Wednesday, June 14, 2006

The Bubble Will Pop ...

It's now common consensus that the housing markets will correct, although still no consensus on if it will be gentle (stagnation in prices) or harsh (you see horror stories in the newspaper) I tend to be a believer that the scenario will be closer to the latter than the former. I wrote way back in September 2005 that the historical record suggests housing markets do correct harshly, with three giant nation-wide bear markets since 1967. Now, an article by Paul Lim in USNews argues along similar lines, and once again points to the historical record.
The bottom line: Real estate prices eventually correct themselves. And unfortunately for homeowners, it often takes years before home prices start to rise again, especially after a big run up. National City recently studied 66 major metro regions over the past 21 years that suffered through a 10 percent or greater decline in prices for at least a two-year period of time. It found that home prices, once they begin to correct, tend to decline 17 percent on average before markets heal themselves. "And the average duration of these adjustments is 3.5 years," says DeKaser [chief economist at National City].

And remember, your losses are exaggerated by the leverage you used (using Other People's Money works both ways!), so true losses are probably several times that percentage.

As I pointed out in my piece back in September, time is your friend, so if you intend to stay put for 5-10 years, the odds are in your favor, but if you're a 20-something year-old flipper, God be with you, 'cos you're gonna need Him.

1 comment:

DennisAOK said...

I am inclined to agree. Furthermore, it isn't really good for the country to have such a large chunk of the economy tied to real estate. Time to eliminate the mortgage interest deduction over a ten year period and adopt a flat tax!