December 19, 2005

What do you all think? A bang, or a whimper?

I'm thinking we're seeing the bang right now (drastic listing increases followed by a drastic quick cut of at least 10% in many markets) then followed by a whimper - 5%+ declines until the median housing line gets back in line with the income and rent lines.

Good article here from MN:

Housing boom bound to run out of steam

News that the Twin Cities area housing market cooled in October is no surprise. Sale prices for existing homes had increased sharply for two years. New construction had boomed. Neither trend was sustainable over the long run.

The most important economic law is that if things cannot go on forever, they won't. The housing boom has to end, and apparently is starting to do so. The only question is whether it will end with a bang or a whimper.

A bang would see house prices falling 20 percent or more, many households defaulting on mortgages and construction coming to a virtual standstill. It would take five years or more to sort out and might be the foremost economic problem on most people's minds during that period. Personal bankruptcies would rise, mortgage companies would write off large losses and many builders would go belly up.

A whimper would see stagnation in prices. Some houses would appreciate a few percent a year while prices of others fell by similar proportions. Overall, prices would remain essentially flat for three to five years as incomes and the general price level caught up to housing. Turnover and refinancing would drop dramatically as people hunkered down in their homes. Mortgage defaults might increase, but would not reach epidemic proportions.

1 comment:

Wes D said...

I used to think whimper but now that everyone says we're in for a soft landing I suspect it will be a hard one. The fulcrum is eroding and the inflection point was probably July/Aug timeframe. We're already 4-5 months into the bust and it's now just getting noticed on a daily basis.