2 Cents likes Roubini so much that I thought I would post his latest missive.
How Much Will Home Prices Fall During This Housing Bust? At Least 20% to 30%!
Nouriel Roubini | Sep 10, 2006
Now it is clear even to reality-blindfolded perma-bulls that housing is not going through a âsoft landingâ or an âorderly adjustmentâ but rather through an ugly and nasty bust, as severe as we have seen in decades. Soon enough the only thing âsoftâ or âorderlyâ about this comatose housing market will be the undertaker carrying the coffin.
Last month I argued that âthis will be the worst housing bust - calling it slump is too mild - in decades. And since median home prices may actually fall on a year-on-year basis in 2007 - something that has not happened since the Great Depression of the 1930s - this may end up being the biggest housing bust in the last 75 years, not just 40 years as the Toll Brothers argue or 53 years as Countrywide arguesâ.
And guess what? Now even the cheerleaders representing the housing sector are now finally admitting that home prices will fall â on a year on year basis - for the first time since 1933. The evidence that home prices are falling are mounting: median home prices â based on NAR data - are already falling for three of the four regions of the US: North East, West and even the supposedly non-bubbly Mid West. Perma-bulls got relief from the recent OFHEO figure that showed still positive price increase in Q2; too bad that the figure was an average of three months and that we are already in September, not in March when the current bust was just starting. Also, even the OFHEO figures show a sharp deceleration of price growth; and those figures â long favored by the Fed as being âunbiasedâ by composition change - s are actually the most biased at all as they exclude the most frothy part of the housing market: condos, co-ops and any home with mortgage above $470,000, i.e. they exclude all the McMansions and other middle to high priced properties.
But more importantly, sellerâs incentives â that are now estimated to be 3% to 8% of the selling price are becoming pathetically ridiculous: $30,000 swimming pools given away for free; even gift certificates worth $99,000 or 40% off mortgage payments (YES 40%; this is not a typo). Soon enough, desperate homebuilders are likely to give you a âtwo for one: buy one home, get the other one for freeâ deals. Sellers are doing everything â via such seller-side incentives and subsidies â to pretend that home prices are falling; indeed, it is supposed to be bad omen to show in any local housing market that prices are falling (as buyers may then wait to buy at the bottom); thus, spin-master realt estate builders and brokers are now climbing on mirrors to distort the data and hide the simple truth â that is evident to anyone who has even one functioning eye - that prices are already sharply falling everywhere in the U.S.. As an industry representative put it ânon-priceâ incentives (what an Orwellian double talk) are going âbeserkâ; even David Seiders, chief economist for the National Association of Home Builders says that 75 percent of the nation's builders and developers are offering incentives. (hat tip to Calculated Risk)
It is really a pathetic joke bordering on a lie for the desperate perma-bulls to argue â as they are still doing â that home prices are not yet falling but just softening; in which delusional dream world are they living? How can they argue with a straight face that this is a soft landing and that prices are not falling? What is a $99,000 gift certificate on properties that are going for as low as $300,000? That is a 33% price fall in the language of first grade math.
These facts, together with every other possible indicator â including futures prices that project a 5% price fall in 2007 â suggests that home price will keep on falling for the next two or three years. The only question at this point is not whether home prices will fall but, rather, the speed at which they are falling and will fall further and how much they will fall overall. There is now an ugly glut of new homes and the total supply is still sharply increasing as many construction developments that were started about a year ago - before the current bust started - will be literally dumped in the market in the next six months. Thus, the glut of unsold homes will become much worse in the next 12 months than the already ugly oversupply and glut that we have now. Thus, the worst of the glut and housing rout is ahead of us.
My own prediction is that, over the next two years, real home prices will fall by at least 20% and possibly by 30%. What is my prediction based on? Let me provide my analysis and explanation.
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http://www.rgemonitor.com/blog/roubini/145489/