The 800-Pound Gorilla

I've listened to some of the talking heads over the past couple of days and more than a few have predicted a strong economic recovery during 2011. But there's still the 800-pound gorilla they're all ignoring: the housing market.

With a large shadow inventory waiting in the wings, housing prices aren't likely to be heading up any time soon. Banks are holding on to a huge inventory of foreclosed homes, hoping to dispose of them in a manner that will allow them to recoup some of their losses. But if they were to put all of them on the market over the next year the already fragile housing market would collapse and many people whose homes are still 'right-side up' would end up being upside down, meaning their homes would now be worth less than the unpaid principal of their mortgages. That in turn might encourage more homeowners with upside down mortgages walk away from them, leaving the banks or other mortgage holders in the lurch.

I've been checking the real estate listings here in central New Hampshire and one thing that stands out is the tumble in prices. (Both Deb and I like to look through the monthly/quarterly real estate slicks the various realty groups make available at the local supermarkets and banks.) Homes that had listed for $250K to $300K are now on the market for between $190K to $240K. Even some of the high-end homes on Lake Winnipesaukee listed in the millions have dropped the asking prices by up to 30%! (One property with which I am familiar was originally listed for $301,000 last year. It just recently sold for $69,000.)

The new lower prices can be seen as a long overdue correction. The housing bubble drove prices up at well above the rate of inflation for over 6 years. Maybe the most recent listings are showing a return to sanity and a more realistic value of the properties up for sale.

It is unfortunate for some of those selling their properties because unless they have owned them since before the bubble they are likely to lose money on the sale.

Unless the economic pundits take this 800-pound gorilla seriously, their predictions for the economic recovery this year can't be taken seriously either.