The Worst-Case Scenario for Housing

[midnight armadillo]

http://www.usnews.com/articles/business/real-estate/2008/02/28/the-worst-case-scenario-for-housing.html

The Worst-Case Scenario for Housing
Forecasters say a 40 percent drop in home prices from their peak is possible, though quite unlikely
By Kirk Shinkle
Posted February 28, 2008

A year ago, most economists talked in worried tones about the possibility that American home prices could slip after almost doubling during the prior decade. At worst, fretted Wall Street's more bearish forecasters, prices could drop as much as 20 percent from their peak in a more dire version of the last housing downturn during the early 1990s, when new-home sales dipped but existing homes held their value.

Fast-forward to today, and the scope of those concerns looks almost quaint. Home prices are already falling fast (with builders offering huge rebates on new homes), and the only question now is: Just how low can they go? Forecasts by Moody's Economy.com now use a 20 percent drop in median existing-home prices from their 2005 peak as a baseline, with prices weakening through at least mid-2009. The forecast assumes the United States is already in a mild recession.

And that is the good news. "Our weaker scenario...is a 25 percent decline in prices," says Celia Chen, Moody's director of housing economics. "That would be in the case of a housing and credit crash and still a moderate recession." There are new worst-case whispers as well. "You want the darkest? Forty percent," she says. "There's your apocalypse."

[Tandalayo_Scheisskopf]

1. I'll take the under.

40%, on the nose. At the very least.

These guys have a real problem with denial, don't they?

[Warpy]

2. It will easily be 40% in the markets that went totally insane

where ten people were trying to outbid each other on a property the day it was listed. It might go to 60% in some of those areas. It will likely be 25% in my area. We didn't see a bubble, but housing was overbuilt for out of state yuppies buying new construction as an investment. Woops, they lost. Now there is a huge number of higher end houses nobody here wants to heat and cool on the market and we'll have to wait for enough people to move out here from the coasts to absorb it all.

Some places that didn't see a bubble and weren't overbuilt will see a 10% decline, just from people who bought with iffy paper in the past 5 years and either can't afford the balloon payments or find themselves in a negative equity situation early in the game.

Exurbs where there was no large increase in prices will also see a sharp decline as people can no longer afford a 100+ mile commute to and from work. Again, we're fortunate here because Richardson got a north-south commuter rail system built to service the bulk of the exurbs.

[dkf]

3. How long did it take to get that commuter rail system done?

Or is it being built?

[Warpy]

6. It's all been done really fast and is ahead of schedule

It was originally scheduled to get to Santa Fe in 5 years, now they're saying it might be within the year.

One thing NM has plenty of is land for right of way. Nobody had their house or business torn down to put this in and keeping it next to the Rio Grande made sure there were no hills to blast through.

A lot of people out here in other parts of the state think it's a big boondoggle, but as far as I can tell, it's a truly visionary project that links all the major exurbs up with both the big city and the state capital.

I don't see it being built much farther north, but eventually it might be built south to El Paso if the state can find the will and the funding.

[Sarah Ibarruri]

4. There are countless empty condos in Miami, which no one wants to buy....

... if the prices of these drop dramatically, would they be worth buying?

[Warpy]

5. Most of them are going to be called "apartments."

The top floors will likely sell. The lower floors will all be rented.

If I were in the market, I'd be going to the auctions where they're selling at $.50 to the dollar of the original asking price.

I'd just make sure it was on the top five floors of a high rise building. Those will appreciate down the line just for the view.

[Sarah Ibarruri]

9. Ok thanks :) nt

[El Pinko]

8. I consider myself a pessimist, but I don't think there will be significant decline in the rust belt-

-unless or until we have nationwide double-digit unemplyment. If it gets to that point, all bets are off.

[sepulveda]

7. fantastic!

this gloom and doom ignores the fact that lower prices = better value for buyers.

and if you are IN a house and not overleveraged, drop in prices don't hurt you at all *unless you want to sell it*

that's the nature of markets (i make my $$$ as a trader of futures). to quote jp morgan - "it will fluctuate"

there are two sides to every market and what is bad news for sellers is very good news for buyers

[midnight armadillo]

10. Exactly!

I'm a renter who's been shut out of the housing market for years due to my wife and I never dreaming of mortgages like Option ARMs and interest-only loans.

While I appreciate the general economic pain that will be involved, I can't wait for a 30% drop in price...

[sepulveda]

11. nice

in the long run markets reward those who are prudent, patient, and wait to buy value.