Minyan Mailbag: Housing Today vs. 1990-1991
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next email with that very intent.
"Does anyone remember 1990-1991?"
Glibly or not, I don't think anyone can compare the housing market today with the early 90's without acknowledging the enormous structural differences in the tax code now and then.
Being a derivatives guru, you certainly know the effect of tax policy on prices. (As, for some reason, all derivatives scholars seem to. My professor in grad school, Myron Scholes actually taught a tax class.) Although the Tax Reform Act of 1986 effectively ended the tax shelter effects of real estate investing, those changes were phased in slowly. 1990 was the true beginning of the new era in real estate investing. Prices plunged, poorly managed S&L's were left holding vast amounts of over leveraged properties, and a secular bear market began in real estate.
I'm not suggesting that can't or won't happen now, but 1990-1991 build up in inventory didn't signal a decline in demand, it resulted due to the effective removal of huge tax subsidies by the government.
The tax reform removed tax-shelter status for many real-estate investments. This increased supply as investors sold properties that no longer made sense to hold.
Current supply is not being created by any changes in tax policy. Current over-supply is the result of non-equilibrium forces between supply and demand. The corrective variable is prices. This will likely make the current supply-demand imbalance correction more severe.
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