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Thursday, October 19, 2006

Thornberg: 'Housing a slow moving train wreck'

by Calculated Risk on 10/19/2006 12:40:00 PM

UCLA economics professor Christopher Thornberg spoke at a conference in Torrance yesterday. Here are a few of his comments via the Daily Breeze:

"At the end of last year, the real estate bubble popped. And right now, we're in the middle of the bubble popping," Christopher Thornberg said at the South Bay Economic Forecast Conference. "The real question is, of course, is it going to be a hard or soft landing?"

Thornberg ... described the housing situation in harsh terms: "This is a slow-moving train wreck."
"Prices are easily 30 to 35 percent over-valued," Thornberg said. "Whether prices go down or stay the way they are, you can pretty much guarantee that whatever the value of your house now, that's going to be the value of your house in 2011."
The good news is that the rest of the economy is doing well, Thornberg said. That means it's unlikely that we will see mass job losses like we had in the early 1990s, when home values began to tank.
"In a housing bubble ... prices tend not to fall," he said. "Housing is not something you day trade."
Thornberg's view is that prices will stay flat in nominal terms, until inflation and real wage growth catch up with current prices. On the one hand Thornberg argues that real prices will fall 15% or so (flat nominal prices for five years), and then he argues prices are 30% to 35% overvalued. So it seems he is arguing that prices will still be overvalued in 2011.

I think it is more likely that we will see some nominal price declines over several years. I believe a combination of real wage growth, inflation AND some nominal price declines will eventually bring housing prices back in line with incomes.