Falling back to earth…

The Greek myth about Icarus and his wax wings serves as somewhat of a nice metaphor for the current housing market meltdown, except in the housing market case the homeowners (Icarus) were sold a bill of goods (wax and feather wings) in the form of easy credit. Too many took up those wings and soared into home ownership without a clue as to how to pay for everything. That caused the so-called housing bubble, which was essentially a quick run-up of housing prices produced by too much easy money chasing too few houses. That was especially true in places like California, Florida and Las Vegas.

In Michigan we did experience a run-up in perceived values just due to the overall jump in appreciation rates. We went from a norm 3-4% annual appreciation to 5-8% per year for a while. So what happened was that perceived (and assessed) values shot up, even though there was little real reason for that in our area. Easy money, even in Michigan, did make it easier for more and more buyers to try to get into houses, so prices rose quickly.

Then, the wax melted; and, flap our arms as we might, we can not fly and we all fell to earth. Actually we’re still falling. In my post yesterday there was an example of a home that happened to be out west, but could have been anywhere. It has fallen 8% in the last year from a “value” of $230,000 down to a current estimated value of $212,240. The article mentions that prior to the run-up that started in 2001 it would have been valued at $154,100. Let’s use that example to see how this works.

Because of the steeper appreciation curve that it was on, due to the housing bubble, it had “appreciated” 150% over those 7 years. If the normal appreciation rate of the pre-bubble years had applied it would have only appreciated maybe 127% (using equal numbers of 3% and 4% appreciation years) and it would be worth about $201,552 today. So the “overshot” of it being perceived at a value of $230,000 is about 14%. That’s why it’s not hard to believe the estimates that I see of values dropping by 10-18% in our area. We likely had that much overshot on prices, plus we’re in a depressed economy locally.

The high point of the run-up was supposedly 2004. If you look at what has been happening to values, even assessed values you can actually see the values peak and then start back down. The fall in assessed values lags the market by almost two years, since assessors were initially reluctant use much of the really bad data (foreclosures) in their work. After 2006 they could no longer deny what was happening and you start to see assessed values falling in 2006 and beyond.

In the Greek myth, Icarus plunged to his death in the sea, which I suppose we could equate to the foreclosure mess that we’ve seen in the housing market. Recall however that Icarus’s father Daedalus did not take the risks that Icarus did and he was fine. I suppose the analogy there is that there were lots (many more in fact) home buyers who did not get caught up in the euphoria and who are safe (a relative term in this economy to be sure).

It would make the story more meaningful if the myth contained references to some sleazebag wax salesmen selling bad wax to Icarus’s father, but I can only push this analogy thing so far and, truth be told, Icarus brought much of his fate upon himself. Suffice to say that we are falling back to the level we should have been at, had we followed the normal appreciation curve, maybe even a little below. Hopefully, we will land soon and start a more normal appreciation cycle again.