2008 February 03 Sunday
A Further 25% Housing Price Decline Coming?

Look for more housing price drops according to some analysts.

While a 25% decline is unprecedented in modern times, some economists are beginning to talk about it. "We now see potential for another 25% to 30% downside over the next two years," says David A. Rosenberg, North American economist for Merrill Lynch (MER), who until recently had expected a much smaller slide.

Shocking though it might seem, a decline of 25% from here would merely reverse the market's spectacular appreciation during the boom. It would put the national price level right back on its long-term growth trend line, a surprisingly modest 0.4% a year after inflation. There's a recent model for this kind of return to normalcy after the bursting of a financial bubble. The stock market decline that began in 2000 erased most of the gains of the boom of the second half of the 1990s, leaving investors with ordinary-sized returns.

Why might housing prices plunge violently from here? Remember the two powerful forces that pushed them up: lax lending standards and the conviction that housing is a fail-safe investment. Now both are working in reverse, depressing demand for housing faster than homebuilders can rein in supply. By reinstituting safeguards such as down payments and proof of income, lenders have disqualified thousands of potential buyers. And many people who do qualify have lost the desire to buy.

Bargains! Housing bargains await us.

One problem: Will a rise in housing material costs driven by rising oil prices and rising commodities prices keep the price of new housing construction high enough that the long term cost of housing will rise above the old trend line? If the marginal cost of building a new house gets high enough I expect the marginal price to eventually equal that cost.

Share |      By Randall Parker at 2008 February 03 08:54 PM  Economics Housing


Comments
Wolf-Dog said at February 4, 2008 9:58 AM:

"Why might housing prices plunge violently from here? Remember the two powerful forces that pushed them up: lax lending standards and the conviction that housing is a fail-safe investment. Now both are working in reverse, depressing demand for housing faster than homebuilders can rein in supply. By reinstituting safeguards such as down payments and proof of income, lenders have disqualified thousands of potential buyers. And many people who do qualify have lost the desire to buy."
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But there is one more reason for the coming collapse of real estate problems: the relative impoverishment of the average citizen: Since the average American's non-real estate net worth has actually been diminishing on an inflation adjusted basis (our accumulated foreign trade deficit, and the destruction of well paying middle class jobs), is one reason the average citizen simply cannot afford to buy a house at these prices, unless there is a 75 % discount or more.

Bob Badour said at February 4, 2008 2:35 PM:

What? Americans have no cash for buying houses?

"No problem! Meet your new landlord Mr. Leung from the PRC."

acid reflux said at November 8, 2011 3:11 AM:

(our accumulated foreign trade deficit, and the destruction of well paying middle class jobs), is one reason the average citizen simply cannot afford to buy a house at these prices, unless there is a 75 % discount or more.


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