Building back from an upside down Market

An understanding of long term trends is always helpful in predicting where the future in general terms leads us to; especially when it comes to the biggest investment most people make in their lifetime: a Home. When researching some statistics for my friend Lila Keim’s website, I dug in to check out long term trends, because they reflect all aspects of life that impact pricing over a longer period of time, balancing out the effects of unusual or unnatural influences, such as artificial interest rates and easy money.

Since the ongoing discussion about reaching the bottom is confusing a lot of people these days, it may be a good thing to check those long term trends, removed from all the drama and ignorance that has been created through a boom period, we are now harshly coming down from.

The 25 year trend

Here is an average example of across the board value statistics. If you bought a house in the spring of 1987 for $100,000, the value by spring of 2000 would have taken it to $161,300; but by the spring of 2006, at the hight of the boom, that same house was valued at $305,000.
Now if I apply the long term appreciation, without the boom craze, the value in the spring of 2006 would have been appraised at $174,250 instead of the over-the-top $305,000 that the market was going for early that year.

The price trend line since 1975

In contrast if you bought the same house for $315,000 in the spring of 2006, you’re now looking at an appraised value of about $215,000, a hundred thousand less, while if the long term trendline would have continued without the impact of the housing boom, the value would be appraised at $199,000.

This conclusion is simply based on the available Statistical Composite available to anyone. Why do I like to use these numbers? Because they show the reality over a long period of time, that equates to everything that happens during those years, from oil price increases, military expenditures and their influence on building materials, transportation, inflation and everything else from politics to taxes and migrations.

In this example the Housing boom made us overshoot the long term appreciation trend by $116,00 and that has created a lot of hurting. But contrary to the initial Government and Economist’claims in the Fall of 2008, that housing needed to be propped up, which led to a.) enormous bailouts for Freddie and Fannie, b.) an $8000 first time buyer subsidy and c.) a gluttony of schemes to prevent foreclosures, the latter part of last year showed that the expected bottoming out of housing prices continued after the subsidy ended in April 2010 and Fannie and Freddie are still reporting huge and growing losses.

Since that time, house prices have resumed what seems an inexorable decline, which seems likely to continue considerably further. However even in that event, it is unlikely that housing’s new problems will do more to stem the overall U.S. economic recovery.

Why the economy is firing up and housing is still declining

It’s really a matter of timing. I won’t go into the miserable economic policies during the George W. presidency, because it is all well documented by now. I also will not go into the equally disastrous fiscal policies from the Obama administration, because the voters already showed last November that they had lost the promise part of his dream of change and its horrendous financial consequences.

As a result of both these presidencies, investment in truly productive enterprises has been suppressed, and the country was and still is forced to undergo a huge and painful recession as the “mal-investment” is working itself out. And no, we have not bottomed out in housing prices yet.
There’s still another key point to consider. From an economic standpoint, January 2000 was not a recessionary period, but actually the top of a crazy dot.com boom.  This means that we can expect the downward pendulum forces of housing prices to fall even beyond the longterm trend -perhaps an additional 10% to 15%, or even more if interest rates back up much longer.

And now the good news!

Even though this all sounds like a dire prediction, it isn’t. The good news is not a paradox. What we have now is that the heavy federal “stimulus” spending plans are winding down. Most were wasted, but their demise frees up financial resources for the private sector -sort of a reversal of the so-called “crowding out” effect.

Now that the government has finally stopped trying to prop up housing, we can see that the less money that’s “mal-invested” in housing, the more that is available for productive investment -particularly for small businesses, which are the main engines for job growth in this country.

If taxpayers and the new Republican Congress are suitably mean with bailouts of housing-related disasters, this trend will continue. In the long run, a U.S. economy that devotes fewer resources to housing and state spending is a U.S. economy that can devote more resources to productive, job-producing uses.

The important truth to remember is that -outside the housing market -the rest of the U.S. economy is now looking perkier. The Institute of Supply Management indices both actually rose more than expected in December, Holiday retail was better than expected, indicating that U.S. growth is picking up beyond its previously anemic pace in the 2% to 3% range. December job growth was “robust” in comparison -the first such report since the recession hit in 2007.

Unfortunately, there are still dangers lurking.

Starting a family, retiring in your favorite location, buying now is a good option.

The over-creation of money by Fed Chairman Bernanke and his international counterparts has inflated a commodity-price bubble, which will almost certainly bring about inflation. Until now, inflation has been America’s most successful export product over the past several years. But now that major supplier China has announced an increase in its interest rate percentages and oil is moving up quite rapidly, inflation may be the fly in the ointment.  Money spent on oil imports at more than $100 per barrel is also money that cannot be devoted to productive investment. Thus, further increases in the price of oil and other commodities could produce a second “dip” to the recession.

If that happens, the rising interest rates that are a virtual lock if inflation resurfaces, will themselves depress home buying and other asset-heavy capital investments. However, the inflation itself will tend to support the prices of housing and reduce the real value of debt -both benign developments.

If you’re in the market, now is the time to look

At the end of the day, what we find is that housing’s renewed decline is mostly a positive development. And if you’re in the market for a home, now is the time to start looking, before Bernanke’s latest $600 billion QE2 (quantitative easing) is going to push up interest rates. If you can swing it, push for a price 15-20% below the asking price ( the expected further drop for 2011), and if not, rest assured that the coming inflation will compensate you from not having waited until the market has bottomed out.

In my native country we have an expression that says: “I you want what’s at the bottom of the pot, you may end up with the lid on your nose.”