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Jim Scott
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Are We There Yet?

The housing recession is turning four. Few people have been spared from the effects of this massive price correction. Granted some regional markets and certain types of properties have fared better than average, but no one has been safe from the lowering tide.

Since so much of our collective wealth derives from real estate values, it is no wonder the national economy continues to underwhelm.

Our economic betters have gone to great lengths to shore up the housing market and have largely succeeded if you define success as avoiding real estate deflation. Mr. Bernancke and his cohorts at the Fed have done cartwheels to insure long-term mortgage rates remain at historic lows. More open than his opaque predecessor, the Chair has told us the free ride will go on at least another two years. Inflation Hawks at the Fed are in full retreat.

From the beginning of la crise, the Fed’s accommodative policies were to many dangerous, inviting a future period of ruinous inflation. Those same people also decried the various Federal stimulus programs, paid for by printing money and creating debt, as foolhardy economic policies. The steep run-up in the price of gold and other commodities in 2010-11 was symptomatic of unwarranted global fears of inflation.

It was was hardly news when last quarter’s rate was 1.7%, under the Fed’s stated goal of 2%. I am sanguine about out-of-control prices. The global economy and the information revolution have created an excess capacity of labor and many raw materials. Put another way, there is not enough aggregate demand for all the goods and services available globally. The world economy is still adjusting to changes wrought by globalism and technology and I suspect that process will go on at least another decade.

These events will have a continuing impact on local housing markets. After all, inflation is the mother’s milk of real estate success. Often people who invested successfully in real estate assumed they were financial stars. The truth is inflation made a lot of people rich. Until a few years ago, when Lehman Brothers imploded, it was very difficult to lose any money in real estate. It was a sure play.

Which brings me to back to the housing recession in San Diego County. I recognize there has been a steady drumbeat of positive press lately concerning sales and the reporting has usually been spot on. It is true inventories are about one-half of where they were a year ago. Yes, the number of foreclosure filings has stabilized and the median price in the County is up 1.7% for the past year as of this writing. Some markets are very competitive and the media love stories about frustrated buyers trying to get on the property ladder at the lower pricing reaches. The brightest spot is the landlord-friendly rental market. I think the logjam at the bottom of the market of first-time buyers is driven by as much rising rents as attractive interest rates. These positive developments are welcome but they are only part of the story. Or to put it another way, are the many positive numbers indicative of the beginning of a recovery?

I believe 2012 and to a certain extent the back side of 2011 can best be described as a cease fire, like when in World War I when the combatants had an unspoken agreement not shell each other on Christmas.This is not a negative view of prospects, quite to the contrary. Recovery is ahead, just as Armistice Day was inevitable for those poor souls laboring the trenches.

The reason I hold this view is that the rich countries are engaged in a strategy of kicking the can down the road. Not that I disagree with this course, it is the only choice. All of the smart people running the Western economies have not arrived at this point by accident. In the New World Order, housing will not deliver the economy from the recession, as has been the case in every postwar recession. This time around real estate will have to rely on job growth and moderate inflation.  

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