In early 2007, many analysts were predicting that real estate prices would soon rebound from a mild slump. But economic forecaster Robert Wiedemer knew better. He warned Bottom Line/Personal’s readers that home prices were only at the beginning of an extended decline. We recently interviewed Wiedemer for an update and his latest forecast…
The US is in the early stages of this correction. Nationwide, real estate prices have declined just a few percent, on average, even though it’s been much worse in some parts of the US. Easy financing has largely disappeared, a key element pushing down prices now. Banks are demanding that borrowers have much better credit and larger down payments than before. This trend will accelerate as prices fall further.
During the next three to five years, real estate prices could fall to as low as their 2001 levels. That means declines in some regions of 20% or even 35%, and potentially more. Goldman Sachs recently said that home prices in California are overvalued by 35% to 40%, for example.
Subprime mortgages, which allowed borrowers with weak credit to buy houses, were merely the first shoe to drop. Once home prices in a region fall by more than 20%, even many borrowers with solid credit and mainstream mortgages will face serious problems. A home owner whose equity has disappeared because of falling prices might have to cough up $50,000 or more just to escape his/her mortgage if he is forced to sell his home because of a relocation or divorce. And refinancing has become more difficult.
When housing slumps drag on, potential home buyers choose to stay on the sidelines and wait for a rebound. Few people are anxious to make the biggest investment of their lives while prices are still falling. Potential buyers will abandon the housing market in ever greater numbers as prices begin to fall more rapidly — and prices will start to fall even more sharply as these additional buyers leave the market.
Consumer spending will slow significantly by late 2008 as falling home values undercut consumer confidence and make it more difficult to tap home equity for spending money. I expect a 5%-to-10% decline in consumer spending during the Christmas shopping season this year. Declining consumer confidence and spending will undercut the retail sector… the hospitality and leisure sector… and automakers. By 2009, the economic slowdown will broaden, and many Americans will lose their jobs, leading to more foreclosures.
Even traditionally secure government jobs might not be safe during this economic downturn. Plummeting home values mean billions in lost property-tax revenue for local governments, causing budget shortfalls and layoffs.
When the worst of the problems start to recede years from now, home prices will go back to increasing by 2% to 3% per year, as they used to do before the recent bubble. If you are waiting to buy a home, do not try to identify the exact moment when the real estate rebound begins. Real estate prices rebound slowly, not all at once as the stock market has been known to do. Rule of thumb: During a real estate correction, it is better to wait a little too long to buy a home than it is to buy too early.
