Wednesday, October 20, 2010

We've seen this movie before.

Those of us who remember the real estate and mortgage world thirty years ago find a striking similarity to what’s happening today. Unemployment was widespread and topped 10%. Home prices declined and sales activity came to a standstill. Mortgage approvals were near impossible. The cause was different than today but the effect was the same. In the early 1980 the Federal Reserve under Paul Volker intentionally raised interest rates to stratospheric levels to break the back of inflation that had been running the dangerously  high for the previous 10 years. The effect was immediate. People couldn’t get loans, sales dried up, and unemployment soared. Adverse economic conditions persisted for nearly three years. In fact, it was a true double dip recession. The first recession ran six months, then a brief period of anemic economic growth and then another dip lasting 14 month. Pundits pointed to what was termed the “Misery Index”, a combination of the unemployment rate and the inflation rate, which hit 22% in mid 1980.  Eventually the Fed’s policies worked.  Inflation began coming down, employment improved and credit loosened. The effect on residential real estate was profound and lasted for the next 8 years. There was so much pent up demand that once things improved consumption grew at a robust rate and a healthy real estate environment reestablished itself.

Are there parallels today? The current unemployment rate is troubling and may be with us for some time. Also, the household balance sheet has been damaged by stock market declines, property value declines and excess debt. But on the positive side, over 90% of Marylanders are still employed, household income is increasing and interest rates are at historic lows. In the meanwhile unsatisfied demand is building up in the marketplace. How many families who want to move-up are concerned about the future and have decided to wait?  How many seniors who want to move-down have postponed the decision? How many employers have deferred hiring or expansion plans? The collective effect of these decisions is similar to what happened in the early 80’s…market paralysis resulting from a lack of confidence. It will not take much to turn the tide of consumer sentiment. Hopefully 2011 will produce continued slow improvement in economic gains and convince most Marylanders that Armageddon is not at hand, Once that happens pent up demand, combined with favorable pricing and low interest rates, should awaken a slumbering real estate market. 

Don’t believe any of the doomsday scenarios. It was prevalent in the mid 70’s and early 80’s as well. A best selling book at that time was Harry Browne’s “You Can Profit from the Coming Monetary Crisis”. It reached #1 on the New York Times best selling list. He told his readers to hoard coins and food as paper money would become worthless and governments would collapse.It didn't happen then and it's not going to happen this time either.

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