Friday, March 16, 2007

Homes aren't like stocks, they don't fall that much. Do they?

This chart was compiled from an FDIC report. It's easy enough to dismiss the evidence from the oil patch, if you want to. Prices there were forced down by an unusual, and very local, economic shock. The economies of L.A. and Boston are better diversified. Then again, if the oil boom-and-bust of the 1980s was an anomaly, what should we call the easy-credit-driven housing inflation of the early 2000s? Liar loans, interest-onlys, option ARMs, and aggressive subprime lending have changed the rules. We don't know how some people will handle these mortgage loans in a falling real estate market with many loans resetting to higher rates. Do they walk away?Do they buckle down and take a second job to make ends meet? History wouldn't seem to be a very reliable guide right now.