October 26, 2006

Christopher Thornberg calls housing crash "slow moving train wreck", says housing prices "easily 30% to 35% overvalued"

Thornberg argues that home prices will stay flat for years and years, leaving the devaluation up to the ravages of inflation to get back to their true worth. I agree on his 30 to 35% call, but disagree on how the excess will be washed away.

I think we'll see both - an immediate crash in prices, combined with ongoing inflation-led devaluation for years and years. Very similar to Japan, but more harsh on the front end as people panic as they're doing right now. Also, we have a massive amount of dead inventory out there, and in order to move it, it has to come down in price, and that price cut will be led by the builders, who can cut all the way to the bone, where they break even or lose a bit.

Individual homedebtors having to compete against builders to move inventory will have to drop prices in many cases way below what they paid. To the point of bankruptcy and foreclosure. It's a housing blue light special in aisle three America.

The housing bubble already has burst. The only question is how badly. That was the conclusion of a UCLA economics professor who spoke Wednesday at a conference in Torrance.

"At the end of last year, the real estate bubble popped. And right now, we're in the middle of the bubble popping," Christopher Thornberg said at the South Bay Economic Forecast Conference. "The real question is, of course, is it going to be a hard or soft landing?"

Thornberg, who also serves as principal of Beacon Economics, described the housing situation in harsh terms: "This is a slow-moving train wreck."

"Prices are easily 30 to 35 percent over-valued," Thornberg said. "Whether prices go down or stay the way they are, you can pretty much guarantee that whatever the value of your house now, that's going to be the value of your house in 2011."

Starting in 2003, home buyers bid up home prices by chasing the upward trend in a "feeding frenzy," he said.

10 comments:

bubble trouble said...

What's funny about this article is I live in the Torrance/Redondo Beach area and he goes on to say that prices will not fall in S. Cal, but just stay steady all the way to 2011. Pretty damn optimisic, don't you think? I think it's amusing the floundering going on. It's like he is trying to be somewhat professional by recognizing the stats, but at the same time he is very careful not to freak anybody out. "All is well", now go back to work!

It's a freaking joke, the one factor he so elequently left out is interest rates. Does anyone really think interests rates will stay this low until 2011, especially given all the chatter about foreign countries looking to pull more and more out of the dollar? I don't think so.

Additionally, is he taking into account the jobs that will be lost due to the huge drop in home sales? No, I don't think so, but than again the people he spoke to are the ones that will be losing jobs.

Disgorge! said...

40% easy. With peak oil, 60%+ too high.

Anonymous said...

...I live in the Torrance/Redondo Beach area...

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Without the defense jobs on the one hand, and the Japanese companies on the other, home prices in the South Bay would collapse rather dramatically. The Japanese might be on their way out (Nissan has moved to TN) and the defense cuts will come in a big way in 2009 (first year of the next administration), if not before.

I think the guy meant that home prices will stay flat in nominal dollars but lose 30-35% due to inflation, but that seems kind of optimistic, especially for the South Bay, if the jobs base gets eroded.

Mark in San Diego said...

Slow moving train is right - I watch the weekly MLS here in SD, and each week I see 5K or 10K reduction on properties - of course a one-bedroom condo starts at 500K and comes down 10K a week to 450K!!! Still about 150K overpriced. . .but slow gets there sooner or later. . .every once in a while there is a nice "fire sale" as someone panics, or the bank forecloses.

Anonymous said...

Ahhh... good old San Diego... What's the jobs base there? The soon-to-be-cut defense spending? The soon-to-be-offshored biotech?

But hey, everyone wants to live there.

It IS a nice place (for California) but how can people without really high paying jobs afford those kinds of prices? The answer is that they can't.

Anonymous said...

Ahhh... good old San Diego... What's the jobs base there? The soon-to-be-cut defense spending? The soon-to-be-offshored biotech?

But hey, everyone wants to live there.

It IS a nice place (for California) but how can people without really high paying jobs afford those kinds of prices? The answer is that they can't.

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Oh, I forgot about Qualcomm, but that can't be looking good these days either. Engineering jobs are SO profitable to offshore.

Anonymous said...

A note about the South Bay, San Diego, and other "nice" bubble epicenter areas... Nice areas have a way of becoming not-so-nice once the economy is in shambles, with collapsed home values and a terrible job maket. Remember the early 1990's?

Everyone wants to live in So. Cal. -- until they don't.

Anonymous said...

buying makes sense

Bernanke is bailing out the homeowners.


Owning a home is just like getting free money printed from the FED delivered to your door.



People who bought a few years ago got over 100k in free money right from Greenspan/Bernanke

Anonymous said...

buying makes sense

Bernanke is bailing out the homeowners.


Owning a home is just like getting free money printed from the FED delivered to your door.



People who bought a few years ago got over 100k in free money right from Greenspan/Bernanke

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Sarcasm? If not, put your money where your mouth is and buy NOW. The economy needs cheap indentured servant labor. Maybe if we have enough home-grown ones, it will stem the tide of illegal immigration.

Anonymous said...

Only 30% to 35%?

Try again!