Newton’s Laws and Real Estate

I sold my house a while back, and right now I rent. I have heard every reason why I should be buying again, but still I rent. My friends and colleagues continue to invest in real estate, continue to say how their area is different than the rest of the country, and that appreciation is inevitable. My reasoning – house prices have been acting like bonds – interest rates went into a long decline, and Newton’s Third Law kicked in. And the external force that causes Mr. Gravity’s First Law to take affect are now on our heels.

The following article is about 11 months old, but I believe it is still extremely relevant today. Entitled “There Goes the Neighborhood” by Benjamin Wallace-Wells, it delves into some of the tie-ins between the Federal Reserve, federally insured institutions such as Fannie Mae and Freddie Mac, and how the whole process of mortgage lending (and its underlying lack of accountability), has created a dangerous situation for US homeowners.

Keep in mind, much of what Wallace-Wells says hasn’t quite happened yet, but it is interesting to note that he mentioned problems with Freddie Mac; subsequent to the article, Fannie Mae too has experienced accounting and regulatory inquiry. As these institutions are the engines that make the home lending wheels spin, problems there may still fortell of systemic issues down the road.

Please refrain from comment about how building moratoriums in your particular area have created short supply, how replacement cost for your home has skyrocketed along with lumber prices, or that I should be thinking about my next home as an abode instead of an investment. I have heard every one of those arguments, and by folks from all over the country. They are all thinking the same way you are.

Price takes into account most factors up front, and the unchecked liquidity we have experienced over the last decade will end, sooner rather than later (in fact, it is already beginning). As I believe this liquidity has been the biggest factor in price increases, those prices will have to correct as well, and likely sooner rather than later.