Sunday, August 26, 2007

Will Home Prices Retrace to 1995 or 1997?

The short answer is no one knows.

Perhaps it will be somewhere between what's ahead in this post and those who glibly feel there will be little price depreciation - "that it's different this time, etc"...

I had thought I had seen most of best blogs out there on things financial. This morning I stumbled upon this guy, Charles Hugh Smith, who makes some salient points about speculative bubbles, retracements and the disconnect of present home values vs. average national incomes of Americans.

Two Irresistible Reasons Housing Will Retrace to 1997 Prices

While I realize that U.S. housing is not the Nasdaq stock market, or even what the Japanese real estate market was, Smith might be on to something, unless someone is going to pipe up and tell me that reversion-to-the-mean after a bubble doesn't apply in housing.

Back to 1995, or 1997 prices? Wow, that would be draconian for most and is would seem to many to be a doom and gloom scenario. Have these "doom and gloom" corrections occurred in the past in housing? If you were to take a myopic view and use something like the HPI which goes back a whopping 17 years!, you're happier than a pig in you know what that just a little depreciation in housing is all that will happen. But longer perspective, for those of us who are intellectually honest, is needed. Let's go back the "Gay-90's"... no, not Greenwich Village in 1990, but 1890.

The above figures are adjusted for inflation.

Even with alchemical like rejiggering to bring the trend line up 30% to account for whatever silly whim, or blind-bull argument there is, there would still seem to be a ton more downside in housing then the consensus expects. Something to think about.

The Fed with its recent helicopter drops and bending of the rules is already thinking about this and if present behavior is any indication, the central bank will try its hardest to make sure there is no such return to '97 prices.

Society would become a bad place if reversion to the mean in housing took place.

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