Exuberance Waning

From the Philadelphia Inquirer:

Housing decline: How 'temporary'?

You know the boom is over when even the brokers start predicting lower prices. That was true of the stock-market bubble in 2001, and it's true now, as the air comes out of housing.

Yesterday, the National Association of Realtors issued its sales forecast for the rest of this year, saying an "inventory and price imbalance" will likely cause home prices to fall below the levels of a year ago.

Of course, the drop will be only temporary, the brokers' group says, just until "the market works through a buildup in housing inventory."

Anyone who didn't buy a house last year in hopes of "flipping" it for a quick profit should be fine, they assure us. And perhaps they're right.

But as long as "temporary" lasts, we could be in for a bumpy ride.
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Closer to home, they found house prices in the Atlantic City area rose only 2.6 percent during the first six months of 2006. A year earlier, the same market saw prices rise nearly 8 percent.

But isn't a 2.6 percent increase still an increase? Not necessarily. Houses don't behave like stocks; when the market cools, publicly reported prices are the last thing to change.

First, sales volume slows down. Then sellers start offering "incentives" - discounted add-ons, flexible payment terms or subsidized mortgage deals. The real price can be falling for months before it shows up in anyone's statistics.

That means it could be a while before we know the size of this "correction." And the extent of the fallout - political as well as economic - is anyone's guess.
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Alan Greenspan once referred to that kind of behavior as "irrational exuberance." The question now is, what happens when it stops?