Now House Prices Will Drop Another 20%

B

bearice

Last October, when everyone was jubilant about the housing "recovery," Gary Shilling of A. Gary Shilling & Co., predicted that house prices would fall another 20%.

In the five months since, house prices have resumed their decline.

In his most recent research note, Gary sticks by his "20%" decline prediction. We've included a summary and updated charts from his argument below.

Here's why house prices will now drop another 20%

http://www.businessinsider.com/gary-shilling-house-prices-2011-3
 
I have noticed many many people predicting house prices will go down. These same people were predicting house prices would keep going up just 5 years ago.

There is a rule in real estate. Sell when everyone & their mother loves real estate. Buy when everyone & their mother hates it.
 
You need to understand that house prices go up only while credit is expanding, i.e. an ever increasing willingness for banks to book profits by making home loans.

You need to have an increasing supply of lending chasing up house prices for them to increase. Can you see this happening any time soon?
 
At the assisted care place my Mom is at, they had a bunch of new people move into vacant condos last month, the first in quite a while. My Mom, who used to be an RN and is the liason between the condo assoc and the caregivers, said that many of them had waited too long, and were not likely to last in the assisted care wing, and end up in the nursing care facility instead, very quickly. She said they were waiting because they either couldn't sell their homes, or because they were delaying, hoping home prices would recover, but ended up being FORCED to give up living on their own. My guess is there are many more like them waiting in the wings, who will eventually be forced to go to assisted or nursing care facilities, taking whatever loss they have to, because they just can't survive on their own anymore.

Yes, demographics is but another negative for the housing market as the population ages, retires, and either dies off or lands in care facilities. Just add them to the 20% vacant, and the 50% of mortgages underwater, combined with the 20% un/under employed.

A friend, who had bought a place in 2006 after the initial subprime/housing troubles started, had got a mortgage mod last year after taking a 25% pay cut over the past couple years to keep his job. He told me yesterday that he owes $165k and that the places are now selling, when they do sell, for $50 to $60k, and that he's just going to stop paying and save up cash for a few months to go rent a place and mail in the keys. What's even worse is that he told his son that when he graduates from high school he will have 30 days to move out, because he says he can't afford the extra mouth to feed. I think its partly because a kid across the hall stays home all day and mooches off his Mom at age 25 and my friend isn't going to let that happen to him, but its a very sad state this nation is in when we start telling our kids they have 30 days to vacate.

PS: My Mom gave up and mailed in the keys to her previous condo recently (6 or 8 months ago) after trying to sell/rent it for the past 5 years. The bank still doesn't even have it listed for sale, I don't think
 
the worst news for the housing market in a long time is that now you are hearing rumors of the death of the 30yr loan. reducing a loan's lifetime from 30 yrs to 15 yrs will provide a huge headwind for housing, combine that with interest rates in general going up over the next decade and you have two quite potent headwinds. if you really think about housing prices, the way they went parabolic was everyone all of a sudden qualifying for 30 year loans, and record low interest rates. the monthly payment didn't change all that much on any home, it's value just went up dramatically because people signed up to make that same monthly payment for twice as long and a smaller fraction of it went to pay down interest compared to accruing equity. now reverse those former tailwinds and turn them into headwinds and you have the power of compounding crippling the housing market for a while to come.
 
I lived in an area that was overflow housing from the Los Angeles Basin. When LA prices were rising buyers that were priced out would opt for the longer commute and buy in my area... the volatility was unreal, $30,000 at the bottom and $350,000 a few years later... at the bottom people would move and give their house to somebody. A friend of mine got one with only 11 years to go on the mortgage and payments that were about equal to my lunch money for a month... That is the microcosmic model for the current RE market, I've seen it close up already...

Socialism is in world class meltdown state, the efforts to rescue it [bailouts] are dragging the economy down and even though the mood is here to expand the economies they simply can't start yet... and housing prices don't start to run up until late in the business cycle so yeah, grim outlook for housing for awhile for sure...
 
Quote from peilthetraveler:

I have noticed many many people predicting house prices will go down. These same people were predicting house prices would keep going up just 5 years ago.

There is a rule in real estate. Sell when everyone & their mother loves real estate. Buy when everyone & their mother hates it.
More...

Excellent observation. I have noticed the same thing here in England.

Crucially, alot of people are using phrases like 'can't go up when they raise rates', 'impossible for people to get loans, so the prices can't go up' etc

As a contrarian trader my ears are pricking up when I hear these things..
 
Quote from BlackBison:

Excellent observation. I have noticed the same thing here in England.

Crucially, alot of people are using phrases like 'can't go up when they raise rates', 'impossible for people to get loans, so the prices can't go up' etc

As a contrarian trader my ears are pricking up when I hear these things..
More...

FYI, Your housing bubble burst about 6 to 9 months before ours did. Has your economy started to turn around, yet?

IMO, people need to have incomes (decent jobs) to buy homes. Minimum wage, like most of our new jobs pay, isn't sufficient to buy a home. So, I will theorize that the bottom corner won't be there till the economy is at least close to turning around.

What do you think?
 
Quote from BlackBison:

Excellent observation. I have noticed the same thing here in England.

Crucially, alot of people are using phrases like 'can't go up when they raise rates', 'impossible for people to get loans, so the prices can't go up' etc

As a contrarian trader my ears are pricking up when I hear these things..
More...

Why are you a 'contrarian' trader? Obviously real estate prices will start going up again at *some* point in the future. Just wait until the asset-collateral-credit spiral cranks up again. When it does, it will last a decade or so. You don't have to get in at the bottom.

Right now you will be very susceptible to dead cat bounces.
 
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