Don't cry over burst bubble: A reality check on housing will be good for us

September 28, 2007|By STEVE CHAPMAN

Back in the 17th century in the Netherlands, there was a mass rage for, of all things, tulip bulbs. Prices got bid way up, and speculators jumped in to bid them up higher still. By the peak of the tulip fever, a single bulb was going for the equivalent of thousands of dollars. But eventually the market fizzled and prices plunged.

If I had been one of the people who invested in flowers during the frenzy, I would have felt bad to lose my money. But I like to imagine I also would have taken great comfort in seeing the triumph of rationality - to find that there was indeed a connection between the real usefulness of tulip bulbs and the price they would fetch.

Actually, I don't have to imagine how I would feel, because I've been a participant in the closest modern equivalent. I'm a homeowner. Not only that, but I bought my current house in 2005, which now looks to have been pretty close to the top of the real estate boom. And I paid more than I really thought it was worth, in the firm expectation that someday, I could sell it at an even more ridiculous premium. With home prices dropping, that no longer appears to be a plausible forecast.

The boom in prices has long been disconnected from the actual utility of a single-family dwelling, and it's satisfying to see reality assert itself for a change.

Back in 2005, you could hardly hear a word about real estate without wondering who repealed the law of gravity. That year, the National Association of Realtors reported that in the previous 12 months, the median price of a home in Phoenix had risen 55 percent; in the Washington, D.C., area, it was 26 percent. Nationally, prices climbed nearly 15 percent.

They are not rising anymore. According to a report this week, they fell by 4.5 percent in July, the biggest decline since 1991. This will cause some disruption to the economy as a whole, and maybe even a recession. But in truth, the great majority of us will be better off in the long run if the housing bubble has burst.

Most homeowners, after all, don't face foreclosure even if their houses are suddenly worth less than before. Not until they sell will they take a hit. But even then, the pain should usually be mostly theoretical. That's because while the house they are selling will command a lower price, the house they are buying will also cost less. The average person will come out even.

It's true that some people of modest means who have stretched to afford subprime mortgages will lose their homes. But other people, of equally modest means, will gain. Someone who couldn't afford to buy at the height of the boom may find that a house is now within reach.

Falling home values will also mean downward pressure on rents. Just as cheaper cars, clothes and computers are a good thing, so is cheaper housing. For every loser, there is a winner.

Of course, speculators who sank money into second homes and investment properties, figuring they could flip them in a year or two for a handsome profit, will get the short end of the stick. But that's why it's called speculation, not certainty.

Like many events in a dynamic capitalist economy, the overdue cooling of an absurdly overheated housing market will inflict some pain. But that doesn't make it a bad thing.

Steve Chapman is a columnist for the Chicago Tribune. His column appears Mondays and Fridays in The Sun. His e-mail is schapman@tribune.com.

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