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Mood of the Market

Tara-Nicholle Nelson
Inman News

Physics may not be something that we knowingly talk about on an everyday basis, but we talk and think about physics so much more than we know.

After all, physics seems accessible to all but that minute fraction of human society who can roll the words "quarks" and "leptons" smartly and swimmingly off their tongues. In reality, as put so nicely by a publication of the U.S. Department of Energy's Office of Science:

"Physics is all around us. It is in the electric light you turn on in the morning, the car you drive to work, your wristwatch, cell phone, CD player, radio and that big plasma TV set you got for Christmas. It makes the stars shine every night and the sun shine every day, and it makes a baseball soar into the stands for a home run.

"Physics is the science of matter, energy, space and time."

I submit, in fact, that the laws and observations of physics can apply to and illuminate many, seemingly unrelated realms of inquiry. Including the real estate market.

Part of what's so interesting about physics is that there are so many unanswered questions, so many issues and phenomena still ripe for study and understanding. One of those areas filled with open questions is the transition and boundary between turbulence and order.

In physics, this is an issue of flow -- of fluid mechanics. When smoke flows from a lit cigarette, it at first flows in orderly layers -- this is laminar flow. Then at some point, for some reason, the smoke contorts into eddies and swirls. That chaos is turbulence.

When a boat or submarine moves through the surface of the water, the clear streams of water that envelope the hull are laminar layers. The churning froth in its wake: turbulence. You get the picture.

Funny enough, no one really has a precise grasp on what causes the orderly laminar flow to devolve into turbulence. But a few years ago, some physicists had the a-ha moment that, sometimes, the random chaos of turbulence, applied to a system, can actually create very orderly results.

But, as novelist Jeannette Walls wrote -- pretty correctly -- of the boundary between turbulence and order in her memoir, "Glass Castles," "It's a place where no rules apply, or at least they haven't figured 'em out yet. "

And perhaps it is so with our real estate market.

While some would label the subprime mortgage era turbulent, I would actually call that an orderly, if maladaptive, force in the market. It was an understandable system, albeit illogical and doomed to fail, we know now.

Banks offered loans to people with ever-fewer restrictions on their credit-worthiness or their ability to repay the loans. People took them. And the initial result, like the stream of smoke at the tip of the cigarette, was very orderly, too.

Prices got to be unsustainable by other market inputs, homeowners were unable to refinance loans they never expected to be in over the long term, folks started losing their jobs, and borrowers defaulted. In ever-larger numbers.

Then, enter the random chaos -- the turbulence -- of the various market players' reaction to the laminar flow of borrowers into default. Sometimes, banks foreclosed on the homes. The government intervened and tried to stimulate both new homebuyer activity, new lending activity and bank's loan modification activity -- to moderate effect, at best.

Sometimes, borrowers just walked away. Sometimes, borrowers trying to do the right thing were encouraged by their banks to fall behind on their loans in order to qualify for a loan modification that would never come. Other times, borrowers tried to short sale their homes and either were able to do so or lost their homes after eight months of waiting for a short-sale approval.

Foreclosed homes were held off the market as "shadow inventory" by banks that refused to give an iota of information about when or how they would resell them, creating a strange supply-demand imbalance in some towns, where multiple offers made it tough to be a successful bank-owned property (REO) buyer.