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September 10, 2006

Today's Housing Bubble Post - Prices Will Drop Now

-- by Dave Johnson

Here's the kind of headline that is starting to reach home buyers: House hunters' tip: Prices may fall, a first in 13 years. This news that people should expect falling prices is only starting to sink in out there. Changing people's expectations is a slow process. But when it does sink in -- that is when we will start seeing real drops in prices. Right now we're still in a housing bubble and buyers think they are seeing "bargains" while sellers are holding out with unrealistic expectations. Once it really sinks in that prices are falling - and falling fast - the buyers will start expecting ever lower prices, and the sellers will either take their homes off the market or dump them before prices fall further.

Prices will likely revert to the mean. This June chart from The Economist -- "The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops" -- shows where prices were in relation to the mean (100 on the chart) back in 2005, and shows what happened when Japan's smaller bubble popped.

From the Economist story,

Japan provides a nasty warning of what can happen when boom turns to bust. Japanese property prices have dropped for 14 years in a row, by 40% from their peak in 1991. [emphasis added]

And more housing bubble news: Housing slump harsher than predicted,

For years, real estate brokers and home builders promised that the soaring property market eventually would glide to a soft landing. These optimists predicted that home prices, which had more than doubled in parts of the country between 2000 and 2005, would continue to rise, but at a more normal pace of 5 percent or 6 percent a year.

It isn't working out that way. The rapid deterioration of the market over the past 12 months has caught many homeowners and builders off guard. Some are being forced to cut prices far below what their homes could have fetched a year ago.

...The market may be weaker than the Realtors' widely followed monthly reports suggest. The group's data don't reflect the latest transactions.

Builders Brace for a Housing Downturn,
The housing market is looking sicker by the day. On Sept. 7, the perpetually optimistic National Association of Realtors acknowledged for the first time that housing prices are likely to fall on a year-over-year basis, at least for a time.

Posted by Dave Johnson at September 10, 2006 2:29 PM

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