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  1. #1
    Senior Member AirborneSapper7's Avatar
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    Housing's worst-case scenario

    Housing's worst-case scenario

    Although some forecasters say a catastrophic, 40% plunge in home prices from their peak is possible, a more likely scenario is a decline of 20-25% before a recovery starts to kick in.

    By Kirk Shinkle, U.S. News & World Report



    A year ago, most economists talked in worried tones about the possibility that American home prices could slip after almost doubling during the prior decade. At worst, fretted Wall Street's more bearish forecasters, prices could drop as much as 20% from their peak in a more dire version of the last housing downturn, during the early 1990s, when new-home sales dipped but existing homes held their value.

    Fast-forward to today, and the scope of those concerns looks almost quaint. Home prices are already falling fast (with builders offering huge rebates on new homes), and the only question now is: Just how low can they go? Forecasts by Moody's Economy.com now use a 20% drop in median existing-home prices from their 2005 peak as a baseline, with prices weakening through at least mid-2009. The forecast assumes the United States is already in a mild recession.

    And that is the good news. "Our weaker scenario ... is a 25% decline in prices," says Celia Chen, Moody's director of housing economics. "That would be in the case of a housing and credit crash and still a moderate recession." There are new worst-case whispers as well. "You want the darkest? 40%," she says. "There's your apocalypse."

    That's right. In Moody's most pessimistic (and most unlikely) scenario, existing-home prices plummet by 40% from their peak. A drop like that would certainly plunge the economy into a deep recession, push unemployment to around 9% and hamstring economic growth in a way that could take years to undo. The shock of falling home prices and tight credit markets would spill into everything from consumer spending to business investment.

    Ouch

    Mix in the huge glut of unsold houses on the market, and such a catastrophe would be a recipe for a huge devaluation of not just homes but other assets, such as automobiles. Tight credit would exacerbate the pain, forcing interest rates on bank loans to climb. It would also coincide with a generation of retiring baby boomers who watched home prices soar and pared back their personal savings accordingly, notes Merrill Lynch.

    Last year, the primary culprit behind the turmoil in the housing, credit and equity markets was the threat of defaults on subprime mortgages. The accompanying rise in default and foreclosure activity is distressing, but in some ways it's also old news. The next villain, if the credit crunch continues, will be corporate debt. "If the credit tightening spills over into the corporate debt market in a significant way, that would result in a much deeper recession than we're expecting, and that in turn would drag home prices down further," Chen says.

    Worse-than-expected home price declines come on top of the damage already done by several months of housing-related turmoil. "These are almost the 1979-82 (numbers) -- the worst housing depression of the postwar era," says Richard DeKaser, chief economist at National City Corp. Back then, however, double-digit inflation and interest rates were the rule. Today, all of those factors are relatively in check.

    Still, the worst scenarios will most likely prove no more than a cautionary tale. Home prices remain a largely local phenomenon, with the largest declines coming in parts of the country that watched prices soar the most during the boom. Also, some forecasts are rosier than Moody's. Lawrence Yun, the chief economist at the National Association of Realtors, says the worst outcome for housing would require a period of stagflation -- slow growth and prolonged job losses coupled with rising inflation. Most analysts expect the economy to avoid that '70s-era threat as inflation cools amid slower growth.

    Yun expects the economy and the housing market to recover in the second half as Federal Reserve interest-rate cuts and the government stimulus kick in. "In terms of home sales activity," he says, "we may be scratching the bottom." Even if that turns out to be true, it will be a long time before cocktail-party chat is dominated by tales of how much your home has gone up in value.

    http://realestate.msn.com/buying/Articl ... id=6441566
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  2. #2
    Senior Member SicNTiredInSoCal's Avatar
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    that was interesting...thank you.
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    Senior Member Bowman's Avatar
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    Re: Housing's worst-case scenario

    Quote Originally Posted by AirborneSapper7
    Housing's worst-case scenario
    Although some forecasters say a catastrophic, 40% plunge in home prices from their peak is possible, a more likely scenario is a decline of 20-25% before a recovery starts to kick in.
    My house has already dropped 25% and it' still dropping. I would say it will bottom out at about 35%.
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  4. #4
    Senior Member AirborneSapper7's Avatar
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    I am so sorry to hear that .... so sorry... here in Florida it is just as bad
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    Senior Member Bowman's Avatar
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    Quote Originally Posted by AirborneSapper7
    I am so sorry to hear that .... so sorry... here in Florida it is just as bad
    It's OK, I didn't buy my current house at the peak, but I did sell my old house near the peak (to a Mexican) so I am doing OK.
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  6. #6
    Senior Member SicNTiredInSoCal's Avatar
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    Quote Originally Posted by Bowman
    Quote Originally Posted by AirborneSapper7
    I am so sorry to hear that .... so sorry... here in Florida it is just as bad
    It's OK, I didn't buy my current house at the peak, but I did sell my old house near the peak (to a Mexican) so I am doing OK.
    LOL....thats the name of the game, baby. We are trying to buy a second home right now and rent the current one out. Im hoping they drop a bit more (for purely selfish reasons) because even in this market, they still have not dropped far enough for us to afford something decent and still keep our current house. Mind you, this isn't about "keeping up with the Joneses", I don't see any other way for us to save enough for our retirement.

    If you are smart and patient, its hard to go wrong with California real estate. However, we are not patient (or rich) enough to struggle with a $2800 a month mortgage either...
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