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August 23, 2006

Today's Housing Bubble Post

-- by Dave Johnson

This is the beginning of the housing crash. It is JUST starting to hit the mailstream news that sales are slowing. Sure, it's old news to you and me but "regular people" are only now going to start hearing about it.

Since it's early in the cycle, we're still hearing that buyers are "waiting on the sidelines to jump in." These are people who still think that "real estate always goes up." (Remember the people who believed that stocks always go up?) When those last few "always goes up" people are shaken out of the market things will really start happening.

And, since it's just the beginning of the downturn, we're now hearing comforting, calm words about a "soft landing" and that "this is a healthy thing," etc.

Here's the thing. Sales slowing and rising inventories necessarily mean that prices will start to drop soon. And just wait until THAT starts hitting the news. That's the tipping point. That's when people's expectations change. Once people stop seeing house prices rising, everything will change. And when they realize that prices are dropping, everything will really change.

Right now, people are willing to pay these high prices because they believe that prices will be even higher next year. They see housing as an investment, rather than just as a place to live. People are willing to pay mortgage payments that are much, much higher than rents because they believe that prices will be higher next year. But what will happen when people start realizing that prices will be lower next year? Everything changes.

First, people who are overextended will start being forced to sell. When people have to sell, they will drop the price until the house sells. And as each month's housing price report tells people that prices are dropping, people who have to sell will be willing to lower the price even more.

After that starts, people will wait to buy. And with people waiting to buy, prices will have to start dropping even faster.

As with all bubbles, the unwinding of unrealistically high prices will accelerate.

So how low will prices fall? They will fall to the place they should be, which is the place where demand and supply meet, and return on investment makes sense, without the unrealistic expectation that "prices always go up" involved in the equation. In other words, prices will not reflect an expectation of future price appreciation. There has been a lot of new housing build, reducing demand, and prices are incredibly high, so they could fall QUITE a lot. It is possible that this bubble could unwind as seriously as the stock market bubble did.

Update - Mary has more at The Left Coaster.

Atrios, too, linking to Is a Housing Crisis Approaching?

Posted by Dave Johnson at August 23, 2006 7:00 PM

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» Predicted Slowdown in Housing Arrives from The Left Coaster
The housing boom has finally come to a halt as the interest rates rise and the number of prospective buyers dwindle and they refuse to pay the listed price. In the latest and strongest indication that the home buying and... [Read More]

Tracked on August 24, 2006 7:28 AM

» Today's Housing Bubble Post from Seeing the Forest
The price drop begins. Sales have been slowing down and inventory has been building up, but prices were not dropping yet. But now we're starting to see the first signs that "real estate always goes up" isn't a law of... [Read More]

Tracked on August 24, 2006 5:34 PM


Comments

This FINALLY hit the local news in NYC yesterday, actually including speculation about a hard landing. Prices are dropping here, not in the asking price but in the prices actually paid. This is true for new construction as well as for resale. One huge problem is that those who don't have fixed mortgages and whose mortgages rise dramatically have to refinance or sell. Plus, in this area, there's been too much investment in the building of luxury apartment buildings and forcing people out of their homes to refurbish older buildings as luxury condos and co-ops. Along with a general exodus of the middle class from Manhattan and the city in general, there's now beginning to be a shortage of the super rich to buy this stuff. Rents are still sky high, though. Even rents will have to level off and start to fall sooner or later.

Posted by: MJ [TypeKey Profile Page] at August 24, 2006 4:58 AM

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