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It's the vastly inflated price of land, stupid



September 08, 2008 – Comments (2) | RELATED TICKERS: DHI , PHM , RYL.DL

I haven't blogged in over 3 weeks (except on my shamelessly profiteering blog). Going by recs, I haven't blogged well in even longer than that. But I'm back now, and I have something to say.

Homebuilders? Homebuilders?!?!?!? Give me a break! It's not about buyers caught in the credit crunch. It's about them having paid 3-5 times too much for land, like tech stock fund managers buying equities in the year 2000, and now they have to sell into a market that is starting to wake up to valuation reality. And it is just starting, do not kid yourself.

I'm young, and I don't know if there are markets out there that deviate vastly from the national average. But I know that where I live, and in the national average statistics, house prices are at least 20% higher than they should be, even if the economy keeps its legs. The government has taken steps to prolong, not mitigate, the correction. And the FDR-like interventionism of the Bush administration (and, most likely, the next administration) will probably cut the legs out from under the economy, leaving house prices without their only support.

Furthermore, these house prices reflect slashed prices of existing homes! Companies building new homes are going to have even more trouble than that unloading their unwanted inventory into an environment of people living with their parents because they can't find a job.

We've just had our most Nixon-like Republican president since Nixon, and we're about to elect Carter Jr. (guess who -hint: he's half black) or Nixon III (guess who -hint: it's McCain). It's going to be worse than bad. It's going to be stagflation. It's going to be economic hell until we get, to keep the analogy going, Reagan II (guess who -hint: she doesn't have a unit of Vietnamese currency).

Whether you like Reagan or not, don't buy homebuilders for pete's sake.

2 Comments – Post Your Own

#1) On September 08, 2008 at 7:30 PM, TheGarcipian (33.65) wrote:

Yep, I hear ya, FB. But when you're in a hole, whether it's financial or political, the first rule is: Stop Digging!  Obama wasn't my first pick, but now knowing that McCain plans to carry on with the failed and failing Bush policies (having voted > 90% of the time with G.W.B.), ya think we'd all know which direction is up from here, eh?  After all, it was the failure of the Republican Congress in the years 2001-2005 that, after being so heavily lobbied by the banking & financial industries, got us into this housing debacle with their deregulation laws, removing many of the stops that have been in place for years and for good reason. Greenspan's cheap money policy didn't help, but it wasn't in itself the cause for these massive losses & writeoffs & federal rescues; it was the deregulation that lead to the "Bankers Go Wild!" free-for-all. If I hear another politician or industry proclaim that they can regulate themselves, I think I'm gonna scream "Financial Shenanigans!" at the top of my voice.

Best of luck to you in your shameless profiteering!

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#2) On September 09, 2008 at 3:25 PM, FleaBagger (27.39) wrote:

Thanks, Gar! I must disagree with you on the cause of the problems, though. We've all been taught that renting is throwing your money away, that only the poor rent, that they're not making any more land, and that homeownership is the American dream through the most comprehensive and word-of-mouth advertising campaign in human history, so when gov't gets involved in an anti-free market policy of artificially lowering mortgage rates, we do what we've been trained to do. And is bidding up the price of houses really so different from bidding up the price of tech stocks? Or industrial stocks in the 1920's? The problem is that politicians try to fix these problems that really do fix themselves at the expense of the rich and irresponsible, as Reagan proved in the 1980's by not swooping in to save the day after Black Monday in 1987.

The key concept to remember is that a precipitous decline in the price of an asset does not destroy wealth, and therefore does not require a response. Wealth is the sum of goods and services, much like gold as opposed to dollars. When stocks crash 22% in one day, therefore they either were overvalued before, are undervalued after, or both. It is not a 22% change in real value, and therefore not a loss of real wealth, ergo no emergency action is required.

To apply that to today, when house prices plummet, no actual wealth is being destroyed, because the houses are still there. If homebuyers were bilked out of their money overpaying for a house that is a different matter, but the drop in prices itself is not an emergency, and requires no action. But government acts nonetheless, except in 1987, when an obstinately free-market president (Reagan) was in office. The times the gov't came to the rescue (1929, 1932, 2001, etc.) didn't turn out so well, pushing recovery times back years, instead of just months in the case of 1987.

You can easily make the case that economic fundamentals were better in 1987 than in 1932, but our economy was doing really well in 1929, and even better in 2001. Government "help" took one of the greatest economies the world has ever seen and made it desperately poor, with some people starving while gov't helped farmers by buying and destroying food. Hoover did badly, but FDR trumped his predecessor's mistakes and made them worse, more politically successful, longer-lasting, and more lethal.

It's true that industries don't regulate themselves, but they can and should be regulated by their customers and their suppliers. When that happens, peace and prosperity rule the markets. When gov't lends a hand, you get the 1930's, or at least the 2000's.

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