Ah, the languid appeal of the "soft landing". The phrase itself sounds soothing, like a day in the Tuscan sun or an advert for a mattress guaranteed to provide deep slumber. If only that were the reality. Macroeconomics aside, here is one definition, writes Elaine Lafferty.
A "soft landing" is what you call it when it happens to the other guy. A "real estate crash" is what you call it when it happens to you. The US housing market has experienced numerous cycles over the past 75 years. There is no question that residential property in the long run has been a good investment. It will continue to be. And I believe that is also the situation for the majority of Irish property-owners
Now, with that caveat out of the way, the problem is that a so-called soft landing can hit middle-class people the hardest. Because real estate values are cyclical. When prices go down, they can drop dramatically and quickly. It is not a problem if you don't need to sell your house - just as it often is not a problem if you don't need to sell your stock portfolio and can hang on. But this era of the adjustable-rate mortgage has changed everything. If you must sell, or if you cannot afford increasing mortgage payments, there can be serious trouble ahead.
When property prices fall, economists call it "negative price appreciation". But, if you need to sell your house right away, I call it "losing money". Let's take the California housing market, a good example of fairly constant rising prices in a robust economy. Between 1969 and 1989, home prices rose anywhere between 3 per cent and 28 per cent each year, with only 1984 being flat. By 1989, the median home price was $196,120. But by 1996 that median had dropped to $177,270. If you bought your home in 1989 and circumstances forced you to sell anytime in the next six years, you lost money. Did anyone shout "housing crash"? Not at all. Because, as we will learn here, it is rarely in any institution's interest to bring attention to the reality on the ground. Estate agents are reluctant to chat about how bad things are or, worse, are going to get - the best they usually do is try to appeal to people with news that it is a "buyer's market".
Often the media is reluctant to publicise perils ahead because it portends poorly for advertising revenues (The Los Angeles Times, for example, barely covered what was clearly a real estate crash in 1994-1996). And banks? In the US, at least, they are unlikely to tell you during a period of credit tightening that the only people able to obtain mortgages are those who barely need them.
Joanne Chando is an estate agent and owner of a real estate company in Florida, as well as serving as a director of the Florida Association of Realtors, a trade group. "I hear about soft landings all the time but the phrase has no resemblance to what is happening at the kitchen tables in my world. When we had the last market collapse in 1987 I was selling property in New York. It took 10 years for the market to recover from that. I never went to a closing without a box of tissues."
In fact, between the stock market crash in 1987 and 1995, Manhattan apartment prices dropped 46.7 per cent. It took until late 1999 for prices to match pre-crash levels.
Chando is seeing a similar situation now in Miami, where foreclosures rose 146 per cent from the second quarter of 2006 to today. (Foreclosures are up 19 per cent in New York and 202 per cent in Los Angeles, by the way).
"We are finding people owe more money than their home is worth and they cannot find a buyer at any price," Chando said. "A spouse is deceased, or they have other caretaking responsibilities, and they have to sell. And we have lenders, banks that are far from the marketplace, who have no idea what is happening locally, who are refusing to take pretty solid offers short of the balance."
Chando says that no amount of real estate training can prepare her agents to sit helplessly while people weep, pull out their bank refinancing appraisals that show their homes are worth thousands more than their home can actually sell for today. "Sellers cry as you try and explain what is happening," she says.
The Center for Responsible Lending says that 2.2 million households in the US which hold 100 per cent or sub-prime mortgages have either lost their homes to foreclosure or will do so shortly. Those foreclosures will cost home-owners $164 billion in lost equity.
I am not saying this is the inevitable near future for the Irish housing market, or that the Irish economy is not full of promise and opportunity. I am saying that we need to temper our expectations and exercise a financial caution that is a distant memory for too many people. In my area of east Cork, where a number of housing developments sit unsold, a neighbour of mine recently said he'd be willing to part with a few acres of nearby agricultural land - no planning permission, no services - for €1.5 million. I don't think he understands that those sites are going to be his for some time to come.
Elaine Lafferty is a journalist who divides her time between the US and Ireland. John Waters is on leave.