Sell Now or Risk Losing 30%+
Good article over at BusinessWeek on their front
page called, “ Housing Meltdown ”.
“But it's considerably more likely that the storm is still gathering force.”
“The Standard & Poor's/Case-Shiller 20-city home price index fell 7.7% in November from the year before, the biggest decline since the index was created in 2000. And that could be just the start. Brace yourself: Home prices could sink an additional 25% over the next two or three years, returning values to their 2000 levels in inflation-adjusted terms. That's even with the Federal Reserve's half-percentage-point rate cut on Jan. 30”
“While a 25% decline is unprecedented in modern times, some economists are beginning to talk about it. "We now see potential for another 25% to 30% downside over the next two years," says David A. Rosenberg, North American economist for Merrill Lynch ( MER ), who until recently had expected a much smaller slide.”
“Shocking though it might seem, a decline of 25% from here would merely reverse the market's spectacular appreciation during the boom. It would put the national price level right back on its long-term growth trend line, a surprisingly modest 0.4% a year after inflation. There's a recent model for this kind of return to normalcy after the bursting of a financial bubble. The stock market decline that began in 2000 erased most of the gains of the boom of the second half of the 1990s, leaving investors with ordinary-sized returns.”
“Why might housing prices plunge violently from here? Remember the two powerful forces that pushed them up: lax lending standards and the conviction that housing is a fail-safe investment. Now both are working in reverse, depressing demand for housing faster than homebuilders can rein in supply. By reinstituting safeguards such as down payments and proof of income, lenders have disqualified thousands of potential buyers. And many people who do qualify have lost the desire to buy. "A down market is getting baked into expectations," says Chris Flanagan, head of research in JPMorgan Chase's ( JPM ) asset-backed securities group. "People say: I'm not buying until prices are lower.'" He predicts prices will fall about 25%, bottoming in 2010.”
“Still, if the national average decline is anywhere near 25%, the entire U.S. economy is in for trouble. Keep in mind, says Merrill's Rosenberg , that the relatively puny price decline to date has already pushed home-loan delinquencies to their highest level in 20 years. The plunge in residential construction reduced the economy's annual growth rate by a full percentage point in the third quarter of 2007. A bigger decrease would wipe out even more jobs—carpenters, real estate agents, mortgage brokers, furniture salespeople.”
“However things unfold, the changes are likely to be wrenching. The bigger the boom, the harder the fall.”
(emphasis mine)
This is the main article from this weeks BusinessWeek, and its 5 pages long so what I posted are only a few snippets. Now it seem that the mainstream has woken up! I’ve been calling for a housing correction since early 2004 (only my friends and family could confirm this) and I've had this blog up since 2006. Back in 2004 I though we needed a mid to high single digit percent decline to correct the housing bubble, but I was also perplex at how prices keep rising. I underestimated the lax lending standards which drove the market from 2004 – 2006. Back in 2004 I almost purchased a starter home from a friend (at a huge discount of $100K), but decided to use my money to pay for an MBA instead of a home. I think my MBA was a better investment as I’ll make drastically more money over my lifetime than I would compared to a homes appreciation.
Now that everyone doesn’t think I’m just some kook on the internet claiming that the sky is falling, I warn you to sell you house for whatever price you can TODAY because you are quickly running out of time. Once the spring season starts, expect to see almost double the inventory on the market with everyone thinking the same thing. The slippery slope has begun and there is no turning back. No rate cuts, government intervention, etc.. can save you from what has been set in motion. I expect at least a 30% price correction in the Baltimore Metro area and maybe even 50% in some area further North of here like Bel Air and southern PA. The reason I expect more drastic price declines further out you might ask? Well its simple, all real estate costs more the close you get to the center of the business center ( Inner Harbor ) as it is most desirable. You pay less money for a home, but trade it for a longer commute, and you pay more money for a home for a shorter commute. This is basic real estate valuation.
Cut your losses now and sell your home for whatever you can, your kids and grandkids will thank you one day.
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