Legends of the Fall

September marks the arrival of the second half of real estate’s selling season. Think of summer as halftime, a chance to review the spring drive and draw up game plans to—hopefully—achieve a “meeting of the minds” in the fall.

In the midst of this effort, a new word has been creeping in that has raised concerns: Deflation. It generates all sorts of negative connotations, but most specific to the housing market is a continued negative pressure on home prices that has been prevalent since the housing bubble burst.

The bust sparked the foreclosure fire that continues to burn and is causing people—even those who can pay their mortgages—to walk away from those homes due to the reversal of fortune in debt to value, further putting a downward pressure on market values.

The federal government tried to prime the economic pump with the stimulus program, which notably included the $8,000 home buyer tax credit. That incentive has helped and has been extended through September 30. The caveat? You needed to be in contract to buy before an April 30 deadline.

If you didn’t make it, you are among the many whose enthusiasm for buying homes, at least for home buyers looking for a healthy federally funded tax credit, has gone the way of BP’s stock.

But given the craziness that is the real estate market, will this fall see a return to normalcy or will the unforeseen remain the norm? In speaking with those who make their livings in residential real estate, the outlook for the second half of the selling season is a matter of perspective and deflation could play a significant role.

“The market will remain in the tank. There are no signs that that is going to change in the next six months,” said one developer. He asserted that there will be no positive change until the inventory of foreclosures and short sales are absorbed.

This brings us back to deflation. To be honest I had to look up its definition, at least from an economic perspective, and it appears its presence is never a good sign. In general, deflation occurs when price levels decline as a result of a reduction in the supply of money and/or credit. It often results in increased unemployment—not good if you want to buy a house. And it causes a decline in demand—not good if you are selling one. From a housing perspective, deflation causes debt to grow compared with real asset prices.

From an economic perspective, many an economist has asserted that fear has shifted from inflation towards deflation. Though the market could be buoyed by record low mortgage rates, which are likely to last well into 2011, possibly 2012. But even in this instance, the silver lining comes with its dark cloud. Lending requirements remain strict and getting approved for those low-rate mortgages is not easy, and banks lending less could further encourage deflation.

And if there’s another round of foreclosures or other market factors that trigger the belief that the bottom has yet been reached, that could set back any gains the market has made.

Pearl Kamer, chief economist for the Long Island Association, called the current recession transitional as we shift from a consumer-based economy to one more reliant on technology. Until that handoff is complete, government spending will likely have to support the current economic model before it can hand off to the new economy that will spur the economic recovery and that of the real estate market.

conor bly

Conor Bly has been writing about Long Island for the past 14 years covering, well, pretty much everything, from automobiles to zoning regulations. When not writing, much of his time is occupied by looking for that elusive perfect house.