Absolutely. I was just discussing this issue with a coworker who used the analogy of gravity as well. Economic laws (and even to some degree human nature) operate on certain rules just like gravity. You may be able to break the rule for a while, but ultimately the economic laws win.

This should get more interesting as talk of freezing mortgage rates or foreclosures increases. While it may seem like these measure fix the problem, they merely cause further disruptions in other areas (buyers, interest rates, banking, etc.).

Nate,

Things will continue to be quite local, but I’m curious about how quickly the unwind will happen. 10 years to unwind or will this thing unravel at a faster clip. Additionally, I’d complete agree that things kicked off in the mid-nineties.

I still think you are correct in pointing to differences in specific neighborhoods. At a high level analysis the market will most likely correct back to historic norms, a point I’ve argued before. Within the “Twin-Cities” market individual neighborhoods will change at different rates. You have to figure from the beginning to the end of this cycle we will be talking at least 10 years, possibly 20 or more since I track this back to 1995.

In that 10-20 years individual neighborhoods will change; schools will get better or worse, crime will improve or deteriorate, mass transit systems will be installed, etc… These micro events will alter how each neighborhood is affected by the bubble bursting. While on a macro level the entire region will reset to historic norms.

This whole thing was fueled by the termendous expansion of credit and generational interest rate lows.

I’d expect, in the aggregate, most metropolitan markets to fall commensurate with their rise, so the only question that remains is then, just how overvalued did we get in (and within) the Twin Cities – 10%? 20%? 30%? – as compared to the long term historical norms. It would stand to reason then that the local areas that saw the most gains, will also suffer the greatest losses.

In some sense, we can think of the ongoing unwind of the real estate market like gravity, and the overheated cities, towns, and localities like Icarus, who flew too close to the sun only to come crashing down.

Great post. While I would agree that real estate is local, it’s hard not to see this as a national problem that is and will continue to affect the Twin Cities. If I look at the Case- Shiller graph provided below with all of the markets on one graph, it becomes quite obvious that something happened nationally to drive prices up. In some regions the affects were greater (CA, FL) and in some regions the affects were not nearly as great (Dallas, Charlotte), while then there is Chicago and us somewhere in the middle.

http://themessthatgreenspanmade.blogspot.com/2008/03/how-low-can-you-go.html#links

When one considers that the Pioneer Press reports that Ramsey County is expecting 3,000 foreclosures this year and then look at City Data to find out that less than 2000 homes sold in the first 3 quarters of 2007 (I’d be curious if you have different numbers) and you realize that this is a problem that’s likely to drag down home prices across the board. It just may take a bit longer for the wealthier folks to feel the pain.

So in some sense we are playing fast and loose with the various statistical measures to make a broader point.

There is really no “perfect” measure of market value for real estate. Average has the Bill Gates effect (Bill Gates walks into a bar and everyone is a millionaire, on average.) Median tends to get meaningless when the sample size dwindles. Price per square foot can be equally misleading, as even small differences in calculated finished square feet result in fairly wild price swings.

At the end of the day, all of them bear watching, but because housing stock is so tremendously varied, no home is worth “a number” – the pricing mechanisms are just not able to be that precise.

No matter hwo closely you analyze comparable sales, statistical measures, etc., some people will overpay, some will get a deal, and most will wind up with something close to a fair price, but the only way to truly know this is in retrospect. There will also be intangibles that some buyers value, and others don’t, so there’s that human element at work here as well.

This of course brings the argument full circle, and speaks to the utility of ALSO using broader market trends that capture the price movement across a metro area or region to underpin any analysis of a hyper-local market.