Why The Housing Market Isn't Going to Collapse

After a 10 years of hype on how the real-estate market is the safest place to be, the spinmeisters have gone into reverse, saying we're headed for a collapse. Don't believe it. Sure, the real-estate market is correcting but it's not going to collapse and bring the economy down with it. Here's why.

There's been a lot of talk on this site and across the Web about how the drop in housing prices is going to sink the economy.  The common theory is that rising rates on variable rates loans are putting pressure on many homeowners who can no longer unload their homes because prices have fallen.  As a result, many are going into default, causing the value of the securitized sub-prime loans to fall.  This has wiped out several hedge funds and cast a pall over the sub-prime market in general.

Many believe the damage will spread out of the sub-prime market as housing prices continue to drop and interest rates rise.  I see several problems with this theory: 

  1. The economy is strong and the unemployment rate is low.  Most people who are employed do not default on their homes.  They will give up everything else before they lose their house.  As a result, while defaults are high compared to recent history, don't expect them to rise much higher unless the unemployment picture changes.
  2. Interest rates are relatively stable and if anything may drop.  Certainly if the economy weakens and unemployment rises, rates will drop.  This will help to boost real-estate and allow many variable rate mortgage holders to refinance.
  3. The drop in prices only impacts a small percentage of people who purchased their home in the last two years.  The reality is that most homeowners are still way ahead on the value of their homes.  Someone who bought 5-10 years ago still has plenty of equity, as long as they didn't take it all out with home equity loans.
  4. The drop in prices isn't equal nationally.  In many places of the country housing prices have hardly dropped at all.  As a result, the damage is limited.

While real-estate may be a drag on the economy, it is hard to imagine that its impact will be consequential enough to drag a relatively robust economy into recession.

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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Comments

  • Richard Mac

    August 14, 2007

    Lots of folks in California, Nevada, Colorado and Miami have already been burned by applying this kind of rationale so I wouldn't be so sanguine. Read this:
    http://www.nytimes.com/2007/08/13/us/13stockton.html

  • Ming

    August 07, 2007

    I agree. I think home prices went up for one big reason. They were cheap. That is the real reason they went so high the last 10 years. Are home prices still high or low? That is question is easy to answer. Home prices are still relatively cheap. If human populations continue to grow as planned, home prices worldwide could double easily from current prices.

    So, if there a housing bubble on earth? Not really as long as humans are living on this limited earth. Conclusion is buy as much land as possible for the future because home and land prices and even water itself will be very expensive. Land is where one can get water. Water will be major drive to fight wars. They are fighting for Oil now but water is coming soon. Land will be expensive because they hole water underneath.

  • RajJat

    August 06, 2007

    There is a massive industry that has been bent on getting millions of ill-informed Americans to borrow much more than they could afford or than they should have been allowed. Many cannot service their debt even if they stay employed.

  • Gunther

    August 06, 2007

    You are wrong. Rising rates on adjustables are going to squeeze people's ability to pay regardless of having a job or not. It's not like salaries have gone up much in the last couple of years.

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