Serious consideration of a 50% correction does not represent an extreme. An extreme would be referring to a downswing that overshoots the trendline in proportion to the excess of the upswing. During every cycle so far the market has corrected to the trendline then overcorrected a little more.
If we look at the trendline in terms of statistics and numbers, without any of the emotional baggage, there is an extreme scenario that most people haven’t given serious consideration to. If the trendline includes markets that are overvalued and undervalued, and if we extrapolate that trendline to continue forward as it has in the past, the 50% correction wouldn’t really represent a correction. It would be a break from the old trendline and would establish a new trendline of its own. It could be argued that a correction of only 50% would represent a version of the New Paradigm, albeit not the extreme version NAR has been pushing.
Just to get to the trendline would take a correction of 60% or more, depending on whose numbers are being used and whether inflation is factored in. Add in even a nominal overcorrection of 10% and that adds up to a 70% downswing. Now THERE’s an extreme!!
It’s strange that as a society we seem to be able to comprehend the 300% increase ($200,000 home increases to $600,000 current price), but we can’t wrap our minds around a 60% correction ($600,000 decreases to $240,000). That we think that 6% interest rates can co-exist indefinitely with our current rate of spending and consumption. I think it has something to do with a widespread sense of entitlement. I don’t know about anyone else, but as time goes on I’m feeling more and more like a Roman.
BTW, I’m don’t trust that “the government won’t let it happen”. As far as I’m concerned, the government not only did allow the current upswing to happen – they encouraged it and relied upon it to provide a short term fix to their economic problems.
