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The Bubble Next Time

The NAR

are in,  causing much gnashing of teeth on Wall Street. So the figures are at "10-year lows" (actually lowest since 1996—and will probably go a lot lower still). This was stunningly predictable, so I don't understand all the concern. The

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Times

did a

on Sunday ringing the death knell for houses as a "wealth building" tool. The take away quote there: "The experience we had from the late 1970s to the late 1990s was an aberration," Barry Ritholtz said. It's all very gloomy, isn't it? OK, so here's the thing. House prices are going to fall for another two to four years in most places. Baltimore is one of them. The BRAC hype is baked into our market, and the people in New Jersey are very unimpressed with the deals they've been offered here. Most of the jobs will be filled by newcomers, which will help the market suck less than it would have otherwise. But prices will still drop. Until 2012, at least. Then they will linger near the bottom, as interest rates begin to climb. You remember interest? That stuff you now pay record amounts of if you're unfortunate or stupid enough to carry a balance on your credit card? One day, maybe not next year, maybe not the year after, or the year after that, it's going to go up for home debtors too. Loans will be expensive, but houses will be cheap. This is not a bad thing. Since the 1970s a whole industry—of bureaucrats, bankers, bond underwriters, and lobbyists—has sprouted up to advocate for "affordable housing." This is an amazing phenomenon, not least because "affordable housing," in Washington-speak, has long been held as something separate from "market-rate" housing. "Affordable housing" (ironically costing two to three times as much to build as the "market rate" variety) was always pitched for teachers, firefighters, and cops—people who earn upward of $50,000 per year and have cost-of-living -allowance pensions. That is, people who make substantially more than the average worker. It was as if the was a capitalist system had failed, but nobody noticed. Now that formerly "market-rate" housing is becoming affordable, this is deemed to be the root of the largest financial crisis since the Great Depression. The

Times

trots out Ritholtz to tell us housing is over. Forever. I admire

,  and he more or less

But I think he's forgotten something important about the housing market from the 1970s through the 1990s: namely, the last boom and bust. Housing last crashed in 1989. Prices, which had basically gone haywire over the preceding seven years, fell in much of the Northeast (and across the nation, as

shows). They fell, then lingered in the doldrums for most of the 1990s. By 1996 or so, houses where I come from were actually under-valued. In Connecticut, buying in 1997, ‘98, or ‘99 meant paying less than the house was intrinsically* worth. Interest rates were absurdly high during much of this time. My 1999 mortgage was pegged at 8.6 percent—insulting at a time when inflation was below three. But that's how it happens: Just as the real risks are at their lowest, the banks will be acting as if they are at their highest—and vice-versa. If the past is any guide (and it is, when it comes to market cycles), prices will again rise unreasonably quickly, and to unsustainable heights. Probably in about 20 years. House prices will inflate again because houses are one of the only ways ordinary idiots have of madly leveraging their money. So, absent a complete reform and overhaul of the mortgage finance system—an overhaul the current administration (like the last) seems determined to do everything in its power to avoid—we can expect more housing bubbles. It's a matter only of when. What does this mean for most of us? What does it mean for our kids and our parents, who might be fixing to sell the old Colonial and get a low-maintenance place with no stairs for their dotage? For our kids, it means that in 10 or 15 years, even if they're still earning crap money at a crap job (which they will be, since nobody in Washington thinks wages should ever rise for anyone out of government), they might be able to buy a house anyway, because prices will have fallen by then to something like the true market level—or probably lower. Rents will be higher than the cost of ownership, so the math will work. For our parents, it means that the house they're in (provided they didn't use it as an ATM) will still put them in their new place, which is the same thing that happens whether the market is frothy with fraud or depressed. During the past 20 or 30 years, our parents and grandparents solved that problem by going to cheap locales such as Nevada, Arizona, and Florida. And whaddya know? Those are the places that are most overbuilt today—and thus most likely to remain depressed longest. If you live in a civilized state and (for some reason) want to move to a desert or a humid, swampy, Third World wannabe state with low taxes, no services, and tea-baggers shouting from every corner, you still can—now more than ever. So, is owning a home a bad bet? Not if you're willing to pay attention to the market's fluctuations and remain flexible about when to sell for retirement (the house I bought in 1999 for $76,000 had been listed six years earlier for $210,000). Buying a house was never the road to riches. Paying off one's mortgage and doing needed maintenance, however, will likely remain a good way to afford some options in later life—particularly if one is not blessed with a government pension. The time to buy is coming. =================================================== * I speak of intrinsic value in its original,

, not in the nonsensical

the finance people misuse it.

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