The Other Side of Irrational Exuberance

by Stan Blacker

Those of us who make their living in the mortgage and real estate business are used to business cycles. Although the last few years have been worse than any other period since the Great Depression, we're only experiencing the other side of the curve created by the appropriately titled "irrational exuberance" era.

In retrospect, exuberance is not a strong enough word for the culpable actions of the parties that fueled the bubble until it burst. However, this is not another rant about who to point the finger at or which direction the next knock-out blow is coming from. While the real culprits in every Ponzi scheme (or, "bubble") are the sales people who generate the new suckers ("investors"), it's always a handful of loud Armageddon types who make a name for themselves by getting their clients out in time.

But when it comes to housing -- once referred to not long ago as the engine of the economy -- those making the right call this time will be me and anyone else who tells you just how robust our recovery will be once it starts.

Our company operates in Florida, where home prices doubled in less than a three-year period and just a few years later 50% of homeowners owe more than what their homes are worth. So how can I predict that when the inevitable home sales recovery cycle begins, it won't be a barely perceptible flat curve no one will notice until years later? It's actually quite simple.

Housing, like any sector, is based on supply and demand. There's just too much pent-up demand not to expect a flood of home purchases once people perceive we've reached the bottom as far as home prices are concerned. Unfortunately, no one can be sure when that will occur. We will be sure, however, that a sustained bottom has been reached once the perception -- not the fundamentals -- changes, i.e. when Mr. Case, Mr. Schiller and others like them say so. And just like that, it will be, as they say, "Katie, bar the door ...."

Change will be immediate. More renters will become buyers. Kids grow up and become first-time home buyers every year (but less lately). Baby boomers reaching retirement will buy homes in Florida again or second homes. Sure, they won't all buy in Florida. There are certainly enough boomers to go around. And housing stimulates a lot of other sectors like construction, retail, finance and other services that will help add jobs.

Better employment numbers are key to any recovery, but they will also ease the traditional rate of household movement around the country. This number -- based off of natural migrations due to job opportunities in growth areas or joining other family members who previously relocated -- has dropped to record lows in the last few years. Now add all the move-up buyers who make up a large portion of home sales whose plans have all been on hold due to the declining markets. Move-up buyers are previous first-time home buyers who have grown out of their initial purchase or homeowners looking to upgrade.

This group has been reluctant to buy because they know if they wait they'll get a better deal. Why would anyone ready, willing and able to move up make that move if they thought they could pay another 10% or 5% or even 3% less by holding off a little longer? Their decision to wait is validated by the constant media attention to foreclosures, short sales and doomsday predictions. So they wait. And the pent-up demand keeps building, albeit under the surface.

Last week, we received news of the ultimate guarantee that we Floridians will have another boom in our colorful economic history, long characterized by booms and busts. (You'd think the meltdown the country just endured would result in real reform that will lessen the pendulum swings next time, but that's a story for a different day.) Last week, a University of Florida study indicating population growth of almost 20% by 2020 was released. Last year, the Armageddon folks had a field day with the news that for the first time, more people moved out of Florida than moved in. The news of an increase this year, although small, and the 2020 projections, was greeted with mixed reaction -- some encouragement but little solace to the downtrodden.

But there's one obvious conclusion that bodes well for all sectors of our economy -- all those people will need places to live.

The sheer numbers we're talking about in terms of first-time home buyers, boomers, mover-uppers and general migration will drive up the number of transactions and eventually prices as well. As in every cycle, we'll move from a buyer's market to a seller's market -- it's inevitable.

The government and the powers that be are keeping interest rates low enough for everyone who can qualify to refinance their mortgage -- and we're busy because of it. But I think we're going to be a lot busier when the market turns. And it'll be a flood, not a trickle.

Stan Blacker is president of Mortgage Resource Partners in Clearwater, Florida.


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