Up until the beginning of this year, I was in the “long slow decline” camp, meaning I figured the slope of the decline would go to about 45 degree or so and it would take 5 or 6 years from the peak to settle down. In other words, I had projected a 1990s type of decline, albeit from a much higher starting point.
However, the big chuck losses over the last couple months – which caught me by surprise – has now resulted in a correction that has already covered a LOT of ground, pricewise. This rate of decline just isn’t sustainable over the long term for the simple reason that there isn’t enough gas to burn off to last that entire time period. Just as trees don’t grow to the sky the leaves can’t fall below ground level.
So instead of the Japan-style bleed off that takes several years, I have now come to the conclusion that if this current trend continues we might be looking at a downcycle that more closely resembles a “U” where the downstroke occurs quickly and the extended bottom bleeds off the rest over time.
I suppose we could get a bigger dead-cat bounce this spring, followed by a more moderate decline; or perhaps a series of more radical bounce-decline jogs on the way down.
I think a lot will depend on what happens over the next 3 or 4 months. If there is going to be a significant bounce then it follows that it will take longer to clear the suckers out. If the spring bounce is as weak this year as it was last year then I think 2008 will end up being the big year for declines. That’s because by the time you whack another 20% off the current prices you’re going to be getting within range of some of the rents.
And yes, I agree with the poster above (sorry, I forgot who it was) who said rents might decline, thereby moving that buy point even lower. The examples I used above were just for illustration; they weren’t intended to be a prediction of timing. I’ve learned my lesson on that one, thank you.
