Dean Baker: The Coming Housing Crash

[desmond]

“The crash and post-crash world will not be pretty. Millions of people will lose their jobs and their homes. Unfortunately, the economists who led us down this path are not likely to be among the ones who suffer severe consequences”

I could see how an Economist might miss this crash working with the overall picture and not in the day to day trenches, etc. But how do CEO’s of homebuilders, NAR Executives, etc. with all the sales figures, cancellation and inventory numbers, miss? Very interesting to see if certain execs were in “Lay Speek” and dumping shares or selling properties and still talking a good game.

[PerryChase]

sdsundevil, did you buy RE in the last few years? If you don’t mind, please tell us a little about the good deal you had, and how you plan on making RE work for you in the future.

BTW, sdsundevil, you’re entitled to your opinion. Please keep on posting away otherwise, we’ll just have one set of opinions here and it’ll get quite boring.

[murray]

The reason most people don’t pay attention to doom and gloomers is because they’ve heard it all before and the D&Gs have always been proven wrong. The demise of the US economic system has been predicted before and it never happened. Losers like Ruff, Batra, Precter(sp?) make a good living selling D&G senarios that never happen. Oh they produce very convincing data and charts to convince you but they are just guessing. Nobody knows anything.

[Steve Beebo]

Deadzone –

I can’t agree with you completely: “Anyone who buys now is a complete idiot, period. It could take 10 or 15 years for prices to return to today’s levels.” Buying now is a lot better idea than buying 12 months ago. There are some desperate sellers now, a huge inventory to choose from, and you can probably buy cheaper than someone did 12 months ago.

Granted, the market is very soft right now in SD, and will very likely get worse, but a lot of informed people are not forecasting a 30-50% drop in prices. I would say that the average home or condo is off by about 4-5% since 12 months ago. I really haven’t seen anything drop by 10% in the past year, except for some newer housing developments where big incentives are available, and I’m doing residential appraisals every day. Some areas have even seen prices go up slightly in the past 12 months, and a lot of areas are flat over the same time period.

But let’s say that prices drop some more over the next two years, then flatten, then start inching up, and overall are about the same in 10 years. Instead of renting for 5 years, if you can afford it, wouldn’t you rather buy a house sometime in the next year with 20% down and a fixed rate, and start paying down the principle? Granted, you may lose some equity over the next 2 or 3 years, but prices will recover in my opinion. But if you really are convinced that prices will drop 30-50%, I know nothing will make you buy.

[equalizer]

Steve

I doubt there are too many people who have 20% down and could afford fixed rate right now. The rent/own differential could be $500-1000 a month, INCLUDING 30% tax deduction.

[equalizer]

sdsundevil

you say that there are always corrections and downturns. Then you “whimsically” state that if there is a bottom. What does that mean? That correction will only last 3-6 months, so you must buy now?

“In the long-term you will be fine.” Sure, if you can afford the fixed mortgage. What about people who bought in the last year or so on ARMs? Is that what you told everyone who may face huge payment increases soon?

[sunsetbeachguy]

I disagree, unsupported bullish comments should be shouted down.

If he wants to come to a housing bubble site and present a bullish case, that is supported with data, then everyone is welcome.

BTW, I haven’t yet had an RE bull come forward with a well supported argument that rivals what Rich has put together here.

Stupidity must be punished anywhere it raises its head.

[PD]

For “the long term” to work out for you, you have to plan to stay in the house and be certain that nothing in your situation will force a sale. Many people won’t be able to afford the long term because they financed for the short term.

[equalizer]

Daniel

Dont worry about it is a complete Non sequitur.
Gene Epstein, Barrons economist, is MR. Optimist, but at least he presents valid points such as fact that only X % of homes have a mortgage, etc.

[powayseller]

Daniel, I agree with your point, but they really need to read the Bubble Primer before they start posting. Then, they can address the weakness in the Primer, instead of making posts like “real estate goes up in the long run” and “you can’t time the bottom” and other myths that have already been debunked in the Primer. If he reads the Primer, he can refute it or make new points, and such a discussion is very welcome.

