That argument leaves out one thing. And that one thing is the thing that drives the market up past where it should be and down past where it should be. And that thing is, of course, market psychology.
The only reason prices are as high as they are is that people thought prices would keep going up forever. So, no matter how much they had to stretch, no matter how many extra hours they had to work, no matter how many other things they could’nt buy or services they couldn’t afford, buyers would spend whatever it took to get a house at whatever price they could buy one at. The only reason so many people paid $500,000 for a 1300 s.f. crackerbox in Clairemont Mesa was that they thought it’d be worth $600,000 in a year or two.
So, it doesn’t matter if interest rates go down again (unless buyer sentiment turns around with it. But that would require the whole herd to change direction again, and that doesn’t seem likely to happen twice in one year). Because if interest rates went down, then while affordability would be back to where it was when interest rates were lower (and affordability was pretty damn low then), people wouldn’t make the sacrifices and stretches that they would have before in order to buy the house. They wouldn’t pay more than the house was worth as shelter (plus whatever premiums “pride of ownership” and what not add). Because they’d be expecting them to drop in price, rather than go up.
In fact, now that the herd is expecting a drop in prices, there will be plenty of people out there who won’t want to buy a house at any price until they’re convinced that prices aren’t dropping any more. The herd has a lot of inertia. And the herd is accelerating. So it may be a while before the herd is convinced that prices aren’t dropping anymore.
Affordability wasn’t the issue on the way up. If it was, then prices wouldn’t have gotten so high. And affordability, while it may be what turned the tide and sent the herd thundering in the other direction, is not the issue on the way down, either.
Fear of being priced out of the market was the main factor on the way up. And fear of losing money will be the main factor on the way down.
