The article goes head to head with some long held givens about owning a home. I personally agree with Mark Gimein having lived through enough boom and bust cycles to to have seen the wisdom of buying cheap and the folly of buying high. In my area, Upstate NY, the second home market kept prices way higher than they would have been without it. The people looking to retire and move to Florida liked it, but people who tried to own a home on a non-NYC income didn't. Then 9/11 hit and the prices at least doubled overnight and in a lot of cases tripled! That scenerio created an unreal and unsustainable situation. How could a $80,000 house suddenly be worth $250,000+? Un-improved lots going for $3,000 suddenly were selling $25,000 in an area where the un-employment was usually at least half again as high as other places in the state. Add that to the fact that incomes were probably 60% of the median for the state and it was easy to see why there weren't many people born there still living there. Now that the 9/11 panic has subsided and people who moved upstate have realized they are going to have to make radical adjustments and then probably will still be stuck with that underwater house. They're killing themselves physicly and financially with 3 hour each way commutes trying to salvage an impossible situation. Nobody wants to 'fail', but I can see thousands of these cases and the question is...how much can they take? Being on thin ice to start with and then adding the burdens of higher commuting costs and flat or declining wages will eventually break the ice. My suspicion is that NY, NJ and CT are all in the same shape. It also went out to PA. That's a large area with a lot of people who are in the middle of a major adjustment. Where does it all start to turn around? And where's housing prices headed once people can't continue to pay for houses they overpaid for in the first place with the same or less money in an time when prices in general will be escalating?

Those tales that Mark Gimein told of purchase prices being equal to 10 months rent and still not selling are true. If mortgage foreclosuers stay high what happens? Lower prices? Same price with less valuable money? I hear that banks are already walking away from forclosed houses, in some cases, (just like the homeowners) because the loses they will incur will be greater if they try to dispose of it through selling it. That's a very strange and scary situation.

What if Housing Prices Do Recover? Then the current generation of young people will be unable to afford housing without taking on massive loans they cannot afford, even in supposedly "affordable" areas. Meaning one of two things will happen, home ownership will decline sharply, or we'll start building another housing bubble with a fresh new generation to foreclose on (though I doubt anyone would be willing to lend out the money this time around). Yes, people who currently own homes that they bought at over-valued prices are getting screwed by the current situation, but raising housing prices back up will simply cut off the option of buying a house for the next generation. After all, people were only able to buy those homes in the last decade because the banks were lending out larger loans than people could handle.

Foreclosures did not lead to housing prices falling below true their value, inflated home prices led people into foreclosure. But everyone seems to have it backwards. So let's think about this a minute. I will use the area I live in as an example. It has been, for a long time, a mostly working and middle class area. Up until 2000 the median home price was around $180,000. Since the median income is a little higher than the national average this price was affordable to most in the area. The 2005-2007 median housing price estimate in the same area from census.gov was over $400,000. In the same time period the median income went up maybe 10%. Doesn't do too much when housing is up almost 250%. Two years later you see a foreclosure or bank-owned property on almost every block. When I'm bored on the bus, I try to see how many signs I can spot in front of houses on my way to work. I counted over 20 last time....I live about 3 miles from work.

Home buyers, like investors, wrongly believed that housing prices would go up forever. Except, unlike investor who saw the potential to make huge profits on property speculation, this idea scared home buyers. Normally they might have been inclined to look for a cheaper property, or wait till their income rose more, but prices jumped so much so quickly and were seeming to jump everywhere. Governments, even in "blue counties," ignored community and progressive groups complaints about an affordable housing crisis. Local papers were writing articles about teachers and firefighters making 3-4 hour commutes, sometimes even sleeping at friend's or relative's during the week, because they had been priced out of the county. But the boom continued, developers and government's ignored the problems and potential home buyers got even more scared. "Maybe prices will never come down, it's not even that much cheaper in the 'bad neighborhoods.' At this rate if we wait another 5 years we won't be able to afford a tenement in the ghetto." So they bought what was available, which was still way too expensive, but the banks were willing to lend to anybody.

This is the other half of the foreclosure story. Yes, we all love to talk about and point fingers at the guy who bought a half a million dollar home on a $30,000 income, or better yet already had a home but just found it too damn easy to take out a few hundred grand in home equity loans and spend it on useless crap. I don't deny they exist, because I know enough of them personally. I remember saying to them, "your house is almost paid off, why the hell would you want to take out a loan on it for more than twice what you bought it for?" But blaming people doesn't address the underlying issue of why so many people were seeking loans that were beyond their affordability. We know poorly regulated banking with continually easing lending standards created the supply of easy access jumbo loans. But what was the demand? Lack of self-control, greed, irresponsibility, sure those played their part. But what led mass numbers of otherwise rational people to borrow such astronomic sums of money is that in order to own a home it seemed they had no other choice. Now, however, we do have a choice. Let home prices restabilize at a sensible and affordable price so that the median income family can afford the median priced home and not be bankrupted by their monthly payment. Otherwise this generation will never be able to own homes because of the irresponsibility of the previous ones.

I'm still stunned that anyone thinks the bubble prices of the 2000's were sustainable or will ever come back in the near future. While there may be localized cases of sustained housing price rises, on a broad national level I can think of none. Three historical cases stand out in my mind. 1) Robert Shiller has collected a magnificent database of US real housing prices since 1890. There was a housing bubble that peaked in 1894. Between then and 1921 real housing prices declined by 45%. It was not until 1989, 95 years later that real housing prices surpassed that peak, and then they only stayed that high though 1990. In the most recent bubble housing prices started to rise in 1997, the year of the Taxpayer Relief Act that extended so much preferential tax treatments to first and (for the first time) to second homes. In 2006 real housing prices were double their national average from 1890 through 1997. They are still 37% above that average and so real national housing prices will have to fall nearly 30% from current levels to get back to their secular trend average. 2) Japan had a huge housing bubble that peaked in 1990. Since then the Japanese residential land value index has fallen every year and now is over 40% below its peak. No one realistically thinks the prices of the late 1980's and early 1990's will come back in our lifetimes. 3) Piet Eichholtz did a research study of real housing prices in Amsterdam from 1628-1973. Although there was significant deviations from trend there is one inescable conclusion concerning the real housing price trend in the Netherlands over that 350 year period: it is flat. Not only has housing tended not to appreciate over four centuries in the Netherlands but there was one period between 1734 and 1816 when real housing prices actually declined by about 80%. They never again attained the peak values set the 1730's. The link to Eichholtz's paper is here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=5051 I think people need to review the history of housing prices here and abroad to disabuse themselves of the false notion that housing appreciates over time.

I don't think that USA in the 19th Century is really a good model for the country anymore as we no longer have the westward expansion to dissipate demand. Perhaps there are European models that are more comparable during that time period.