that in 20 years the new airport will be very busy, but not any time soon.

JMHO,
Flyguy

Fly,

What's your view of what future airline mergers will bring to the party?
(i.e., rubblings about America West & US Airways; American & United)

/

[flyguy]

Fly,

What's your view of what future airline consolidations will bring to the party?
(i.e., rubblings about America West & US Airways; American & United)

/

Very good for the stock holders in the short term. The short term has passed for America West and US Airways as it is now tanking. This merger is going so badly that I would not be suprised to see the companys split again and sold to separate buyers.

If the other mergers happen I would cash out early, over the long haul a merger is very difficult.

But I really don't think any of the big mergers like United/Continental or Delta/Northwest will ever happen due to government intervention by senators protecting their home airline. But if it does it will also have to happen quickly under Bush as I don't think McCain or the Dems would be for consolidation.

Airlines are generally an awful investment over the long term.

JMHO,
Flyguy

[SHELLY]

Airlines are generally an awful investment over the long term.

JMHO,
Flyguy


I know about the "investment"...scratch that...malinvestment aspects of airlines; I was interested in your view as to what such mergers will do for the area airports.


.

[Beach Runner]

More likely than you think - for Europeans our winter temps are very mild. And they get a lot more bang for their buck on our beach verses South Beach, etc. And Europeans are not necessarily snowbirds - France, for example, celebrates their "summer break" in August and for an entire month. If you go to Paris in August, you'll find it feels empty, other than the tourists. In October, schools are let out for a few weeks and families head out - perfect weather in our area for those Europeans who can't take the August heat. Believe it or not, the Panhandle doesn't have a "redneck" reputation in France. Most of them haven't even heard of our beach - but they will. I think of Field of Dreams when I think of the new airport - build it and they will come!
Not just in France, but all over Western Europe. They call it "holiday." I mean, Milan, for example, is a ghost town during the month of August. I went once expecting to shop at the couturiers, and they were all closed. Even La Scala was dark.

I think that the dollar is so bad that Europeans just might consider vacationing in the Panhandle. It would be a bargain as compared to Portugal or Minorca. In addition, the beaches I've been to on the Med from Barcelona all the way around to Roma are bad in comparison to those on the Emerald Coast, so once they experience them, the word should get out. Of course, Europeans would have to get used to not sunbathing topless. :lol:

[SHELLY]

I think that the dollar is so bad that Europeans just might consider vacationing in the Panhandle. :lol:

You'll know them by their trademark black socks & brown sandals, speedos and notoriously stingy (if at all) tipping protocol.

.

[flyguy]

I know about the "investment"...scratch that...malinvestment aspects of airlines; I was interested in your view as to what such mergers will do for the area airports.


.


I don't think mergers will make any difference to the Panhandle airports. You will still see service to all the major hubs (Atlanta, DFW, etc.) in this part of the country from PCB. I suppose there is a chance of a slight decrease to certain hub cities as the new airline consolidates its schedule. But the overall seats available out of PCB should remain relatively constant after a merger.

All airline service is driven by passenger demand.

Reality: If you buy the ticket they will come.
Dream: If you build it they will come.

JMHO,
Flyguy

[Chickpea]

My sister is getting married this year here and I cannot tell you all what a ROYAL pain in the butt it has been for our relatives coming from overseas to get here..... the new airport (unless they start having direct flights and there is NO way I see that happening!) - we are still years and years away from the seeing the europeans coming here - Orlando and Miami are just so much more convenient, infintely cheaper and to some have much more to offer.....

[Mango]

I can't see how Europeans won't be tempted to take 3 different connecting flights and travel 12-15 hrs to get to THE BEACH. :idontno::lol:

[SHELLY]

My sister is getting married this year here and I cannot tell you all what a ROYAL pain in the butt it has been for our relatives coming from overseas to get here..... the new airport (unless they start having direct flights and there is NO way I see that happening!) - we are still years and years away from the seeing the europeans coming here - Orlando and Miami are just so much more convenient, infintely cheaper and to some have much more to offer.....

Absolutely.

