Thursday, June 01, 2006

Nationwide Implosion?

From Forbes:

Implosion
A. Gary Shilling

This is the first nationwide housing bubble since the 1920s, and it's driven by three nationwide forces: low interest rates, loose lending practices and the desperate search for a stock substitute after the 2000--02 debacle. Previous real estate bubbles were regional, spurred by economic cycles like the rise and fall of the oil patch in the 1970s and 1980s, and southern California's aerospace leap in the late 1980s during the Reagan defense buildup, ending with the Cold War's demise....

With inventories high and sales falling, the ratio of inventory to sales flow is rising. Inventories for both new and existing homes have jumped from 3.5 months in 2003 to 5.8 months and 6 months, respectively. It is reasonable to expect those ratios to climb into the 6-to-8-month range of the real-estate-troubled early 1990s.

Already inventories since last year have jumped 91% in Boston, 236% in Miami and 149% in Los Angeles. Asking prices have been cut on one-third of listings in Boston, San Diego, Sacramento, Los Angeles and Miami. Nationwide median prices will probably fall at least 20% before the break is over. It will take a 35% fall to return prices to their long-run link to the Consumer Price Index; markets overshoot on the downside as well as the up.

Even a 20% price decline will be devastating for many homeowners. On average, those with mortgages have 37% equity in their abodes. Of those who borrowed or refinanced in 2005, 29% have zero or negative equity, calculates First American Real Estate Solutions.

A house-price collapse will be far worse than the 2000--02 bear market on Wall Street and will bring a serious global recession. Half of households own stocks or mutual funds, but 69% own homes. The resulting unemployment will kill many subprime borrowers' ability to make payments.

10 comments:

Anonymous said...

Nation wide neg 20%. Carve that in stone and revisit it as the years go by.

Lander said...

If Mr. Shilling is correct and nationwide prices decline by at least 20%, what would you guess Sacramento's decline would be?

tom stone said...

for sacto,i think close to a 50% decline,based on traditional methods of valuing property,such as median income vs median price,rent to own ratios and so on.it could easily be worae than 50% because of related job losses and the usual overcorrection,75% is not unbelievable,and i expect close to that for some classes of property in sonoma county that sold last year for 5 or 6 times the 2000 price.ouch.this will hurt everyone.29% with no equity at the start of a downturn is unprecedented and frightening to any thoughtful person.....luckily our leader is guided by god in all things...so i'm sure everything will be just fine...just fine...just fine.

Anonymous said...

Over the next five years the market will go back to and sit at the 2002 levels based on current interest rate trends.

The Oracle

norcal ray said...

For Sac, would expect at least 35 to 50% decline. Could be worse depends if we get a deep recession or just a regular recession. It is a time to store up some cash for likely tougher times ahead.

Marinite said...

I don't believe that national -20% prediction. No way.

Lander said...

I don't believe that national -20% prediction. No way.

Marinite-
Too much or not enough?

Anonymous said...

A national neg 20% prediction does nothing but shred the credibilty of the author. It's tin foil hatsville. Fishing without bait.

bgates said...

Anon, the arguments in favor of the large drop include
-the runup over the past 3-5 years was unsupported by fundamentals
-resetting ARMs will force many buyers who stretched to sell
-there was a large element of speculation
-comparison of rent to home price suggests home price will drop or rent will rise significantly
-comparison of home price to wages suggests home price will drop
-comparison of home price to CPI suggests home price will drop

Shilling gives the 20% figure as a way to get halfway to the long-term trendline in home prices. There's your bait. Go fish.

Anonymous said...

It takes all kinds to fill the freeways - or the blogsphere. If you can see getting to -20% from here

http://i12.photobucket.com/albums/a216/Pixbucket/OFHEOQ1.jpg

then you should push away from the keyboard, remove the tin foil hat and do a little fishing yourself, assuming you can find some bait, chum.