We’ve been saying for some time, and are in the process of becoming much more assertive in our commentary – that focusing primarily on the price of homes is the wrong approach in looking toward recovering in housing (and subsequently in housing induced credit and financial markets). 

Barry Ritholtz today comments on another aspect of the “home price” issue today; the context has to do with the WSJ article today suggesting that one in six homeowners today is underwater.  Here’s are the paragraphs that caught our eye –

Its (sic) important that the Fed/Treasury stop focusing on prices. If entry level homes remain elevated and unaffordable, the sales move up cycle won’t happen. What is missing in the current housing crisis are that buying chain: entry level buyers purchase a “starter home (i.e., 2 bedroom 1 bath, 1/4 acre), from people who buy a larger house to accommodate a growing family (3 bedroom, 2 bath, more yard) from people who up to an even bigger home (4-5 bedrooms, 3 baths, 1 acre), etc.

If the entry level homes are not affordable, the entire chain of transactions won’t occur. This is why it is a huge mistake to focus on prices — they should be allowed to mean revert back to price levels on their own. The Fed and US should instead be working on making mortgage loans available to those who qualify, and reworking those that can feasibly prevent foreclosure in a reasonable manner (i.e., where they won’t default again or walk away in 6 months).
One of the cornerstones of our argument has been that the restoration of affordability is one of the keys to getting single family moving again; home prices are still too high in most markets.  Tight credit, bulging inventory, and a sagging economy will continue to exert downward pressure on single family and condo prices – appropriately in our book. 

Somewhat surprisingly, pending home sales as reported by the NAR  jumped significantly in August; of course this was before the latest round of credit construction and frenetic shuffling in the world of finance in September.  There will be a plethora of opinions rendered about the data today; a quick discussion in our office this morning makes us wonder if price reductions in many markets around the country aren’t beginning to move some homebuyers and investors off the sidelines…..

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