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Subject: about that house... Date: 3/7/2008 9:37 AM
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Let's see if anyone else is reading here. I agree it's awfully quiet for what this board is supposed to cover.

A couple of years ago, all we heard about was how high the price of housing would reach. My wife and I went to an open house in our building (high rise condo) and had a chat with the realtor. It was a two bedroom one or two baths with a balcony. The place was somewhere between 1100 and 1200 square feet. Lots of light came in through the big windows and the view was not bad. This was in the DC area. The condo was listing for almost $400K.

We were surprised and told the realtor prices had really gone up (as though no one had noticed!). Her reply really floored me. She said that these places would go up to a million dollars. She was probably right because 25 years ago the same unit went for about $80 thousand. As surely as the sun sets every day, the price of real estate does go up over time. How long it will take to reach a million dollars is anyone's guess, but it will get there.

Flashback to the present...

Now that we're all in a funk over the falling price of housing, ghouls and goblins are crawling out of the shadows and making their pronouncements about how bad it will get. Denial seems to have made way for some kind of realization that we are in a funk. Prognosticators are now calling for falling prices. They are also telling us that many people will simply walk away rather than pay up. Is that really what will happen?

Who are the people who will walk away from their houses? Where will they go?

One article I saw gave the example of a person who found out he could rent a home identical to the one where he lived for significantly less than his mortgage payment. How many homeowners can really do that?

On another note, it was mentioned that people are trying to sell their houses but that they refuse to lower their prices. The conclusion is that they must lower their prices further to sell and that unless and until that happens the market will stay frozen. What this fails to take into account is that in previous real estate bubbles (we did have some local ones that popped in the early 90s), some people tried to sell to cash in. When they couldn't, they took their houses off the market and stayed there.

Is it unreasonable to expect that some people might wait this whole thing out? Inflation will help bring down the price of houses in real terms. If the budding inflation rates that we are seeing now are any indication, we might chop a few percent off the value of houses without their prices having to go down at all. To down 25% in real terms, we might only need to go down 10-15% over a couple of years. It might not be fun to see prices fall, but we'll have the illusion of preserving more value if we ignore inflation.

Looking at real estate prices in the US going back to the late 80s, prices do fall at times, but they do so rather slowly. In the DC area, prices did not move for 10 years. Adjusted for inflation, they fell, but the dollar amount that shows up as the sales price did not change. As fast as prices rose in the last few years, they may take a while to wind down.
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