A number of readers pointed out these comments by Bainbridge Island portfolio manager and part-time prophet Carl Haefling (who I admit I’ve never heard of):
It takes time for the housing market to fully unravel, we are in the early stages of stage 1. Stage 1 is where the market begins to recognize that prices have reached levels that reduce affordability and thus the number of possible buyers. Sellers, who have been holding back selling for fear of not selling at the top, begin posting signs advertising their home, usually at prices that reflect the highest paid for a similar home, and suddenly the inventory of homes foresale explodes. This has already happened in many parts of the country. This stage may take one to three years to fully unfold.
Stage 2 is price cuts by those who are becoming convinced that the market has softened if they want to sell their home they better cut prices. Once those “reduced” signs start appearing, buyers start reducing offers, even on properties that have been already reduced. Prices will drop far lower then anyone thinks possible in stage 2.
Stage 3 is the exhaustive phase. Buyers are afraid to buy, investors have no liquidity, mortgage requirements demand a high down payment and supporting cash flow, and the press is filled with articles claiming real estate is a terrible investment. (which happens to be true in the previous 5 years).
There are serious other problems that will contribute to this cycle, including a decline in the buying power of the middle class, tilting demographics which will reduce the number of possible buyers beginning about 2010 for real estate and possible shifts in values of owning vs. renting.
While many parts of the country may be “in the early stages of stage 1,” I don’t think we’d doing ourselves any favors to try to claim we’ve reached that point yet in Seattle. The market is clearly not as hot as it was last year, and there are some definite slowing trends for those that choose to see them, but by and large the Seattle market is so far oblivious to what’s going on everywhere else. When scenes like the one pictured above become commonplace, we’ll know that we’ve finally reached “stage 1.” As of right now, I had to bike three miles to a specific location to get a picture of a corner with six for sale signs.
How soon will we actually reach “stage 1”? Or will we even reach “stage 1” at all? It’s anyone’s guess. They always say that bubbles last longer than any rational person thinks they will, so who knows?
As a side note, one of Mr. Haefling’s predictions brings up something I’ve been thinking about for a while:
And one of the unseen values will be the desire to downsize as the cost of insurance explodes, the cost to heat and air-condition accelerates, and the cost of maintenance become detriments to ownership.
When people start to downsize, what will they do with all the stuff they’ve collected to fill their McMansions? I’ve got this feeling that they won’t readily part with their precious consumer goods. As such, I predict an uptick in the popularity of self-storage facilities. I’ve actually been mulling the thought of buying some stocks in Shurgard and Public Storage. What do you think?
(Carl Haefling, The Big Picture, 06.30.2006)