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Wednesday, February 4, 2009

Home Prices to Fall and Fall and Fall

I just read an article forecasting more trouble for real estate in 2009. The author seemed to be incredulous about the possibility, saying that some markets were even approaching Pre-Bubble price levels as though that was an organic impossibility.

If you check you will see that the last 2 real estate booms in the 70's and 80's resulted in prices dropping back to pre-boom levels before they took off again. That is what statisticians refer to as a "regression to the mean" falling back to the historic trend line.

There are even more significant troubles for real estate in 2009 and beyond than are perceived by many interested in real estate.

These troubles will continue to drive prices down even further. Although some markets are in fact approaching pre-boom prices, the pendulum may not stop at mid point and may actually swing all the way past pre-boom prices. Have you ever known a pendulum to stop mid way through its swing?

Here are some additional factors to consider:

The credit crisis is forcing banks to husband what little capital they have which is why they will restrict lending to the Very qualified.

How many prospective home buyers have 750+ FICO or Credit scores And 30% in cash for down payment, closing costs and bank mandated cash reserves? Especially since the US savings rate has been hovering around zero for the past decade.

Fewer buyers equal lower demand which means lower prices.

Also, how many more homes will be deserted by home owners who are Underwater, owing more than they owe? It is estimated that nearly 16% of owners with mortgages or about 8 Million home owners are in this situation. These desertions will add greatly to the bloated inventory of homes weighing down the market.

Finally, the only bright spot in housing will probably be extinguished in 2009 as interest rates will skyrocket once China is forced to stop buying our debt because of our dwindling purchases from them.

One report I read said that rental of a typical space on a freighter delivering goods to the US fell from $236,000 for the trans Pacific crossing to $5,000!

Once China stops buying our Treasury Bonds, we will have to lower prices on them to attract other buyers, which will jack up their yields or interest rates as they move inversely to prices.

Our mortgage rates will then soar because they are pegged to the 10 year Treasury Bond yield.

So, despite the optimistic predictions of many rose tinted, shade wearing real estate "professionals" the likelihood of a rebound in housing is probably further away in 2009 than at any time since the real estate bubble burst.

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