Don’t say I didn’t warn you. I’m not saying I have any special powers to predict the future. In fact, who knows? Maybe the economy will come roaring back tomorrow. But here are a few data points that say otherwise:
- You don’t have to like Tony Robbins to watch this video. He makes a good argument that we might be facing another down-term before things get better.
- Texas July home sales collapse.
- George Soros slashed his exposure to US securities.
I’m just saying, don’t put all your eggs in one basket. Be prepared for a setback in the economy.
I’ve spent a lot of time lately thinking about the “subprime” housing crisis and how it will effect house prices. This is especially important to me because I’ve been thinking about buying a house. In order to attempt to forecast how bad/good a house purchase would be, a major concern is will the value of the house plummet further, or is it done falling? This is important because if one sinks a large amount of money into something, especially the most expensive purchase of one’s life, it’d be nice to know what return to expect (or lack there of).
Based on the theory (based on the historical trend) that house prices over time tend to follow a smooth upward line, due to inflation I looked at a chart of home prices from 1987 to June, 2008 (from publicly available data):
I’ve drawn two trend lines (dotted-lines); one optimistic, one pessimistic. Then I extends the graph into the future assuming a parabolic return to the underlying trend-line (a.k.a. what the average price should be without all of the sub-prime mortgages).
In conclusion, there are two possibilities, both have prices falling further from here: prices bottom in late 2009/early 2010, or prices continue to slowly fall until around 2014. This is a 30-40% drop from today’s prices. Note these are average prices, so prices in your neighborhood could very well have a different outcome.
Of course, with all of the chaos in Wall Street, and the government’s proposed bailout schemes, anything could happen; but I really don’t think anything like that will change the overall trend. There are way too many houses for sale, and not enough people who can buy them. Simple supply and demand. Yes, fluctuations of mortgage rates, lender’s rules on who can borrow, and other factors effect house prices to some degree, but the overwhelming facts of the market are greater, in my opinion.
