The Future of the Real Estate Market

Sustainable Growth or Speculative Expansion?

If we agree that the real estate market was brought down by the eventual dry-up of all the speculations, it doesn't take much number crunching to make an easy judgment call that the market will not rebound back to where it was before, not even later--that kind of fanatically climbing and eventually collapsed speculations are gone for the good. Now the market can only take what is given and as prices and sales numbers continue to drop, but noticeably at a diminished rate, it will see some stabilization and any rebound thereafter will no doubt take a whole different course of actions from the most recent past, that is, slow, but sustainable growth will dominate the future housing market, like in the old days backed by the real housing demand. Market moves will be conditioned on home buyers' purchasing power, not on speculators' greedy appetite.

Speculators, including ordinary home buyers betting on quick housing appreciation to get inside the door of homeownership when financially unqualified otherwise, had collectively inflated this big housing bubble. It easily reminds us the Internet bubble and its burst, back when smart money was all speculatively bidding on Internet start-ups. But sustainable growth takes more than chasing a hot commodity. How unreal it seems today that not long ago some experts were still hard selling the idea of no real-estate bubble. How could the then housing market not be a bubble when its values "grew" more than 10 percent year after year while the economy worked damn hard to achieve only a 3 to 4 percent GDP? That magic 10% number well covered interest charges to essentially give borrowers free money while still leaving additional room for profits--extra cash if sell it and expanded equity if retain it. But when speculations finally topped, everything that was built on it fell.

An apparent problem with that easy money-making was its lack of justification in any economic sense--finally detected when rationality returned. One simple thing economics teaches is that to make money, add values. For the most part, an existing piece of property is very much limited to its value adding capacity. To think that the value of any house on the block could by itself increase over and over demonstrates that economics ignorance. When a property is for resale, in a normal case where no renovation of any sort has been done and nothing intangible or psychological in the environment has been changed, it deserves a yearly value adjustment based on only: a run-up at the rate of inflation to reflect the cost of constructing a similar new property today and a run-down at the rate of depreciation to account for the wear and tear over the years. If that's the rule followed in assessing property values, any future rebound and growth in the housing market is not to be represented by price hype, but like in any other sector or industry in the economy, by production increase--measured by new housing starts. But we all know that housing is like no other commodities; tight supplies in desirable locations will always exist and can not be eased by simply building more because of the availability of the land. Therefore, to some extent, speculations will always follow, but as long as they don't spread all over the market, a healthy growth can be still achievable. It takes market dynamics to counteract market concentration that often gives rise to speculations, which are the real enemy to sustainable growth because of its ability to disrupt any steady work in progress.