Most of my overseas acquaintances are of the British and Dutch persuasion. If I could draw a map of the USA from the viewpoint of the citizens of most European countries it would look like this:

The entire N.E. of the USA would be NY City; to the south would be the peninsula of Florida divided into 2 "states" Disneyworld and Miami; a big blob in the mid-west would be labeled Texas (no cities/states, only a picture of a cowboy, Indian and longhorned steer); to the west of Texas would be the "state" of Las Vegas (they would not be able to name the state LV is in); and the west coast would be California divided into Hollywood, LA and San Francisco. (If this sounds far-fetched, have your "average" American draw a map of Britain and pinpoint the following: London, Bath, Scotland, Wales, Cambridge, Devon, Oxford, Plymouth)

When you speak to Europeans in general (believe it or not, the overwhelming majority of them couldn't afford to come to the USA on their holidays--although most of them would want to) they are only interested in hearing about the travels of their colleagues going to "the USA" (the one I pictured above); and as such, most of their travels to the USA will include those locations.

The affluent Europeans are more apt (and financially able) to travel to other areas of the US, but I doubt SoWal will be able to attract these folks in numbers that will make a great deal of difference.

A few of my European friends have come here, and enjoyed the beaches very much, but they're not interested in coming again and again--they enjoy going to different places and seeing different things (our beach is nice, but it is not the end-all and be-all of beaches in other areas of the world available to folks with high net worth). A less well-capitalized friend from England asked to come and crash at my place and make "day-trips" to Disneyworld :biggrin: (afterall I do live in Florida); once he found out how far it was--he just did an inexpensive trip to DisneyWorld.

.

[robertsondavies]

Shelly, you've rightfully guarded your interest in the longer term investment horizon, I think the biggest danger in your analysis is that you've underestimated the power of the internet to disseminate information... for instance, you think that SoWal is a great place to live, either actually or in some sort of sick cyber-freudian sense.... You're bang on about your figurative map of the USA, but that's all rear view mirror stuff Shel... that's whats priced in currently, when people from Europe made decisions in the 80's and 90's on what to buy based on what friends and family did, and based on TV shows like Miami Vice....

Shel, its time to get long some SoWal babe cakes - or else be left in the dust as a two bit trader that made a prescient and psychotically emphatic trading call on a chat board... the internet is now your enemy, information flow your nemisis....

keeping SoWal a secret for the next 20 years will make wak-a-mole look tame.





Absolutely.

Most of my overseas acquaintances are of the British and Dutch persuasion. If I could draw a map of the USA from the viewpoint of the citizens of most European countries it would look like this:

The entire N.E. of the USA would be NY City; to the south would be the peninsula of Florida divided into 2 "states" Disneyworld and Miami; a big blob in the mid-west would be labeled Texas (no cities/states, only a picture of a cowboy, Indian and longhorned steer); to the west of Texas would be the "state" of Las Vegas (they would not be able to name the state LV is in); and the west coast would be California divided into Hollywood, LA and San Francisco. (If this sounds far-fetched, have your "average" American draw a map of Britain and pinpoint the following: London, Bath, Scotland, Wales, Cambridge, Devon, Oxford, Plymouth)

When you speak to Europeans in general (believe it or not, the overwhelming majority of them couldn't afford to come to the USA on their holidays--although most of them would want to) they are only interested in hearing about the travels of their colleagues going to "the USA" (the one I pictured above); and as such, most of their travels to the USA will include those locations.

The affluent Europeans are more apt (and financially able) to travel to other areas of the US, but I doubt SoWal will be able to attract these folks in numbers that will make a great deal of difference.

A few of my European friends have come here, and enjoyed the beaches very much, but they're not interested in coming again and again--they enjoy going to different places and seeing different things (our beach is nice, but it is not the end-all and be-all of beaches in other areas of the world available to folks with high net worth). A less well-capitalized friend from England asked to come and crash at my place and make "day-trips" to Disneyworld :biggrin: (afterall I do live in Florida); once he found out how far it was--he just did an inexpensive trip to DisneyWorld.

.

[SHELLY]

the internet is now your enemy, information flow your nemisis....


Au contraire....the Internet information flow is the nemesis of the people whose overwhelming main objective is to transfer someone else's wealth into their pocket by any means.

Since that is not my inclination, I deem the Internet, and the information contained therein, a friendly distraction.

/

[scooterbug44]

Sowal beaches are gorgeous, but that is seriously the only thing we have to offer as far as competition to other popular European travel destinations.

Yes, the food is good, but not fabulous in comparison, and the lodgings are nice, but not 4 or 5 stars.

theatre?
shopping?
travel time?
nightlife?
transportation?
culture?

Right now we've just got uncrowded white sand and the exchange rate in our favor.

[Pirate]

Sowal beaches are gorgeous, but that is seriously the only thing we have to offer as far as competition to other popular European travel destinations.

