Saturday, August 06, 2005

Housing Bubble: The Soft Landing Myth

Housing Bubbles have a soft landing. Prices just stablize or dip a little - no more than 20% - and everyone is happy. That's the myth and even the Wall Street Journal has bought into it to some degree in their recent article about housing prices stabilizing in Australia (where the bubble has been growing more dramatically than in the US).
There is truth there.
A housing bubble can stop expanding without a total collapse in prices. But there are at least two other kinds of bubble-popping: How long does it take to sell a house? How many houses are available for sale? If the average 2 bedroom home is selling for $500,000 at the peak and 1000 of them are selling in your city every 30 days, is that the same as 1 home selling for 500,000 every six months? That's what happened (with different numbers) in the early 90s in L.A. Speculators drop out of the market. People are afraid to buy a home when all the hype about astronomical appreciation isn't there anymore. They can't commit as much of their income to payments. Sellers still try (for two or three years) to get the peak prices. They can't afford to sell for less than their mortgage. It's a stalemate. And for people who thought they would flip their home for easy money and can't afford their zero principal ARM payments, it's not a good time. Of course, when those people go bust, there will be a bunch of nice, lower priced homes coming on the market that will ease the crunch. And that is the "soft" landing.

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