- Miller Samuel Real Estate Appraisers & Consultants - http://ms.clash.outthinkgroup.com -

[Up Side Down] The Cart Before The Horse (The Mortgage Before The House)

Assuming the US economy is either in a recession, or on the precipice, it will be the first time in history that housing pulled the economy into a recession [1]. Typically a recession drags housing down kicking and screaming with it.

Who cares? (I find it easier to talk to myself)

It help explains why the federal government has been so tardy in reacting to the impact of housing on the economy. Once the Fed began to raise the federal funds rate in 2004 after keeping rates unusually low for 3 years, actions (and acknowledgements) were taken only after last summer’s credit market implosion. It makes me even more wary of comfort messages like this [2].

What happened?

The unusually low rates and unprecedented liquidity in the credit markets fueled the housing boom of 2003-2006 across the US (and much of the world). This created a high level of speculation resulting in unusually high sales levels. The differential between normal sales levels and those of this period were represented by investment properties.

The music stopped in July 2007.

Investor demand, flippers, etc. fueled artificial housing demand layering over an above a brisk housing market caused by low rates and non-existent underwriting standards left a high level of unsold inventory and foreclosures behind.

The combination of rental and sales market trends we see now are unusual.

We now have a situation where both sales and rentals are in sync: characterized by price erosion and inventory expansion.

Perhaps we needed a jackass pulling the cart, rather than a horse?