Yes, the food is good, but not fabulous in comparison, and the lodgings are nice, but not 4 or 5 stars.

theatre?
shopping?
travel time?
nightlife?
transportation?
culture?

Right now we've just got uncrowded white sand and the exchange rate in our favor.

And you might get arrested for setting up a chair on the beach.

[elgordoboy]

And you might get arrested for setting up a chair on the beach.
Great idea! What do you think one could charge for that if one set up a tour around it? Would it really draw folks though?

[BIGDOG]

Absolutely.

Most of my overseas acquaintances are of the British and Dutch persuasion. If I could draw a map of the USA from the viewpoint of the citizens of most European countries it would look like this:

The entire N.E. of the USA would be NY City; to the south would be the peninsula of Florida divided into 2 "states" Disneyworld and Miami; a big blob in the mid-west would be labeled Texas (no cities/states, only a picture of a cowboy, Indian and longhorned steer); to the west of Texas would be the "state" of Las Vegas (they would not be able to name the state LV is in); and the west coast would be California divided into Hollywood, LA and San Francisco. (If this sounds far-fetched, have your "average" American draw a map of Britain and pinpoint the following: London, Bath, Scotland, Wales, Cambridge, Devon, Oxford, Plymouth)

When you speak to Europeans in general (believe it or not, the overwhelming majority of them couldn't afford to come to the USA on their holidays--although most of them would want to) they are only interested in hearing about the travels of their colleagues going to "the USA" (the one I pictured above); and as such, most of their travels to the USA will include those locations.

The affluent Europeans are more apt (and financially able) to travel to other areas of the US, but I doubt SoWal will be able to attract these folks in numbers that will make a great deal of difference.

A few of my European friends have come here, and enjoyed the beaches very much, but they're not interested in coming again and again--they enjoy going to different places and seeing different things (our beach is nice, but it is not the end-all and be-all of beaches in other areas of the world available to folks with high net worth). A less well-capitalized friend from England asked to come and crash at my place and make "day-trips" to Disneyworld :biggrin: (afterall I do live in Florida); once he found out how far it was--he just did an inexpensive trip to DisneyWorld.

.

Ditto.

Our European visitors who come to this area come to visit us, not the destination. We tend to meetup elsewhere, it's so hard to get here. Plus it's such a sacrifice to waste a U.S. trip to come to the panhandle. Popular holiday spots for our European friends stateside include NYC, LA or Miami. Or for our friends with kids, Disney.

[BIGDOG]

Shelly, you've rightfully guarded your interest in the longer term investment horizon, I think the biggest danger in your analysis is that you've underestimated the power of the internet to disseminate information... for instance, you think that SoWal is a great place to live, either actually or in some sort of sick cyber-freudian sense.... You're bang on about your figurative map of the USA, but that's all rear view mirror stuff Shel... that's whats priced in currently, when people from Europe made decisions in the 80's and 90's on what to buy based on what friends and family did, and based on TV shows like Miami Vice....

Shel, its time to get long some SoWal babe cakes - or else be left in the dust as a two bit trader that made a prescient and psychotically emphatic trading call on a chat board... the internet is now your enemy, information flow your nemisis....

keeping SoWal a secret for the next 20 years will make wak-a-mole look tame.

Way to attack Shel. Sorry if she sees something you don't. Internet or not, the New Yorkers have to come here before the Europeans do. Just like Miami.
And even in the 80's and 90's Miami had culture and nighlife.

[Ohio Girl]

Housing bubble explained ... I found this to be an interesting article on Slate.

Foreclosures have become a major political issue. Ever since December, Hillary Clinton has been making daily calls for a 90-day moratorium on foreclosures. The Bush administration has been inching toward an anti-foreclosure policy. The Hope Now alliance was created in October as a voluntary industry effort to aid troubled borrowers. In December, the White House and Treasury Secretary Henry Paulson encouraged Hope Now members to offer interest-rate freezes and refinancing for certain qualified borrowers as part of an effort to avoid foreclosures. This week, the administration rolled out Project Lifeline, which offers qualified borrowers the chance to freeze foreclosure proceedings for 30 days. (Coming next: Operation Desperation.)

All of these proposals are good ideas, and bad ideas, for the same economic reason: Forestalling more foreclosure delays price discovery.

