Friday, December 28, 2007

Home Price Decline Will Be Different This Time

Lots of people have been comparing the national experience today with Los Angeles in the 1980s. Overall prices are inflated roughly the same amount and so the same decline is expected. There are a few reasons why I expect the price collapse to be more rapid and further.

1) The supply of homes increased rapidly during the boom yet the supply of potential homeowners is now falling. I believe that the core driver of the worst parts of the housing boom was a dramatic increase in the number of potential homeowners, created by declines in lending standards. As lending standards rise the number of homeowners will fall off rapidly.

2) The best advice that I could give to someone who is underwater right now and in non-recourse state is to walk away from your home. Take the hit now and start rebuilding your credit.

3) The best advice that I could give to someone who still has equity in a bubble area is to sell. Sell now. Things will only get worse in real terms. You are losing equity when you could be earning interest. Worse yet if illness, job loss or family emergency force you to sell in a hurry then you could loose dramatically more.

In short if you live in a bubble region the only reason to stay in your home right now is because you love your home. A lot. Otherwise it makes sense to get out before everyone else does.

13 comments:

Adalius Thomas said...

Sure. Get out. If you're the same type of speculators that kicked off the whole housing bubble, now's the time to sell out. Go buy Amazon again. Go buy Cisco. It might even be a $500B company soon again. Oh, but if you actually want to live in a house (?? weird, I know) you can probably stay in the house. It might even be worth more in 30 years than it is now. And if your life doesn't hinge on whether the value of your house rises at a CAGR of +1.5% over 30 years vs. +2.5%, it probably won't even bother you the day you make your last payment to the bank. I personally believe prices will fall in the near term, but it's just alarmism to get people thinking they should be selling when the markets are already panicking. Thoughts?

Chris said...

I think adalius hit it right on the nose. It's alarmism at the very least.

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