Thursday, March 31, 2011

When a Housing Market Crashes

Lately, the talking heads on the business channels are abuzz about whether the American housing market is heading for a double dip.

That’s code for… is the housing market going to continue to decline. If it declines, could it possibly crash. Considering that most Americans have most of their assets in their homes, what does that mean for the average American citizen?

For my part I find that these debates contain too much jargon, too many statistics, and too little vision about what a housing market crash actually looks like. To understand the problem, we need to picture it.

What happens when it comes your neighborhood? Does it just mean that there are going to be lots more cheap houses for you to buy up? Does it mean that foreign investors are going to swoop down, pick up bargain condos, and rent them out? That’s what seems to be happening in southern Florida. There the situation seems to be under control.

Perhaps the picture of what is happening in Florida is luring us into complacency. The Economist has just offered an excellent article about what happens to a city that was built on cheap credit when the credit dries up and the housing market crashes. And what happens when the housing crash begins to take on a life of its own. Link here.

And it is not writing about Detroit or some third world country. The Economist is focusing on America’s playground: Las Vegas, Nevada.

I am not going to summarize the article; it is too intricate to lend itself to a quick synopsis. I recommend that you read the whole thing. It is a sobering assessment.

But it refers to a housing bust that has only impacted a limited segment of the American population. What happens if it comes to a neighborhood near you?

For putting some flesh on the bones of the dry charts and graphs and statistics, the Economist deserves considerable praise.

1 comment:

David Foster said...

Note that house price increases/decreases really represent intergenerational wealth transfers, younger-to-older in the case of increases, older-to-younger when prices fall. Yes, there are some non-US housing investors, especially in places like south Florida, but the vast majority of purchases are American-to-American transfers.