San Diego - Modeling the Bust: 25% - 35% price decline, taking 6 years

Well written piece in Voice of San Diego by a real estate pro. Please feel free to submit your own models to HP: % drop and # of years and why

One thing the author doesn't take into account with this bust though is the multiplier effect. I believe that so many jobs were created to support the bubble, not only are they going away, but also jobs that supported the jobs that supported the bubble - the drycleaner, the BMW salesman, the Home Depot worker, etc. I also think you need to measure against inflation to see where you should have been, and where you end up.

Let's say you bought last year for $500,000, in six years it's worth $350,000, inflation at 5% would have brought $500,000 to $638,00, so you lost nearly $300,000. Hello complete and total financial ruin.

All things being equal, the best way to model an impending downturn is to look to past down cycles for repeating patterns of market behavior. All things are, of course, not equal. The duration of the price run-up, the tremendous growth in real estate employment, the prevalence of negative-amortization and other "exotic" mortgages, the low levels of home equity, the sheer magnitude of the price increases, and the resultant crushing lack of home affordability -- all of these elements are unique to this unprecedented housing boom

Even still, keeping all our other assumptions the same, we find that home prices would have to decline by 23 percent within the allotted time period. (Inflation at this level would likely cause interest rates to rise to levels that would be problematic for the housing market. For simplicity's sake, though, let's just leave that aside for now).So, the Ghost of Housing Busts Past says that home prices will drop roughly between 25 percent and 35 percent from their 2005 levels, and that they will take around six years to do so. Will he be right? To answer that question, look back at the painfully long string of assumptions we had to make just to get this far. Put another way: who knows?

There are certainly an awful lot of cross-currents that could cause this post-boom housing market to behave quite differently than those that came before it. But if the past does end up repeating itself, it has at least given us an idea of what we are in for.