Tuesday, November 21, 2006

Housing Market Nonsense

My head feels a like it's going to explode. How does one reconcile these two statements, from today's Wall Street Journal:
The worst of the housing bust is over, economists said by nearly 2-to-1 in the latest WSJ.com economic forecasting survey.
The 49 economists responding to the WSJ.com forecasting survey expect home prices, measured by the government's Office of Federal Housing Enterprise Oversight index, to rise 2.8% this year and to fall by 0.5% next year. That contrasts with a 13.4% increase in 2005.
Can someone explain to me how house prices rising a little this year, and then actually falling next year, is consistent with the notion that "the worst is over"? To me, "the worst is over" somehow implies that next year will be better than this year. Am I wrong? I don't understand.

As a reminder, here's what happened to housing prices in a couple of major cities during the last downturn in the housing market.

If you define "the worst is over" as "the decline in the rate of change of the rate of change in house prices is moderating," then you might have been able to say that the worst was over by the end of 1990. And by that definition, I suppose one could possibly argue that the worst is over today.

But that's a pretty tortuous and ill-conceived definition of "the worst", in my opinion. I think most people who tried to sell a house during the early 1990s would agree that it took years for the worst of that housing market slowdown to pass. Do we really think that today will be the last time we'll read a story like this one?

The real estate market is notoriously cyclical. But historically, those cycles have been 10 or 15 years, not months, in length. I can't see why this time should be any different.

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