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Housing may drop another 25 percent

housing bubble pop

“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. “

Sickening isn’t it? Watching these deceptive, neck-tied, land pimp Realtors and Bankers spin their self-serving monthly pump & dump press releases from cherry-picked statistical data? Banks and Realtors; not exactly your most honourable sources of truthful information.

“Rock bottom interest rates” means mean just one thing; interest rates have nowhere to go but up, and fast. Anyone who builds a house on the mud flats when the tide is out had better be a good swimmer when the tide of interest rates rushes back in.

Affordable prices? $312,585 is an affordable home? For whom? Banksers? Ever wonder why your children’s future jobs are being increasingly outsourced overseas to countries where our wages aren’t required to pay for a 1/3 of a million dollars for a home?

Capital must protect itself in every possible manner by combination and legislation. Debts must be collected; bonds and mortgages must be foreclosed as rapidly as possible. When, through a process of law, the common people lose their homes they will become more docile and more easily governed through the influence of the strong arm of government, applied by a central power of wealth under control of leading financiers. This truth is well known among our principal men now engaged in forming an imperialism of Capital to govern the world. By dividing the voters through the political party system, we can get them to expend their energies in fighting over questions of no importance. Thus by discreet action we can secure for ourselves what has been so well planned and so successfully accomplished.- USA Banker’s Magazine, August 25 1924

With all the talk of the awful sales numbers for both existing and new homes in July, there was one small kernel of seeming good news: existing home prices rose slightly. The national median home price actually increased by 0.7% last month compared to a year earlier, according to the National Association of Realtors. But don’t expect this trend to continue — prices still have a ways to fall before they settle at their natural level.

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Several weeks ago, Barry Ritholtz posted the following chart. It was originally featured by the New York Times, and updated by a commenter to Ritholtz’s blog named Steve Barry.

Shiller-Ritholtz-Barry Home Price Index.png

This is a pretty fascinating picture. First, it shows just how incredibly absurd the housing boom was. Beginning in the 1940s, inflation-adjusted homes prices have settled around the 110 value according to the Case-Shiller index. Yet, the index value exceeded 200 in 2006. Prices began a descent when housing collapsed, but as of May the index remained well above the natural value of 110.

Eyeing the chart, the value looks to have hit around 147 in May. For it to drop back down to 110, home prices would have to decline another 25%. That’s still a pretty long way to fall.

Of course, inflation could help it get there. If the price level does rise in the years to come as some economists expect, then even if home prices remain constant, inflation-adjusted values will be lower. That will provide little consolation to current homeowners, however, as their house’s relative value as an investment will be lower than alternative investments that kept with or exceeded the rate of inflation.

Original article appears on The Atlantic

One Comment

  1. Viable Opposition Viable Opposition August 31, 2010

    If you want to see what can happen to the real estate market in a major American city, look no further than Detroit. When I last looked earlier this week, there were thousands of homes for sale for under $5000 – mainly foreclosures and HUD homes. According to HUD statistics, HUD homes that had sold for over $45000 in the early 2000’s are now selling for around $6000.

    To get an overview of Detroit’s real estate market, see:

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