1 Boring Old Man

The figure above is the Case-Shiller Housing Index from a blog on December 30th, 2008. It depicts the rapid escalation of housing prices we call the housing bubble peaking in 2005, then plummeting. Besides the obvious bubble, there are two other things to note on this graph. First, the Case-Shiller Housing Index is adjusted for Inflation, so the graph shows that House Values are remarkably stable since the end of World War II. The illusion we had in the late 1990s and early 2000s that home ownership was a way to make money was just that – an illusion. The second thing is that the author of this graph [and others like it] projected that the home values would resettle to the 1996 [inflation adjusted] level [in red]. The above graph, by the way, is from immediately before President Obama’s inauguration. Well, that projection isn’t what happened. This is what happened:

As best as I can determine, the Case-Shiller Indexes are derived from homes that are resold on the Real Estate market, comparing their current selling price with their previous selling price. It does not contain foreclosures, defaulted loans, abandoned homes – and there’s a lot of that going around these days. Unfortunately, the exact statistics are not available without paying a fee [RealtyTrac, National Association of Realtors, etc.], and I’m neither a member nor willing to join, so I can’t show current foreclosure/default rates – but they’re both high.

So, I’m guessing here. But what I guess is that the Case-Shiller Index has remained high because people who paid exorbitant prices for their homes on the upswing of the housing bubble are either selling high [because they have desirable properties], or getting good prices because interest rates are so low [a home overvalued by 30% at today’s  4.25% would have the same payments as the lower price at 8%], or staying in their homes and making high payments to do so, or being foreclosed on, or defaulting on their loans. In other words, I’m thinking the Case-Shiller Index is only reflecting the home values for a select group of people. Many whose home values are below their remaining mortgage burdens are exiting through some side door [default, foreclosure, etc].

What this means to me is that we’re still in the "housing bubble." Real estate hasn’t yet reached anything like a steady state. People are either bailing out altogether or waiting in the hopes of retrieving their money from a bad investment [fat chance!]. And where is that money that people keep hoping they can get back? Well, I’ve got some of it. I sold our home in August of 2004 at a gagging price. Sure it was a desirable house in a good neighborhood. Sure, we’d put a lot of work and money into it in the 25 years we had it. But the selling price still seemed astronomical, even taking those things into account. And you know what? I’m not giving it back. You wouldn’t either. So some of that lost money is in the hands of lucky sellers like me – accidental entrepreneurs. Most of it is in the hands of the big banks who bought credit default swaps to cover their losses on mortgage-backed securities. A big hunk is in the National Debt from the government bail-outs that covered those credit default swaps. But no matter where it is, it’s lost to the home-owners who paid such inflated prices for their homes and didn’t sell in time. It’s just plain gone.