09.18.02007 Open Houses and Free Lunches

Driving between meetings earlier today, I was listening to the announcement on the radio of the Fed’s half-percent rate cut when I saw a realtor's sign (below) -- “Open House -- Lunch Served.” I am used to indicators popping up unexpectedly, and this one all but screamed at me. Apparently spooked by a bank run in the UK, the Feds surprised everyone with a larger than expected rate drop. But while Wall Street is celebrating with a run-up, desperate realtors are trying to lure buyers with free lunches.

Moreover, free lunches at houses in the most solid portions of the California real estate market. The sign wasn’t in a foreclosure-blighted exurban cow-town south of Sacramento, but in the heart of San Mateo county, an affluent San Francisco suburb of million Dollar houses and one of the lowest foreclosure rates in the state. Yet things are slow enough that at least one nervous (or desperate) realtor felt it necessary to lure lookie-loos in with a free lunch.

What the sign really says is that this deflating bubble isn’t over; it hasn’t really even started. The rate drop will cause things to level out for a bit, but then they will drop again because of course the half-percent adjustment will not translate into relief for over-extended and desperate sub-prime borrowers. And all the while, once-desirable prime borrowers will continue to be shut out of loans to fund their purchase dreams. Sellers will get frustrated, and property values will continue to slip.

Does it all end up in a recession? More likely than not, though perhaps it is too soon to call with certainty. But if the sign gave me no comfort, the house it pointed to gave me even less. Driving past, I noticed that but for a lone Mercedes -- probably the agent's -- parked in front, the street was empty. No one was stopping for a bite, much less a look. Back at the turn of the century, the immortal Mr. Dooley observed that "There ain't no such thing as a free lunch." Just under a decade ago the bursting of the dot.com bubble reminded us that the wonders of the Internet did not suspend the rules of neo-classical economics. Now it seems that we are about to be reminded again that Mr. Dooley has been right all along.