After a bubble pops, markets go through a painful process in which they try to agree on prices for formerly inflated assets. This is called "price discovery." When the bubble is in stocks, price discovery happens very quickly. A stock can go from $60 to $0 in a matter of days, if not hours, and sometimes did when the Internet bubble popped in 2000. From a macroeconomic perspective, such stock price discovery is painful but not necessarily devastating. The people who own bubbly stocks lose money. People who bought the stock on margin—i.e. they borrowed to buy it—lose a lot money. Banks who lent to high-flying firms frequently must write off loans. And companies that supply, or service, or depend on the afflicted firms may suffer as well. But, as when the tech bubble popped, stock price discovery usually doesn't lead to systemic failures.

By contrast, the process of price discovery in housing, and housing-related credit, has been much slower—and it has much more dire systemic implications. The housing market peaked in 2006, and it has been slowly slumping. But nationwide, according to the Case-Schiller index, housing prices have fallen only 8.4 percent in the past year. Home prices in some areas of the country may need to fall 30 percent in order to find bottom. That process is likely to take years rather than months.

The slope of the housing decline has been gentle because houses can't be flipped like stocks. People live in their homes, and there are big transaction costs associated with selling them. The market isn't very liquid. There's another reason housing prices have been slow to fall. There are all kinds of incentives for everyone involved in the housing market to push off the day of reckoning, to delay the process of price discovery.

Start with the homeowner. Homes are highly leveraged purchases, whether it's 20 percent, 10 percent, or 0 percent down. Owners of existing homes are reluctant to mark down the value of their homes 20 percent overnight because, in many instances, it will wipe out their equity. Homebuilders and condo developers don't like to lower prices quickly because it makes those who bought in their development five months earlier feel like chumps. The banks don't want to concede that the houses they lent against are suddenly worth a great deal less than they were a few months ago. Investors who bought the bonds created by slicing and dicing mortgages—and then leveraged up their positions by borrowing money—get massacred when prices fall. The same holds true for bond insurers like Ambac and MBIA, which insured structured finance products created by lashing groups of mortgage-related securities together.

And so, since the bubble popped and home prices ceased to rise, desperate players in the market have taken a series of actions intended to delay price discovery in housing. Rather than cut prices, sellers began to throw in free cars or other inducements to buyers who paid the asking price. Brokers reduced their commissions. Builders started including all sorts of extras (fancy kitchens, pools, etc.) for no additional price. Every link in the chain sacrificed margins and profits rather than cut prices. The Wall Street Journal reported last year that homebuilders were funneling large cash payments to buyers through third-party marketers, in effect reducing the price buyers had to pay while publicly reporting that sales prices remained buoyant.

Such measures were like throwing sandbags at a rising river. And it hasn't worked. The carnage in subprime loans has led to a spate of foreclosures. When banks or investors take over properties, they recoup whatever they can by placing it on the market quickly and accepting any reasonable offer. When foreclosed properties are dumped onto the market and sold at fire-sale prices, they establish new comparable sales on a given street or neighborhood. It might take a solvent home-seller 18 months to mark down the price of his house by 20 percent. A bank will do it in 18 days.

Foreclosure also has the effect of hastening price discovery on the mortgages on those homes, and on the bonds backing them. Here, again, the impact can be devastating to those who bought the assets with a great deal of leverage. Hedge funds and other institutions sitting on the depreciating debt either had to put up more collateral to maintain their leveraged positions, or dump the assets to raise cash. Bond insurers must increase reserves to prepare for defaults of the bonds they insured. And if the bond insurers fail, the financial firms that purchased insurance from them will have to take their own write-downs. The potential for massive systemic problems is the reason there's been so much discussion between financial institutions and government regulators about trying to orchestrate some sort of bailout for the bond insurers.

In general, cleaning up quickly after popped bubbles is good for the economy, because it enables everybody to move on. Over the years, the American economic system has proved to be quite adept at doing so. And as Japan's experience in recent years shows, refusing to deal with the overhang of bad debt can condemn an economy to a lengthy period of slow growth. But I doubt there's the political will to allow the fast price discovery allowed by foreclosures to continue. While it would certainly bring long-term economic benefits, the short-term social, financial, and political consequences of a rapid clearing of the housing mess are too much to bear. As the year goes on, expect presidential candidates and government officials to keep throwing lifelines and buckets full of hope at the housing market.

Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at moneybox@slate.com. He is the author of Pop! Why Bubbles Are Great for the Economy.

[spinDrAtl]

But I really don't think any of the big mergers like United/Continental or Delta/Northwest will ever happen due to government intervention by senators protecting their home airline. But if it does it will also have to happen quickly under Bush as I don't think McCain or the Dems would be for consolidation.


JMHO,
Flyguy

I believe one Ga senator has already had a conversation with Delta's CEO.