The flip side of 'irrational exuberance'
Journal and Courier

On Friday, the National Association of Realtors reported that the sales of existing homes fell by 2.6 percent in April -- the slowest sales pace since June 2003. Meanwhile, for the ninth month in a row, the median home price dropped.

That's more bad news for those looking to sell their homes, as the housing bubble continues to deflate.

Nationally, the new median price of home prices is $220,900, according to the association. That's an 0.8 percent fall from the median price a year ago.

If homeowners are losing sleep over what for them may be their biggest investment, they can thank speculators and mortgage brokers for starters.

When home prices were soaring during the 1990s, investors bought, renovated and sold properties and made money -- gobs of it. "Flipping" houses became a national trend.

At the same time, credit-challenged homeowners, hungry for a mortgage, found help from subprime lenders who offered them loans at higher interest rates. The increased accessibility to mortgages put more buyers in the market. Home prices soared.

Remember the stock market boom of the 1990s, when former Federal Reserve Board Chairman Alan Greenspan urged caution?

"How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?" he asked during a 1996 speech at the American Enterprise Institute.

The same kind of "irrational exuberance" took the housing market by storm. His comment, now as much a part of the American economic vernacular as the term "supply and demand," could easily apply to the overheated housing market that saw prices increase by double-digit percentage points.

Now homes aren't the get-rich-quick investments they once were.

But there are glimmers of good news, especially for the Midwest.

As reported Friday, the sales decline for existing home here -- 0.7 percent -- was significantly smaller than the one experienced in the Northeast, which saw sales drop 8.8 percent. The correction continues to be worse for homeowners in more expensive areas of the country, such as Connecticut and California.

Economists are crossing their fingers for a modest recovery in 2008. So are we.

In the meantime, hold on.

And if you happen to be in the market for a home, celebrate. For you, all this is good news.