Monopoly Houses“Nobody realizes that some people expend tremendous energy merely to be normal.” — Albert Camus

Michael Mandel recently wrote a commentary for BusinessWeek about the housing bubble entitled: Think of It As a Return to Normal. He believes there’s a “good chance that real estate will follow a similar path as the stock and tech markets: a long boom followed by a decline of several years that gradually brings back values to the long-term trend.”

“If the housing market repeats this pattern, the result would be a slow-motion decline of 10% or so in national home prices, the equivalent of giving back a year or two of gains. Especially hard hit will be recent buyers with a lot of debt as the drop in prices sends them, sadly, into the land of negative equity. Other homeowners would feel excruciating financial and psychological distress as paper gains melted away. Even the real winners — people who formerly couldn’t afford to purchase — will feel anxious and paralyzed as home values fall.”

But over time is this really such a bad thing? After all the affordability yardstick doesn’t quite measure up to current prices in places like Southern California. He continues, “It’s better to think of the housing bust as a return to normal rather than the end of the world. That’s the lesson of the stock and tech crashes. For one thing, after a decade of boom, bust, and recovery, the Standard & Poor’s 500-stock index today is 83% higher, adjusted for inflation, than it was in 1995. Thus, stock prices rose at an annual real rate of 6.3% over the past decade, just below the rate of the previous 15 years.”

“If housing were to return to its long-term trendline, what would that mean for prices? Over the past five years home prices, adjusted for inflation, have risen at an extraordinary 6.8% annually, far higher than the historical 1%. To get values back on the long-term path would require a 20% drop in national home prices by 2010 in real terms. That’s equivalent to a roughly 10% drop in the actual number of dollars buyers have to shell out.”

He makes some good points, but is it a true comparison… or is it more like apple-to-oranges? Maybe the better lesson is that your fruit basket is filled with assets (and throw out the lemons along the way).