The American Spectator

Rick Hiteshew br> Columbia, Maryland /p>

I think your observations depend on where the property sits (the ol’ location, location, location gambit). But real estate markets are not the same throughout the country. Where I live in Texas, we are dead last in home appreciation nationally, but the market is strong and demand remains constant. Some of the markets you allude to have rent control or restrictive land use policies and that effects the market in those areas as well.

The one item that really concerns me was your #8. We see financial instruments similar to your observations, primarily interest only loans or in combination with ARMS. Many for the primary residence. The cascading effect that can take hold on a family when the balloon comes due will be devastating if there is either high interest rates or a bottomed out real estate market. Many of my neighbors are going for them in a big way to purchase a larger home than they might otherwise afford. They are gambling that they will garner a larger appreciation share on an interest only loan by holding a larger asset base. They intend to refinance at the end of the ARM using appreciation to go conventional. The logic of course only holds if the market remains neutral to positive on housing.

p>But just to be devil’s advocate, places like Los Angeles, San Francisco and New York City are havens for liberal Blue Staters. Considering their track record for macroeconomic policy it seems odd to consider their economic decisions commendable at the microeconomic level. That’s like asking Keynes if we should go short on November wheat. br> — John McGinnis br> Arlington, Texas /p>

I found Barron Thomas’s article, “Are We in a Real Estate Bubble?” to be incredible and predictions such as he makes long overdue. The one thing I can’t understand in all of this is why some governmental power has not stepped in to safeguard our financial system. I have been somewhat unaware of the degree to which the prices have risen and the speculation underwritten by out-of-control loan companies. With what he explained, I wouldn’t be surprised to see a fallout somewhere in the category of the great depression.

I’m not in real estate, but I witnessed a bad crisis in real estate here in Texas back in the '80s. Once property started losing significant value, people started dumping any and all property they could afford to get rid of, followed by selling property they could not afford to keep, followed by people walking away from loans rather than be buried so deep that they would spend who knows what part of their lifetime trying to pay their loans down to the incredibly deflated price.

Some of the first to walk away from their loans were those who, without creative financing, would never have qualified for a loan in the first place. The tried-and-true methods of assessing credit worthiness had been abandoned and the law of averages worked themselves out. As values plummeted, even good solid people whose credit worthiness was flawless walked away. I knew a great number of very good and ethical people who went against their consciences when faced with a decision between seven years of bad credit verses paying perhaps ten or more years for evaporated value. (Not all of them ended up with seven years of bad credit, because bad credit back then became a relative term.)

As loan companies started foreclosing, and the number of properties they were trying to liquidate grew, prices for what was sometimes termed “distressed” properties fell to as low as twenty-five cents on the dollar of their original value (depending upon where it was located). Some loan companies even started allowing more slack on credit worthiness when the only way they could get a property off their books or try to get a decent price was to offer a loan to people with noticeably bad credit or suspicious backgrounds. Neighborhoods became run-down in no time. Good neighborhoods became not-so-good neighborhoods. Prices continued to fall.

Of course, back then there were many different dynamics that figured into the equation. There was an oil bust that crippled the economy. Interest rates were sky-high. Many of the “Savings and Loans” were poorly run. However, the human dynamic remains the same. It’s the same dynamic that fuels the corrections in the stock market. Once prices start plummeting, people start bailing out at whatever price they can get. The unfortunate aspect about a price drop in real estate value is that the value of real estate has no foundation other than the value the realtor can successfully market to a potential buyer. If the realtor can’t sell the property, its worth is only a thought in someone’s mind.