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Well the data is in.  Northern Wisconsin showed a median price decline of 6.9% from the second quarter of 2007 to the second quarter of 2008.  There was a 31.2% decline in existing home sales.  Generally speaking brokers believe that inventories will rise or stay the same, and that the number of buyers has declined. 

So what does this mean? 

1) Expect prices to decline as inventory rises and demand falls.

This is good for home buyers that have good credit, and it is bad for sellers that have high mortgage balances on their homes.  The fact that prices have not fallen significantly is probably and indication that many sellers can't budge on prices.

2) The availability of credit has affected the number of qualified buyers.

I have talked with numerous banking and mortgage people and the bottom line is that credit is tight.  This of course has made headlines the past few weeks with Wall Street in a financial crisis.  Things have indeed clogged up, and banks are very cautious.  It has swung to far the other way.  If the Fed and Treasury can figure out how to undue things it would really help.  If not this could be catastrophic.  Let's hope for the best.

What do we do?  Prepare for a significant recession.

1)  Stay calm. Panic feeds on panic.  We've come through this before.

2)  Don't borrow against your home to pay off credit cards.  Figure out a way of negotiating with creditors without using your house as an ATM. 

3)  Start getting your financial house in order.  Don't use credit cards.  Pay off credit cards as fast as you can. Cut expenses any way you can.

4)  Pray for the next President, because he's got a real mess on his hands.  There are no easy solutions.  We are going to have to bite the bullet and do the least painful thing which in and of itself will be painful.

5) Count your blessings.  We are better off than 90% of the people in the world.

Today Obama blamed the Bush Administration for the housing crisis and ultimately the demise of some financial institutions. That tells us just how little Obama knows about economics. The fact is that the mortgage crisis is something that is occurring world wide because of an unsustainable bubble in the housing market fueled by low interest rates in the past decade. Bubbles in markets occur throughout history and this is not unlike the bubble in the late part of the Clinton Administration when many people lost a fortune in the crash of the stock market because of the over valuation of dot.com stocks.

A bubble occurs when people expect prices to rise even further and there is a kind of feeding frenzy going on. People just thought real estate values were going to continue to rise as in the past and they never thought the opposite could occur. I remember telling people in real estate in about 2003 that we were pricing ourselves into oblivion.

This continual rise in prices simply could not sustain itself. But many just scoffed at me and told me I was just being negative. Many were sounding the alarm in the financial markets, but it was going so good that people just didn’t listen. But the history of economics teaches us that all hyper-inflationary trends end in a crash. Remember the stock market crash before the Great Depression? It was the same thing. Sooner or later the market goes out of balance and the opposite affect occurs.

A good example of this is oil. There was a feeding frenzy of speculation with oil. It was fueled by an unrealistic expectation that oil would simply go higher and higher and higher. It hit $147 a barrel. It has now dropped to under $100 as of today. It was a commodity bubble. Those people that bought on the futures at $147 have lost a lot of money. People in the industry were sounding a warning signal that this could not be sustained. Few listened. Sure enough demand began to drop and that caused the oil markets to decline more rapidly than they went up. This is an example of what occurred in the housing market. The difference is that in real estate it takes longer for balance to occur because of the imperfect nature of the market.

This should be a good economic lesson to all. A period of hyper-inflation in any sector of the economy will end with a crash of that sector at some point in time. Some people will ride the bubble for awhile and make money, but many will end up on the scrap heap of economic ruin. And just remember that greed which often fuels these bubbles is one of the seven deadly sins. It wasn’t Bush, it was greed; pure and simple greed.

This leads to the next problem:  ethics.  It seems like in the past decade the ethics of too many leaders have been focused on selfishly making money for themselves and not looking out for their workers, consumers, and the good of society as a whole.  This ethical demise has been a problem in the mortgage industry with lenders getting people into mortgages that simply were not good for them and very risky.  They were cheap at the time, but the downside would put the home owner under.  It also came down to dishonest appraisers that worked to hit numbers irrespective of what the home is worth.  I have seen that so often in doing reviews it is very scary.  I wonder how many people have had their homes grossly over valued; by that I mean 20 to 40%.  Yes, that's right I have seen homes over valued by nearly 40% on a regular basis.

My son, also an appraiser, was at a party some time ago and was approached by a mortgage broker that promised 30,000 in business if we hit the numbers.  This is the kind of dishonesty that has led to demise.  This occurred on a small scale.  What we are witnessing today on a larger scale is the same kind of ethical lapses when financial institutions falsely represented the mortgages they were selling on the market.  The fact is that someone really needs to be held accountable.  But all this is very hard to prove.  And how does one show culpability?

Will more regulation help?  Maybe.  But human behavior is one of the most difficult things to control.  If it was so easy we wouldn't have so many in prison.  In my opinion it is a result of the secularization of society where  "God" has become the dollar.  Values cannot be legislated.  It comes down to core personal values that are taught at a very young age.  The old adage is "I learned most of what I know before I was five years old" is very true.

The Fed took over Fannie and Freddie this last week.  What does that mean?  Well first of all we the taxpayers are now in the lending business.  Second it means that the government is going to prevent a meltdown in confidence in the home mortgage industry.  Rates went down .5% the day it happened.  So hopefully this will stabilize a very unstable situation in home mortgages.

The bad news is that pending sales fell 3.2% nationwide.  That means that buyers are not comfortable yet.  That's what I have been seeing in Northwest Wisconsin.  Many buyers are just waiting until prices come down more.  And they will if supplies continue to grow or not go down.  Maybe now that rates fell it will light a fire under a few buyers.  We'll see.  Credit is still pretty tight.

Inventories here and around the country are still too high.  In Burnett County we have over a 1.5 year supply on the market.  It is especially bad for recreational waterfront with nearly a 2.5 year supply!  Sellers must start reducing their asking prices or they can expect to hold on until next year.  And they will probably get less next year.  Also when we hit November real estate comes to a screeching halt. 

The macro information I have been reading is that this isn't going to bottom until 2010 at the earliest.  And in Burnett County it may take longer because of the nature of the market and the huge over supply.

Robert Shiller is famous for his house pricing index that he developed with Karl Case.  Both are economists that have looked at housing values throughout history in the US.  He made an interesting point on a recent interview.  He stated that when you adjust for inflation the values of homes in 1990 were about the same as in 1890.  He also pointed out that people in general have an unrealistic expectation that their homes will continue to go up and up and up and somehow be the cash cow to save their financial future.  But this simply isn't true. 

Let's understand an appraisal principle.  Houses depreciate in value.  They are not made of materials that last forever.  On the contrary they wear out over time or loose their functionality because of changing markets (a four bedroom home with just one bath).   It is the land that actually can increase in value because it doesn't wear out.  I suppose it could erode.  But generally speaking it is the only thing in a real estate transaction that remains stable.

So if you are out there thinking that your homes is always going to go up in value, please realize that generally speaking when adjusted for inflation your value will most likely remain pretty stable in the long run. 

Hit the link below for the interview.  It's very interesting.

http://finance.yahoo.com/tech-ticker/article/53094/U.S.-House-Price-Decline-Could-Be-Worse-than-Great-Depression?tickers=%5Egspc,fre,fnm