Since we won’t see a cut-off of credit anytime soon, consumer confidence will hold and we’ll see the housing market slowly deflate over years. I believe it’s psychologically healthier to have a slow protracted downturn. Economically, we’re much better off to cut out losses and move-on.
I kind of believe in self-correcting markets. If our assumptions are correct, and subprime mortgages are too risky, the lenders and/or MBS investors are going to get that soon or late. At that point, they will either stringent mortgage requirements or significantly increase subprime interest rates, both of which will push prices down. Additionally, if home prices fall for any prolonged period of time, the mentality will change and RE will become as scary and shunned an investment as hi-tech stocks were in 2002. Right now a substantial percentage of population still seems to be too optimistic and market downturn does is yet not a common knowledge.
I believe we will see a sharp price declines in coming years when all of the above happens. Inflation is of course going to somewhat soften the process, but in a short (2-3 years) period it’s negligible.
My bet is, by 2009 the median/sq.ft price in San Diego will be down by about 40% from the peak. After that, it will continue slightly downward for several years, but most of losses will be offset by inflation.
