Wandering Thoughts on a Meandering Market…

Posted by Jim DeBellis on June 9th, 2011

It has long been said that the minute you drive a new car off the lot it loses thousands of dollars in value.  (Okay, when I was a kid the price of a car was only a couple thousand dollars, so they lost a few hundred in value then.) Nevertheless, people still continue to buy new cars, and they just accept that aspect of the market.  Homes have always been different.  We keep them longer, and we expect the value to grow as the years go by.

No doubt, the value of the home purchased by a young couple today will be worth much more when they retire; the difference is that it may be worth considerably less five years from now.  Value really only matters when a house in on the market, but we never know what opportunities life may have us chasing into other neighborhoods and new cities.  And, even more than that, there is something a bit disconcerting about buying a house that is dropping in value.  We wouldn’t buy a plummeting stock.

This market has the perfect solution built into it: the stockpile of foreclosed and distressed homes can often be purchased at a price well-below market value.  The cheap houses that are pulling down the value of the rest of the market that is competing for sales may actually begin to rise in value the moment they are “driven off the lot” and back into an active and useful life.  The more of these homes that are salvaged from the boneyard of distress and despair, the less downward pressure there will be on the other homes on the market.

If we could just separate the two markets (foreclosed and regular housing), just as car dealers separate new and used cars, then the low prices of one market wouldn’t drag down the values of the other market.  After all, used cars compete for buyers’ dollars in the automobile market the same way that foreclosures do in housing.

The solution to the housing crisis may actually lie in the recovery of the broader economy – jobs and wealth.  The housing market is really quite attractive – low prices and low interest rates.  The bad aspects of the market – falling prices and difficulty in securing financing – would both vanish if people were better off financially.  They would buy homes, and the rising demand would stabilize the prices.  And they would have the employment and income to qualify for a good mortgage.

The Catch-22 is that the housing situation and its effect on financial institutions is holding back the economy as a whole.  Similarly, low consumer confidence and tight credit is keeping spending at low levels, and the jobs won’t come until people open their wallets to buy.