Saturday, June 10, 2006

"Look Out Below"

A reader sent this in. The author does a nice job of delineating the various phases of the real estate cycle. I agree that we are currently sitting on top of or just past the inflection point and all paths lead down as the data for Marin and elsewhere confirm. Here is his prediction going forward:
THE NEXT FEW YEARS
Phase V: - The Future: Look Out Below. The problem becomes obvious and virulent when real estate values begin to fall. With debt service costs rising, real estate begins to flounder, and more risky real estate ends up on the rocks. As default rates rise, mortgages slowly become more expensive and difficult to obtain (“real estate becomes a four letter word” in the parlance of an old banker). Only brave and knowledgeable entrepreneurs venture onto the scene of real estate wreckage at the lowest tide. Only a “foolhardy lender” would venture between the rocks of the now quiet ebb tide.

The “virtuous cycle” has completed its turn into the “vicious cycle.”

HOUSING AND CONSUMER SPENDING
It is our view that the “irrational exuberance” has transferred from stocks to housing, setting up conditions for a “housing deflation.” We expect a serious fall-off of home construction, sales and values, starting in 2006, and becoming very pronounced by 2007. A glut of new houses will accumulate in the next 12-24 months, causing a drop in price and construction of new units, and setting up a serious risk of price decline (similar to the “tech wreck” in the stock market).

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