Well Are They Or Aren't They?

I stumbled across this blog entry out of Irvine, CA and found it to be well thought out and made a lot of sense in terms of explaining why we’ve recently seen such astronomical real estate highs - and lows - across the country. Although it goes against what I learned in the Power Pricing Course and is titled “Houses Should Not Be a Commodity”, I think it has some pretty good information. It has some intriguing graphs and charts predicting how all this will play out and is a pretty long read so here’s an excerpt:

“…once houses become an investment, the prices of houses begin to behave like an investment, and volatility is introduced into the system. You do not want houses to trade with the volatility of a commodities market. It causes more harm than good.”

He goes on to say,

“In a commodities or securities market, you simply cannot have a rally, unsupported by valuation measures, without a crash back to fundamental value. It is very clear the rally in house prices was not caused by a rally in the fundamental valuation measures of rent or income. This was documented in How Inflated are House Prices? and The Anatomy of a Credit Bubble. Many people forgot the primary purpose of a house is to provide shelter — something which can be obtained without ownership by renting. Ownership ceased to be about providing shelter and instead became a way to access one of the world’s largest and most highly leveraged commodity markets: residential real estate.”

Even though Dallas/Ft. Worth doesn’t see huge gains or losses like California, etc. I think there’s a lot of truth and value in what he’s saying and it’s definitely an interesting perspective. And I don’t think this guy is saying houses should be treated as a product either. He kind of invokes Maslow’s hierarchy of needs by saying shelter has always been a basic human need and now we’re in a time where many people are treating it as a commodity and most are losing (just as they would if they tried to beat the stock market).

I’d love to hear your thoughts.