In my previous essay, I argued that much of the current "crisis" atmosphere is simply a matter of looking at only one side of the equation. However, I think I left that topic insufficiently explored, so I shall look at it a bit more.

First, to be clear, and to avoid a mistake I saw in comments elsewhere¹, when we speak of crisis we are speaking only of purchases viewed as investments. We are not concerned with purchases made for use. No one talks of a crisis when you bought a car which went on sale the next week.You may be upset about it, but we seem to reserve "crisis" for investment purchases. Now, you may get some utility out of the purchase as well, such as in the case of a house also used as a residence, but that is secondary to the investment function. It may not be an explicit investment, but it is always a purchase in which we continue to remain interested in the eventual resale value.

Now having said that, let us also agree that the only reason we bother to invest is because the price of good change. Were the price of any good absolutely constant, it would make no sense to invest, as we would receive back exactly what we paid for it, which would mean we were no better off than if we simply held cash.

There are some cases where future appreciation is fixed and certain, such as bonds, but in general most investments not only have a changing sale price, but one that is unpredictable, and one that can rise and fall relative tot he original price. This is not an essential triat, but is true for most investments. In fact, many investors rely on this, as those investments subject to the greatest variation are also thsoe which have potentially the greatest returns.

Having covered the basics, let us look at the market itself. As prices rise and fall, the market is a series of peaks and valleys of varying heights and depths. Sometimes the price is rising, sometimes falling. I know this seems very basic, but many seem to ignore these basic facts.

Now, every transaction has a buyer and seller, but that does not translate into a winner and loser. For example, you could buy at a very low trough, then resell to me at a peak. It would appear that, buying at a peak, I am losing out, as the price will fall. But that ignores future fluctuation, which make it possible a future, higher peak, will allow me to sell at a profit as well. Nor does that make you a "loser". Yes you could have made more profit if you held it through the trough and sold when I did, but you still made a profit on your original sale, and thus we are both "winners".

However, saying that does not mean there are no losers. As with any endeavor relating to uncertainty, there will be people who just get it wrong. People who buy at a peak which will never be reached, or people who sell to cut their losses right before the market takes an upturn. As the general trend of both land prices and stocks is upward, generally those who hold longer tend to average out a bit ahead, but some who buy and sell regularly do even better, though many who follow the buy and sell plan do much worse. And, of course, buy and hold is not a guarantee of success, as anyone who bought VA Linux at $300 or bought Lucent at any price can attest.

My overall point is that so long as there is uncertainty, and people who will invest in the face of uncertainty, there will be those who will jump in at the wrong moment, and those who get out too early or too late. Investing means the risk of loss, it is part of investing.

And that is what makes the housing crisis so absurd. It is not as if property were suddenly declared worthless and everyone found their homes are of no value. We are simply seeing prices drop. And not even drop all that much relative to the past increases. For those who have owned their home for more than four or five years, the net value has still increased.

Nor have the homes lost their utility. For those who bought a home as residence, the home still serves admirably. Admittedly, it may be hard to sell it in the next year or two and cover the original mortgage, but most people do not buy a home with such a short time horizon. And so long as the only plan is to use the place as a residence, there is no way the housing "crisis" can touch that.

So, we are talking about three groups that have been hurt. First, investors who bought properties too near the top of the market. Second, people who took out adjustable mortgages and now want to get into a fixed rate mortgage as interest rates rise. And those who bought houses intending to stay only one or two years before selling. And yes, for those three groups this is a hardship. But even then not as bad as some would suggest.

And let us be honest, all three groups were essentially gambling and lost out. It is obvious how investors are gambling on prices rising, but the other two are as well. The people in adjustable mortgages were there because they bet that the rates would continue to fall, or at least stay low. In order to save money they took this gamble, and lost. That they cannot get out of those mortgages is in some ways their own fault, for having taken a risk to get better rates. I can sympathize, but they knew the risk they took when they jumped into the adjustable rate. Finally, those buying homes for a very short period. Some may honestly be doing so because they simply cannot stand renting, but, for the most part, people who buy a house with such a short time horizon, are doing so because they plan on property appreciation. Considering the mortgage and closing costs, the only way it would be cheaper than renting is if they expect massive property appreciation, which means most, though not all, are effectively investors who are living in their houses.

But there is one other thing to consider, when thinking about all this talk of crisis, even when considering the groups who "lost" in this housing "crisis". That is my example of a win-win investment. Yes, at the moment the price of housing has fallen, but that is no promise it will remain low. Prices have a tendency to rise over time, so there is no reason to expect that they will remain at present levels. Quite likely houses will be worth what they were two years ago, and much more, in the next few years. We are not seeing a permanent collapse of the market, just a momentary downturn.

Of course, those who buy with very little down who cannot cover the finance charges will get little solace form this, but that finance scheme is a risky one even during good times, so the fact that it fails is not a sign of "crisis" but of a risky investment plan.

So, in the end, of what does our crisis consist? A temporary loss of value after an unprecedented period of growth, which has harmed some investors engaged in risky speculation and those who gambled on adjustable rate loans. Other than that, for anyone who actually bought a house as a residence, it means that they may not be able to refinance as easily as before, or take out as large a home equity loan as they had thought, but to call that a crisis is an exaggeration.

As in my last essay, I have to conclude that talk of crisis is a bit overblown.

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1. When debating this topic in comments to a pundit's article, one writer argued that there are no winners or losers as all sales occur between people who agree about the value of goods being exchanged. While technically true, it misses several points. First, we are not talking about a single exchange, but the paired exchanges which constitute investment, a purchase and subsequent sale. In that sense, the loss or gain of money makes one a winner or loser. Second, the comment that both buyer and seller agree as to the value does not mean that both parties are happy with the price established. If I sell something to cut my losses, I may agree to the price, but that does not mean I do not think I am losing in the exchange. I think this is one of those cases where a little too much Ayn Rand has led the writer into misunderstanding human behavior. Consent and approval are quite different things.