I realize this puts me on the wrong side of some of the conventional wisdom, but I disagree that the downturn of the ’90s was due primarily to job losses in the defense industries. Sure, that might have been the trigger, but there wouldn’t have been the big losses if not for the gains that preceded it.
Think about it – if the pricing hadn’t spiked 25% above the long term trend in late 1989 those job losses wouldn’t have resulted in the foreclosure rates we saw because there would have been no fluff (or at least, less fluff) to lose. The loss to -15% was, in part, an overcorrection for a distorted market. Even if you assume that prices would have ended up at the same nominal rate the -15% loss below the long term trend wouldn’t have been enough to hurt that many people.
If a person subscribes to the dominance of the trend (I do) then it follows that they also subscribe to the concept that the farther to an extreme a swing goes, the more gravity is brought to bear to correct to the trend.
What I guess I’m meandering to is that the long term trend itself demonstrates that if there is a distortion it follows that there will eventually be a correction. Exactly what it takes to trigger the correction is irrelevant – literally if it isn’t one thing it will be another. The more irrational the reasoning is for the increase the less it takes to upset the trend.
Look at the Dot-Com blowout. The week that it started was remarkable only for the fact that nothing happened. There was no outside event that triggered that correction. The markets were distorted and when it surpassed an arbitrary reference point that had already been identified by a couple of the big players they started selling.
I don’t think that you can reasonably cite the bust of the 90s unless you also address the reason for the spike in the late ’80s. Same thing as now only to a lesser degree. People were buying out of fear that their window of opportunity was limited and we were going to run out of land. So many people were making so much money some of them were quitting their jobs to work in real estate. This spike is more extreme in magnitude in part because of the easy credit and in part because the stock bubble provided a lot of people with a glimpse of the good life without gainful employment.
Here’s a little reality check: the losses that occurred here in this region were preceded by bank failures on a massive scale in other areas of the nation, brought about by real estate market declines in virtually every other metro area. San Diego was the last stop on that nationwide trend. Other areas of the nation were in decline long before the federal government even started slowing down on their defense spending. This region ultimately followed the rest of the nation not specifically because of the jobs but because the markets are all connected on the macro level.
Here’s a question: why are prices already sliding? What event has turned this trend from positive to negative? Answer: no one thing in particular, just a couple of little things. That’s how little it took to reverse this trend.
