I think all cycles play out a little differently. But I also think that past predicts the future.
I remember in 01/1990 seeing a real softening in most of the residential markets. For about 3 months it was real spotty and inconclusive. By about 03/1990 most of the appraisers had figured out that the market was in decline. It took the newspapers about 6 months before they picked up on that and by then it was way too late for some of the “last fools”.
The residential markets here started to decline and the foreclosures started to rack up. As the lenders’ reserves got quickly eaten up by foreclosing, then selling the foreclosed properties under quick sale conditions, the feds would close them in order to stem the losses. That only made it worse. More lenders went down, more properties came on the market as “bank-owned foreclosures”. Believe me, when potential buyers see that sign on a property they know they can lowball the offer even more because the lender is under pressure to sell and they have to liquidate. It sets the market because at the same time the prices are declining that decline is contributing to the rate of foreclosures which in turn swell the inventory and cause further declines. This is the flip side of the “real estate never goes down in value” line that has been so popular these last few years.
As the declines picked up speed, it affected almost every price bracket, but especially the middle ranges. The bottom end lost a bit, but the middle and top price ranges collapsed like an accordion. At one point there wasn’t a whole lot of price differential between what would have previously passed for a $350k home and a $150k home.
The subdivision developers had to finish their projects and get out, no matter what, so they had to cut their pricing. That made selling their homes even harder, and on top of that it spurred some lawsuits from previous buyers. The developer had basically undercut their purchase prices leaving them upside down. People were suing because a $50k loss was enough to ruin them. There were a whole lot of people who were basically trapped in their homes for a good 6 or 7 years, until prices caught up in the 1996-1997 time frame. Those who could hang made it through and those that didn’t added to the inventory.
All that happened in a market where the peak had topped out about 25% – 30% above the long term trendline. Now that we’re 60% above the trendline I don’t think I am capable of overestimating how bad it can get. We only wish we were looking at $50k losses. Heck, that one model in Bressi Ranch has basically lost $70k and things haven’t even started going south yet.
