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I have enjoyed the comments received so far. And I probably do not have many better answers than the readers. But I will give you my take on some of this.

I am less compulsive about the state of the market than most, and certainly less than the media. Real estate tends to be a snails-pace market, measurable in quarters and years. Measuring in months is less meaningful, and causes undue stress. And I don’t spend a lot of time trying to figure out the bottom. Rather, I advise investors and developers on how to strategically manage in the meantime. As a personal strategy, I advise people to try to take advantage of a down market if they want to buy a home, and think long-term ownership. A house can be a nice investment, but it is more importantly your home. Eventually, it will build equity.

I side with the readers who criticize lending criteria. Essentially, people who should have not qualified were able to do so, flooding the market with demand that would not otherwise have existed. And the whole market pays the price.

What is interesting about the current state of the market is that investors do not know how to price real estate. The market is in such a state of flux, and not just because it is moving down, that even sophisticated and institutional investors — and certainly prospective home buyers — are sitting on the sidelines waiting. No one wants to overpay. Many fear that Voice readers are right and the correction could be much deeper. The credit markets are in a state of flux, and will be for the rest of the year.

My sense is that when markets are bad, that tends to inform our state of mind; just as when markets are strong, we tend to think they will always be strong. Neither extreme is correct. So far we are seeing a cyclical event, which will likely correct over the next 12 to 18 months. The ‘all bets are off’ scenario plays out if this becomes a structural event, meaning the economy weakens and changes, loan ratios and qualifications are permanently redefined and valuation takes a serious hit.

So far, this is not a structural event.

One reader asks about price-to-income ratios as a more useful indicator. I look at the ratio, but this doesn’t take into account accumulated equity. What we have seen over the past ten years is that people are entering the market later than, say, when I purchased my starter home in the 70s, because they need more time to save. Income plays a role, but in our market, not necessarily the determining role. Prices are not likely to come down based solely on income, although the ratio is a factor. It is likely to become more of a factor as lenders move away from ‘stated’ income to proven income.

Another reader suggested “I think the key issue is just how far the foreclosures go…” I would agree, but foreclosures in our market even on subprime loans are still under 20 percent. The factor to keep an eye on is the length of the cycle. It is an economic cat and mouse game. If the down cycle stretches in time beyond my prediction, people on the edge will foreclose, and this will cause a significant market correction. Again, keep in mind that this is not an equal distribution problem. The foreclosures are mostly confined to a few geographical areas.

The other factor to keep in mind is that many lenders are trying to solve consumer loan problems before they start, which should soften the default rate.

— GARY LONDON

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