While being neither a scientist nor economist, there seems to be a similarity between one of Mother Nature's harshest events and the state of the US housing market.
A forest fire begins in a number of different ways but a common element is usually the existence of an over-abundance of fuel including dead undergrowth. The forest fire consumes this dead undergrowth but usually
damages other plants, animals and human dwellings along the way. Once the fuel is gone, either humans or natural processes such as rain, extinguish the fire. More importantly, good new growth can begin after
The housing market had much toxic fuel available after a period of easy mortgages and inflated house values. As we all know, it came to an end and we saw the first load of fuel (sub-prime mortgages) consumed.
What we may not have seen were two other factors: high winds (rising unemployment) and more toxic fuel (ARM and option ARM mortgages) coming through for a second forest fire in the housing market. These two
factors will continue to accelerate and add fuel to the inferno.
When these two begin to subside, we will probably begin an era of new growth. While this is encouraging to many people, there may be another factor that must be addressed. If the forest's canopy was not affected by the fire, new growth can be slow and fitful. The canopy will block out most of the sun and rain, limiting the new growth.
Consider today's house values as the forest's canopy. Many mortgages are higher than the present value of the home. This is hindering or preventing many people from moving up to a more expensive home. Without the move up or “move sideways buyers”, this market may take decades to improve to what it once was.
I hear experts and pundits offering many ideas as when the housing market will turn around. If we believe there may be a correlation between a forest fire and the housing market, common sense would indicate that for the fire to stop and growth to begin:
If these two factors don't happen, it would appear that we are in for long rebuilding period, not only for the housing market but the US economy as a whole. More importantly, something may have to happen which
lenders may not want to hear. Current mortgages may need to be decreased to the present value of the home. Without these mortgages decreasing, the “forest canopy” is still there, shrouding the growth of
many sellers and buyers.
I will leave the details to economists, lenders and housing market experts. However, I will leave you with two thoughts. Einstein said something to the effect, “You cannot solve a problem with the same
mind-set that created it.”
If you believe that the forest fire analogy fits the current housing market, remember that Mother Nature always bats last.