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Thursday, February 16, 2006

Barron's: Is It Crunch Time for Housing?

by Calculated Risk on 2/16/2006 08:58:00 PM

From Barron's Online: Is It Crunch Time for Housing? (hat tip: Gary Evans for the link)

Bear markets, be they in stocks, housing or commodities, go through certain identifiable phases, like Elizabeth Kubler-Ross's famed five stages of dealing with dying -- denial, anger, bargaining, depression and finally acceptance.

"It's a three- to five-year cycle on the downside," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley.

Rosen calls himself a real-estate bear who endorses the doom-and-gloom scenario of Yale University professor Robert Shiller (see Barron's, "The Bubble's New Home," June 20, 2005)."

We've already passed stage one, characterized by "a falloff in new sales and orders," says Rosen, and are just entering stage two, in which unsold inventories build up.

That may be where the crunch begins.

Prospective sellers, of course, can just take their homes off the market and live in them until they think they can get a better price.

But speculators don't have that luxury: At some point they can no longer carry a money-losing investment, so they may throw in the towel and unload their once-promising albatross.

That's stage three, says Rosen, and it usually finishes about three years from the beginning of the downturn.

The final phase is when we see massive defaults or delinquencies on mortgage loans. That's several years away, he says, and this time the damage could be worse because of the large number of exotic loans giddy lenders extended to desperate home buyers (see Barron's, "Coming Home to Roost," Feb. 13)."
There is more in the article. I think the sequence is more like:

1) A surge in inventories as sellers try to get out at today's high prices.

2) followed by a drop in orders as buyers become leery of buying at the top. Historically house prices tend to be sticky as sellers want prices close to those of recent sales in their neighborhood. And buyers want a discount from recent sales. The result is a drop in orders.

3) Then prices start falling as some sellers (speculators and homeowners in distress) need to get out.

There are other economic impacts:

1) as prices stagnate or fall, homeowners will withdraw less equity from their homes and that will impact retail sales.

2) as transactions decline, housing related employment will fall.

3) and finally, as mentioned in Barron's, there will be defaults or delinquencies on mortgage loans.

Already inventories are rising rapidly. And I believe sales are just starting to decline. The next few months will be interesting.