TMFKopp (98.45)

How Fast Will Housing Prices Really Fall?

March 09, 2007 – Comments (1)

It's not a huge mystery why housing prices went up. Even when the Internet boom pulled back we didn't really hit hard times. In fact, we haven't had a true recessionary quarter since back in 1991. No wonder Greenspan is talking about a return to "normal" business cycles. 

On top of that you've got a lot of money that came out of the stock market that was looking for a home in combination with low mortgage rates. Once prices started to heat up, people got excited, and once excitement got going regrettable things like aggressive subprime loans and house flipping came into the picture. Yuck.

Now the only question is how drastically the reigns come in for the housing market. And though it's all interconnected, it's not necessarily going to play out the same way for the big banks like the Wells Fargos (NYSE: WFC) versus the subprime lenders like Fremont General (NYSE: FMT) versus the homebuilders like KB Home (NYSE: KBH) versus the investment banks like Bear Stearns (NYSE: BSC) versus slick Sam the speculator who was going to make real estate riches in Miami.

Or, of course, for Mr. Average Joe who owns a primary residence and has a stake in the US economy through his job and possibly some equity investments.

The most prevalent argument for home prices just flattening out instead of actually falling seems to be that it has never happened in the US before. Not exactly something that I can keep under my pillow to help me feel safe at night if you know what I mean. It's kind of like saying that there will never be a major global nuclear war because there's never been one before. That doesn't make me any more comfortable with certain (we'll leave them unnamed) countries possessing nuclear arms.

If you believe many of the voices out there decrying the housing market -- a group that includes Yale's Robert Schiller, who wrote "Irrational Exuberance" -- a flattening out of real estate price growth may be a godsend. More disastrous consequences could follow, though. As an article in The Economist pointed out back in mid-2005, prices in a handful of global real estate markets (the US included) have risen faster and higher than the run-up that Japan saw in the '80s. The result of that bubble was that property prices in Japan spent 14 years falling and shed 40% of the value at the peak.

I'd be pretty psyched if this didn't come to pass, but I have to admit that a lot of the evidence is pretty compelling.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned.