I still feel confident that price declines around 50% are very likely. This event is completely different from previous cycles. This ere, has lending products, that weren’t around before. Literally anyone who wanted a home, could go buy one. This lead to RAMPANT speculation. Homeowners were getting rich, lenders, RE agents, construction, etc. So many people were behind this and supported it and devoted a lot of time and effort into promoting this boom.
It became common knowledge, that the easiest way to get rich was to buy a home, regardless of your financial condition or the price of the home. Homes have never been looked at this way in our history. In the 90s, a home was barely an investment, but after y2k, a home was considered FREE money. Emotions ran high, as did the peer pressure to go buy a home, cause everyone else is, and everyone else is getting rich. The psychological impact that this current housing boom experienced is also a first for RE.
There is no argument that easy credit, speculation, and a whole new market psychology all have played a crucial role into creating a housing boom that is beyond compare to anything we have previously seen. This correlates the fact that interest rates have been at or near historical lows now for over 4 years.
Some have assumed, that buyers in a tight spot will magically “figure out a budget” to allow them to afford ballooning payments. While if this was possible in theory, which it is not, it would still spell disaster for housing prices. If households facing rate increases, all of a sudden, drastically reduced non mortgage spending, in order to make their payments, these impacts would be felt in the rest of the economy. This trickle down effect has already been felt in the financial markets, and this is just the beginning. The people that try to live life w/ the ridiculous mortgages that they recently have signed up for, will not be buying as many Hummers, Dinner and a Movie Dates, Starbucks lattes, and stamped concrete patios, like they have been in recent years. You will and have already seen corporate downsizing, layoffs, and unemployment. Once again, we are at the beginning. Just as the boom builds momentum slowly on its way up, the same effects will happen on the way back down.
Unfortunately, the only thing that can fix things is a huge market correction. It has begun, but it will take years to reach bottom. My humble advice…be patient sell your home if you have one. Rent for about three years. Save the difference between rent, and what a toxic mortgage would cost you. And after everyone has learned their lesson on cheap excess credit, buy aging. Save yourself 50%
