Walmart's New Health Food Push: Is It Too Hard to Swallow?
Bonds Are a 'Safe' Investment: A Big Lie Gets Even Bigger
Econobrowser suggests that housing prices could drop 50% from their peak. While it was initially skeptical about such a huge drop which was suggested by a commenter, its re-examination of this based on recent developments, and what the economists surveyed by the Wall Street Journal say led it to conclude that such a summit plummet was plausible.
Sunday, I posted on the possibility that it could take 10 years for housing prices to recover based on an interview with the Warren Group and comparing the current housing tumble to the one in the 1990s. Combining this with the Econobrowser's pessimistic scenario suggests that we could be in the longest and deepest housing price decline in American history.
I do not understand the details of the analysis presented here but if my reading of the post is correct, it concludes that the Case-Shiller index of housing prices, one which seems to have more credibility than the one produced by the government's OFHEO (Office of Federal Housing Enterprise Oversight) House Price Index (HPI), is that prices could fall 50%. Econobrower notes "that only a slightly more pessimistic than average forecast implies a 50% decline in house prices as measured by Case-Shiller, relative to peak."
So if you bought a house for $300,000 in 2006, it could be worth $150,000 when the housing market hits bottom and take until 2016 to recover to its original price. How about that for an ownership society?
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
Goldman Earnings Sink After Buffett Dividend
Johnson & Johnson's Income Falls 23%
Burberry Shares Leap on Sales Update
Reader Comments (Page 1 of 1)
4-01-2008 @ 12:31PM
Lee said...
I think that's pretty far fetched. I mean, waa waa, some people got loans they couldn't pay on. That doesn't mean that prices are going to drop 50%. I live in downtown Chicago, and i can tell you that big markets won't change much at all. I've had numerous neighbors sell during this 'ordeal' and it only added a few months to the sale. Prices are still around what they were when i bought 2 years ago.
4-01-2008 @ 12:49PM
thebigkill said...
It's true and false, and heavily dependent on the penetration of purchases from investors and first-time buyers on ARM's.
Areas in CA, CO, NV, AZ, and FL will be hit hardest. Several regional banks in those states undubitably will go belly up. Large investment and commercial will continue to get hit, although they have the convenience of dialing the big, red, government phone.
The Fed cuts are reducing the 1 year treasury. And that's helping every single homeowner on an ARM keep their home right now because ARM's are based on the 1 year US treasury plus some margin (say 2.75-3.00%). But sooner or later, the Fed will have to send the funds rate back on the uptick, and if home prices aren't above what homeowners owe, by then and they can't refinance out of the ARM, we will likely see more foreclosure growth.
Bernanke's creating a soft recovery with temp Fed cuts. With that, folks will still lose homes, but it won't be every single person who bought a home on an ARM in 2006 all at once. It will decline little by little instead of seeing an onslaught of foreclosures all at once, which would have been catastrophic. It will, unfortunately, continue to get worse.
4-01-2008 @ 1:16PM
Kent said...
I don 't believe this criteria applies across the board. It may drop as much as it says in certain geographical areas of the country, but not all of them. Banks will be shorted and will take a generation for them to recoup their losses. I predict bank mergers will result if this scenario occurs. It's not pretty if they do.
4-01-2008 @ 2:11PM
James Reese said...
Homes are overpriced. A home selling for 80,000 dollars 30 years ago sells for 400,000 to 500,000 dollars today. Does everyone think that the chain reachion (buy now with expensive dollars and pay off with cheap dollars will last forever. This is not inflation, its fool hardy. Even if the price of homes dropped 75%, it wouldn't be too little. I would like my chilldren to be able to afford a home. As one reader commented "it won't be pretty", but I believe it to be necessary.
4-01-2008 @ 2:11PM
David Huston said...
Bush's war; Bush's recession; Bush's ownership society; Bush's adherence to the Bible over science; Bush's tax cuts for the wealthiest among us; Bush's radical right wing appointments to the Federal Bench, most particularly to the Supreme Court; Bush's no child left behind education policy where all children are falling behind; Bush's willingness to bail out Wall Street, while spouting market forces nonsense to people being foreclosed from their homes; Bush's calamitous presidency.
4-01-2008 @ 2:18PM
Duncan said...
I think that the idea of a 50% decline is suggested to be a bit of an outlier by the pricing models. Most of the models discussed in the article suggest a significantly smaller decline. One point the article does make is that error terms (variation of the actual data from the model) are not normally distributed. There is evidence that there are more large errors than would be predicted by a normal distribution.
4-01-2008 @ 5:52PM
william lindblad said...
The article is optimistic and I hope that the given scenario is close in final result. Some things are certain and they are market conditions, with some areas fairing better and worse, dictated by job market. Personally, although I hope for what is in article, I expect the bottom line price will be considerably worse.
Wall Street with it's bevy of analists does not and today's advance is based on the concept of "it's over". I hope they are right.
I have but one real fear and that is the queue, modern communications and the changes that have been made to the banking system.
P.s. - Peter - there is no copper shortage, it's cheaper to recycle the metal than mine it. Been that way for 20 years. Same can be said for aluminum. Just costs more to mine and refine.