[lindismith]

Granted, you may lose some equity over the next 2 or 3 years,

SteeveBeebo,

What kind of equity would I lose? I’d like to know, because personally, I’d love to get out of my apartment, and into a condo. I’m just really worried, that I’d lose a BUNCH of money.

You can use the example of the the condos that are going down 4-5%/year.

I can put 20% down. I’m looking in Hillcrest and Mission Hills for a 1 bedroom.

[Daniel]

Powayseller,

I think I’ll address some of the issues in the Primer myself. Not right now, because I need to gather some data to make my points, but hopefully fairly soon (in the next few days, if everythig goes well). So, until then, the ball is in my court, as they say.

Now, mind you, I’m not going to come out and say that there is no bubble, as it’s pretty clear that there is one. But I will take issue with the price/income graph that’s at the top of the Piggington page, the one which shows SD housing about 100% overvalued. I think that graph is leading many here to believe that a ~50% drop is in the cards. I don’t share that belief. Anyhow, let me gather my data, and hopefully I’ll be able to put it together in a convincing way. I’ll keep you posted on this.

Take care,
Daniel

[SD Realtor]

lindismith –

I think the answer is that we don’t really know at this point. If you want to go buy a place, AND you are committed to stay for at least 7 years, (7 is a guess, 3 more bad years followed by 4 years to maybe get back up… and lots of people here will refute that… guys it is just a guess!)then you will be okay…

One thing that I do believe alot of us bears kind of overlook is quality of life. Look, if you want to live in a home and have things that you just cannot get from renting, AND you are HAPPY with it, AND you will not have to leave or relocate… then yeah you can go ahead and buy. Make sure you can afford it, don’t overextend, lowball the heck out of the seller, and get the best deal you can. Then enjoy life…

Also lindi you don’t LOSE money until you sell… so as long as you are living there then you are okay.

(I am sure the forum regulars are ready to string me up for the words I just spoke) so please read on…

**********

Now my PERSONAL advice to you would be to try to sit tight as long as you can. I think that if you could hang for say 2 years, you may be able to buy a nice 2 bedroom in the future for the same price as a 1 bedroom today. Deep down I do believe the correction will be of a more substantial magnitude. When you look at it from a risk perspective the risk of waiting is minimal to none, while the reward for waiting is substantial (perhaps) monetarily but not in a personal quality of life way (you would still be renting which does not sound palatable to you).

Though quality of life does improve with money…

**********

Along the lines of rausting people who don’t read the primer or who have differing opinions and don’t present thier arguments based on facts…. I also welcome thier postings and I try to respond in a measured response. I think it takes guts to come into this forum as an optimistic poster. I fundamentally agree that all of the data seems to be pointing towards some pretty rough times ahead. I am in the same boat as alot of us… I need to buy a home and I am currently renting. Yet as much as I want the pricing to come down and come down hard, I don’t WANT the economy to crash hard or for rampant unemployment. I know the data screams otherwise and so when people come in with optimistic angles it is like shooting fish in a barrel. I think one misconception about bearish points of views is that people think we WANT bad things to happen. That we would rather have bad things happen then not and stand corrected. I do not think this is true for the majority of us.

[Daniel]

Rich,

You’re right on target: I don’t actually have issues with the graph itself, but I do have issues with the way the graph has been used to support certain predictions on this forum. I think the Primer, as a whole, is very balanced and well-written, but that graph has been taken out of context so many times in order to justify certain arguments, that I felt the need to say something about it.

It may not come as a surprise to the regulars here that, almost every time Powayseller cites the “upcoming 50% drop” and the “reversion to the mean”, I come out of the woods arguing with her. So I think I owe her some data and analysis to justify my (somewhat) rosier view of the situation.

[powayseller]

Rich has avoided the flak that I get, because he avoids making predictions. I love a good debate; I must have said that a dozen times. I look forward to your arguments. Perhaps you will show us something that will cause me to change my mind about the 35 – 50% drop? Just to clarify, I am saying in the next 5 years, a 35% drop in the median San Diego County housing prices (condo plus SFH plus attached homes) is certain, a 50% drop is possible.

[Author]

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