Wall Street Journal: Housing Market May Have Hard Fall

From today's WSJ. Some say its cool, some say it's c-c-c-COLD!

"Bubble or not, the biggest housing boom in recent U.S. history is coming to an end."

Nice to see a major business journal actually admit the fact.


"The boom has depended heavily on the upbeat psychology of consumers, builders and lenders. As moods swing, the landing could be very hard indeed."


Especially the lenders - if they get burnt from the current crop of exotic loans they're holding, things are going to get a LOT tougher for all future borrowers, no matter what the interest rates are.


"'We could be underestimating the dark side,' says Mark Zandi, chief US economist at Moody's Economy.com and among the first to seek to quantify the housing boom's broader effects. 'Euphoria could turn into abject pessimism very quickly.'"

The key phrase schaudenfreude comes to mind.


"In June, total single-family-home sales fell 8.7 % form earlier, to an annualized rate of 6.9 million, the sharpest year-to-year drop since April 1995."

I owned a house in 1995 in Phoenix, doubt that it was worth a penny more than when I bought it (new) in 1993 for $99K - sold in 2000 for $135K (after installing a pool). Recently, a search on Zillow reveled that the place is now worth more than $300K. That, my friends, is the Webster definition for "irrational exuberance".


"Still, judging by most economists' forecasts, the fallout from a slowing housing market doesn't look all that unpleasant. Typically, they expect the decline in housing and housing-related activity to shave about a percentage point off inflation-adjusted GDP growth in 2007, compared with the 1 % point the sector contributed to growth in 2005."

I'm not an economist, but I do possess an engineering degree and an MBA, and have been very observant over the past several years. If the market keeps its current path, a 1% downside from housing will be the very best scenario.


"Economists, however, have few clues on which to base their predictions. Today's housing boom differs radically from its predecessors. For one, it has been bigger and longer-lived. House prices are still more than twice the level of 1991, when the boom began."

It should be noted, that the vast majority of that growth is concentrated on the coasts (CA/NV/AZ/OR/WA and Boston-south-to-Miami). For the most part, growth in rural and smaller cities has been much more sane.


"Because the market has risen so far, economists worry it has the potential to fall much harder than their main forecasts would suggest."

If they're worried, why aren't they quantifying this worry-level and incorporating that into their forecasts?


"There is reason to believe home builders will have to pull back more sharply. That is because the leveling off of house prices changes the equation of homeownership. When housing took a down-turn in the 1970s, new-home sales quickly fell to their long-term norm. This time around, that would entail about a 50 % decline in sales, says Ian Shepherdson, chief US economist at Valhalla, NY-based consulting firm High Frequency Economics."

So, the next time you drive by a new home development, that says in smaller font, "from the mid 400s", remember the price will eventually get to "from the low 200s".


"'It's a 15-year bubble unwinding in two years,' Shepherdson says. 'It's going to hurt.'"

No pain, no gain.