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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.

1 Comments – Post Your Own

#1) On March 14, 2007 at 3:08 AM, perfectfifth (< 20) wrote:

The comparison to Japan's real estate bubble in this piece is HIGHLY misleading and I would argue designed to incite hysteria among those susceptible to it. At the height of Japan's bubble, the value of all the real estate in Japan exceeded the value of all the real estate in the United States. At the height of Japan's bubble, the value of the Imperial Palace and grounds in Tokyo exceeded the value of all the real estate in the State of California. The US is nowhere near these levels of valuation, and many parts of the country offer great values. Look at the major capital cities of Europe where 90% of the population has resigned themselves to renting, and this has been the case for years. US valuations are not worse than this. Valuations in desireable US locations have adjusted upwards as befits a mature real estate market. Americans were used to a world where if you could stand up straight and tie your shoes you could buy a ranch house in an LA suburb. Those days are gone, certainly...and they're not coming back.Japan had 40% to fall. The US as a whole certainly does not, and you'd be hard pressed to argue that even the most speculative parts of the market will fall that much. Take it easy on the hype.

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