@Randem

The strangest thing happened this morning as I was walking out the door to go to work. I had just locked the door and walked down the steps when I heard an explosion…

The free market is a funny thing. You know, all that hubbub they taught in school, supply and demand and what-not. Well, it seems like many Americans have lost sight of how it works. That, or else they never understood it to begin with. Let me explain…

In a free market economy there are two factors that determine the value of an item, and neither one is the price tag. Those two factors are supply and demand. When there is a large supply of something it’s value is lower, whereas when there is a short supply the item’s rarity makes it more valuable. Similarly, when there is high demand for an item its value is higher, whereas when there is little or no demand the item is practically worthless.

Supply and demand can also work with or against each other. For a desirable item, a reduction in the supply can drive up the demand, such as in the case of a rare coin or an autographed Mickey Mantle card. In contrast, an increased supply can drive down the demand, like what happens in fashion when everybody has a Coach purse so now Coach purses aren’t all that special anymore.

It tends to work the other way too. Decreased demand will eventually lead to a reduced supply, because there is no point in manufacturing or stocking an item that people do not want. And likewise, when demand increases, supply tends to increase because sellers do not want to miss out on the opportunity to profit from the demand.

So what does this have to do with the housing bubble? Well, here’s how it works.

Population continues to increase, so there’s always a steady increase in demand for housing, and this (along with inflation) tends to have a steady effect of increasing the value of homes.

The demand for homes affects the supply, because when more people want a home than the number of people who have a home, builders see an opportunity to profit so they build more homes.

This trend tends to be gradual over time, increasing and decreasing at times corresponding to events that affect population and finance, such as wars and recessions, but otherwise — when adjusted for inflation — it tends to stay pretty constant.

If you look at the graph provided, you’ll see a major dip at the beginning of World War I. From there, the line stays pretty constant through the depression years, and then climbs back out steeply in the boom years after World War II. There were two small peaks in the ’70s and ’80s, shooting up over 20%. But then, at the very end of the chart, you’ll notice that our current housing market is almost 100% above its actual value!

In the ’90s, demand for homes outpaced supply, so home values increased. Builders saw an opportunity for profit and started building more homes. Homeowners saw the same opportunity for profit and sold their homes, upgrading to larger dwellings. Entrepreneurs also saw the opportunity, and they started “flipping”.

These (and other) factors combined to create momentum. Builders become sellers. Sellers become buyers. Renters become buyers. Entrepreneurs become buyers and sellers. The bubble grows. Then, in 2001, the worst businessman in history becomes the worst president in history, trumpeting the “American dream of home ownership”, creating huge tax breaks for homeowners. Instead of subsiding, the bubble grows bigger and faster.

Supply kept growing — eventually, the demand had to subside. And it has. People aren’t buying any more. Demand is down and supply is up, so the value must decrease.

Reality hasn’t struck quite yet, but it’s coming. The market value of the average house today is almost double what the house is actually worth. A wise buyer in today’s market would pay no more than half the market price for a home.

What goes up must come down. All peaks are followed by plummets. If you’re selling, don’t waste time. Draw attention. Drop your price until somebody buys, and then cut your losses. The longer you hold on, the more you’re going to lose.

South Carolina certainly loves Steve Spurrier!

I love it when a huge, fat chick comes into a burger joint and orders
two - count ‘em, two - double cheeseburgers, and then asks for a diet
soda. You ain’t fooling nobody!

Went to Ed Debevics for lunch on my birthday. Here we see the wait
staff dancing on the countertop.