Housing Bubble? (Pt 2)

I a previous post I opined on the state of the real estate market. I believe it is very important to remember the words of one of history's greatest economists who said, "The markets can remain irrational far longer than we can remain solvent" (or something to that effect. What John Maynard Keynes was suggesting is that asset prices will not necessarily reflect what they should be priced.

In any market (stocks, bonds, houses, and tuna fish), prices are a function of supply and demand. Sometimes, either factor can be artificially enhanced. One example is an "urban growth boundary." I have heard this used as a reason why Portland real estate cannot significantly decline in price. All I have to say about that is to look at Manhattan, which has a very significant urban growth boundary, namely the Hudson and East Rivers. It would be difficult to extend that boundary by law.

Another artificial enhancement is the tax break extended to home owners on mortgage interest. Of course, this enhances demand. Another is derivative mortgage products, allowing people to finance their homes interest only, or fluctuating monthly based upon some measure of interest rates. All of these factors serve to enhance the demand of housing. For prices to change, supply or demand (or both) must fluctuate.

Bottom line: can housing prices decline? Absolutely. Will any measured decline pose a very real problem for some borrowers? Absolutely. If you are in year 1 of a 30 year fixed mortgage and you do not have to move, are you in danger? Probably not. Will housing prices recover from a protracted decline? Sure. Just look to history for precedents. It may take a decade or more (depending upon the severity), but it should happen.

In a related sidenote, based upon an anonymous e-mail I received from a reader, I leaned that this post came up # 2 in popularity when I searched "housing bubble"+"oregon." Pretty cool, even if it did only bring in like 10 readers.

Hope the rest of your weekend goes well.