bob007, it is certainly possible that rental prices will drop, as rental demand decreases, so that the price drops wil overshoot the value of today’s rental prices. You betcha! If today’s $2500 rental becomes a $2100 rental, then the 10x mutliplier means todays’ fair market value of $250k would turn into $210K.
Furthermore, a severe credit crunch is exactly what I and others predict. By 2007, there will be no more I/O loans, 100% financing. The FDIC guidelines are going into effect sometime next year, most likely.
The Fed had no role in encouraging I/O loans, stated income, etc. They allowed it, but they didn’t create rules to make it. Thus, they cannot interfere to bring those rules back, since it is independent investors who buy those loans.
Your comment, hoping that the foreign central banks and Fed won’t allow a credit crunch, sound like the hopes of a homeowner. Are you not a renter? The Fed has no control over what the private investors do, and their aversion to stated income loans. If they increase liquidity from the government side, vs. the private side, inflation is going into the double digits, and the recession will be even worse. We desperately need a credit crunch to cleanse the excesses from our banking system, or the ultimate recession we get will be much worse than the Great Depression.
Remember too, that this is the first time since the Great Depression that national median housing prices have fallen year over year!!!! Every area fell, except the South. If you include the South, the gain for the country was .9% for resale, .3% for new homes. BUT, those figures do not include the incentives, which range from 3-8% (Roubini’s blog). If you include the seller incentives, such as move-in allowance, or closing costs, and the builder allowance, even the South is down.
We are heading into a serious recession, which could end up like a Great Depression. Remember, we have never had a median year over year housing drop since the Great Depression. The fact that we have it now, is a scary scary situation. Bank failures are next, just watch. It is happening very quickly. Also, did you know that GMAC has been saving GM? Wait until next year, when GMAC cannot save GM anymore, and see what happens to our economy when one of the most highly traded bonds (GM) default?