Tuesday, February 19, 2008

Housing Meltdown?

Businessweek recently carried a very negative story on the housing meltdown. A meltdown? If that seems extreme, the authors don't think so. Even for a housing bear like me, some of the predictions and information in the story were surprising and deeply troubling.

Brace yourself: Home prices could sink an additional 25% over the next two or three years, returning values to their 2000 levels in inflation-adjusted terms... Shocking though it might seem, a decline of 25% from here would merely reverse the market's spectacular appreciation during the boom. It would put the national price level right back on its long-term growth trend line, a surprisingly modest 0.4% a year after inflation. There's a recent model for this kind of return to normalcy after the bursting of a financial bubble. The stock market decline that began in 2000 erased most of the gains of the boom of the second half of the 1990s, leaving investors with ordinary-sized returns.

Even more troubling was this excerpt:
For another bearish view, there's what economists refer to as the Mankiw paper. In 1989, long before working in the White House as chief economic adviser or writing his best-selling textbook, Principles of Economics, Harvard University economist N. Gregory Mankiw co-wrote a paper that was startlingly negative on housing. He and David N. Weil predicted that home prices would decline by 47% after inflation over the next 20 years, based on a shrinking pool of potential first-time buyers and an expectation that baby boomers as a group would spend less on housing as they grew older. It could be that Mankiw and Weil were not so much wrong as premature.

Ouch! Not looking good for real estate outlook! True, in recent years, the easy availability of credit would support greater leveraging of household budgets (in contrast, in the 20s and 30s, most houses put something like 50% down!), but if the credit crisis is more than short-term, then we just may see this Mankiw prediction come good after all!

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