How much adjustment is too much adjustment?

I see lots of articles about the home price adjustments that have com about in the current recession. Some parts of the country have experienced little in the way of adjustments because of the recession; while other parts of the country have gone through depression-like price slides. Looking into it a bit, it would appear that certain parts of the country just didn’t engage in the kinds of mass self-delusion about real estate values during the so-called “housing bubble.” Having not run the prices up rapidly, they really didn’t have any false value to lose when the bubble burst.

There are many theories as to why certain parts of the country didn’t get themselves into the trouble that the rest of us are going through. One explaination that I think might make sense is that those states may not have been influenced by the big, reckless banks/lenders that led the inflationary charge – lenders like WaMu and BOA and CountryWide. Perhaps the banking laws in those states were different and worked to discourage those cowboys of the lending world from taking over the lending business there. Perhaps there were some basic value differences within the citizenry (as they might claim) that made them more conservative; however, I believe it is more likely that the citizens were somehow protected by state banking laws from the lure of the cheap and easy money that was flowing during those heady years. The big money went to where state laws made it the easiest to lure the suckers into the game.

But, now we are in the adjustment period, where artificially inflated values have fallen back to earth and in many cases well beyond. That begs the question of how much adjustment is too much. There are creditable sources who put the inflationary run-up at about 40% over the course of the bubble build-up. If that is true, or even close to true, then we have certainly reached the equilibrium point locally and gone beyond. Home values in this area have dropped between 30-40% since the 2005/6 peak and are still dropping, albeit now at a slower pace. One wonders, just how far will the local market fall below what would have been the expected normal value, at a historically adjusted appreciation rate?

This is likely an overshoot on the down side and some adjustment will need to be made to get things back to where they should have been. Some areas locally have already greatly overshot the mark, falling 50% or more in places like Detroit, Pontiac and Ypsilanti. I mean, once you get down to the point where houses are selling for under $5,000, how much further can you go? It is certainly possible right now in many of those areas to buy houses for less than the assessed value of a vacant lot.

Some of the continuing drop is due to the unemployment situation in those areas, where unemployment rates approach 50%. After a while the combination of falling home prices and stubborn unemployment tends to become a vicious cycle that feeds upon itself. So, how much is too much? I think we are there already in this area.

Hopefully, we can reach the inflection point needed to start back soon. In the economy in general, the Fed tried to use what is effectively a zero interest on money to help restart the economy. In housing in many areas locally we are approaching a zero cost point. That has attracted a flurry of investor buying and we are rapidly turning our cities into rental property zones. Maybe that is our fate locally – a retreat from home ownership, back to the old days of the row tenements of rental apartments and houses. A pity perhaps; but, maybe inevitable.