Getcher Predictions Here

Posted by Dave Fratello on Monday, September 3rd, 2007 at 5:52am.


Some new conventional wisdom is forming around the future of the housing market. It ain't pretty.

But this shift in mood is inviting a range of people to speculate – er, let's try a better word – predict what's next.

Oh, predictions, what perils they hold. You may some day be held up as a soothsayer, or fool. Here are some of the most intriguing of the last week:

Housing prices down 7% in 2007, and 7% again in 2008 (using the Case-Shiller methodology, which differs from median-price measures). This one comes from Goldman Sachs researchers. They also put forth several specific estimates of declines in new housing construction and sales, existing-home sales, and residential investment (a broader economic measure – they are extremely pessimistic on this one.)

Housing prices down 16% in California, 20% adjusted for inflation, by 2009. This one is from Global Insight, a private forecasting firm (hey, it's what they do), via the New York Times last week. That story has gone pay now but this quickie references it.

Housing prices down 30-40%. This is courtesy of Edward Leamer, director of UCLA's Anderson Forecast. We assume his timeframe is peak-to-valley, no dates as of yet. His view, via Bloomberg:
Leamer said in an interview today [Aug. 31] at Jackson Hole that some former "hot markets,'' such as pockets of California, may see declines of 30 percent to 40 percent.
Hey, now, we resemble that remark.

Housing prices could drop by half.
This is part of a paper prepared by Robert Shiller (Yale economist who is credited with calling the dot-com bust) for the Kansas City Fed for this weekend's Jackson Hole conference. Click here to go to the conference website; the Shiller paper is the second on the list of downloads. Money quote:
[T]he examples we have of past cycles indicate that major declines in real home prices – even 50% declines in some places – are entirely possible going forward from today or from the not too distant future. Such price declines have happened before. In the last cycle in the United States... real home prices fell only 15% from the peak in the third quarter of 1989 to the fourth quarter of 1996, but some cities' real prices fell much more. Los Angeles real home prices fell 42% from the peak in December 1989 to the trough in March 1997.
Best time to buy will be 2009. That's the considered opinion of SoCal RE investor Kyle Kazan, splashed all over Sunday's Daily Breeze. (How to describe an article that was literally teased above the masthead on Page 1?) The article is a must-read for its local angle and its explosion of descriptive language: "perfect storm," "death-spiral," and the enigmatic, "The South Bay is a microcosm unto itself."

Best time to buy will be 2010 or 2011. In perhaps the least analytical of our links, "The Great Loan Blog" says you'll be in the best position after pretty much all of the ARMs now in the pipeline have adjusted.

Notice how we've scrubbed any reference to a national economic recession. Those predictions are flying everywhere these days, too.

Housing decline and recession seem to be intertwined in many analysts' predictions, but we're focused on one issue here – local home values – as best they can be deduced from these big thoughts.

Surely there are contrary views...


UPDATE 9/4/07: The Robert Shiller paper is now quoted above and a link is provided to download the whole paper.
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