Best, Worst, & Most Likely Scenarios?

Here’s something that should be fun to discuss. I’m interested in hearing everybody’s ideas about the types of scenarios that may play out in the Seattle-area housing market. Best case, worst case, and most likely case. Here are my wild-donkey guesses:

Best Case
Prices flat to +3% for ten or more years. Local economy keeps chugging, population gradually grows (but not at the predicted level), and density gradually increases. Affordability improves as incomes slowly catch up to prices.
Likelihood: <10%

Worst Case
Prices drop to 1997-1998 values over the span of approximately 5 years. National and local economy endure a moderate-to-deep recession for at least as long. Condo projects and cookie-cutter developments are halted mid-construction, resulting in little miniature “ghost towns” scattered throughout the Puget Sound. Affordability shoots through the roof, but very few people are able to qualify for home loans, which require 20% down, and cash-paid closing costs—no exceptions.
Likelihood: 20%

Most Likely Case
The way things are headed as of right now, I expect we’ll see a Japan-style housing downturn. Prices declining 2-5% per year for 7-15 years, eventually shaving off all of the gains of the bubble, and then some. Mild recession (as reported by the government statistics, anyway). Tighter lending standards persist, making it very difficult to get a house without 20% down in cash. Overall public sentiment shifts from “renting is for suckers” to “buying into a declining market is for suckers.”
Likelihood: 50%

A similar thread on this subject was started in the forums, titled Fallout Scenarios, with more of a broad range of possibilities for how this may play out. Be sure to check that out as well.

So what are your best case, worst case, and most likely scenario for the Seattle-area housing market? What factors do you think will determine which direction things end up going?

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

77 comments:

  1. 1

    IMMIGRATION WILL BAIL US OUT?

    New Study: More Illegal Aliens Means Lower Wages for All

    SoftwareEngineer, I changed your comment to a link to the quoted material because honestly, it was entirely off-topic for this post and taking up too much space. – The Tim

  2. 2
    biliruben says:

    Here’s the Economist’s “Economist Intelligence Units” forecast. I thought that was a joke when I first read it.

    I’ve read about a quarter of the report. Pretty interesting, insightful stuff.

    The Economist: Heading for the Rocks

    • Scenario 1. The Economist Intelligence Unit’s central forecast, to which we
    attach a probability of 60%, sees the impact being contained by timely monetary
    policy action, with only a modest effect on the global economy.
    • Scenario 2. Our main risk scenario, with a 30% probability, envisages the
    US falling into recession, with substantial fallout in the rest of the world.
    • Scenario 3. Should the US enter recession, another, darker scenario arises:
    that corrective action fails, and severe economic repercussions cascade from the
    US into the world economy with devastating effect. We attach only a 10%
    probability to this outcome, but the potential impact is so severe that it warrants
    careful consideration.

  3. 3
    Eleua says:

    My best case, worst case, and most likely case are all the same. We will have mid-90s prices with a borderline recession-depression, sky-high interest rates, and foreclosures.

    We are going to lose a big chunk of the banking system before all this is over, and with it the ability to lever-up to buy a house. Since most peoples’ savings, minus transported home equity, is negative, I really don’t see how we support high home prices when 25-30% down payments will be required for full-doc loans.

    If you could scramble to gather $35K for a down payment, that only gets you to the $100-150K range for homes. Hmmmm….

    Inflation will suck most of the savings out of Americans’ checkbooks.

    BTW, immigration will only make the matter worse.

  4. 4
    patient says:

    I think we will see a more rapid decline of ~20-30% in a year or two followed by a pretty stable sub 3% appreciation for many years. The reasons being that people will:
    a: be forced to go back to buy what they can afford due to stricter lending standards.
    b: buy homes for the sole purpose to live in them since speculative buying will disappear.
    c: home ownership will continue to be the most desirable form of housing for most and thereby continue to attract buyers but at much more reasonable price levels.

    The decline trend of markets that are ahead of Seattle will be of little value for comparison since the big shift in lending standards really didn’t happen until early August. I.e I think the decline will be much faster and severe than that.

  5. 5
    sniglet says:

    I am with Eleua for all but the sky-high interest rates. I think central banks will continue to cut rates to the bone, and T-bill yields will remain in the toilet as everyone rushes to buy them as a “safe” haven.

    But I agree that there is a high propability prices will fall BELOW 1997 equivalents (I’ve discussed my reasons at the forum link).

    As far as the Economist article goes, they gave much to low a weight to the wrost-case scenario. Further, I disagree with their take that the US dollar would tank in a “worst” case. I don’t see why we can’t have a deflationary depression, with the US dollar appreciating as everyone dashes for cash to pay off debt (i.e. most debt in the world is denominated in dollars).

  6. 6
    SunTzu says:

    My take is that the gov’t will implicitly allow inflation to creep up. While the FED will continue its “inflation” fighting stance, but in reality it will continue to ignore inflation (by harping on the tameness of core “inflation”) and abet it by cutting rates. Inflation will keep price of houses afloat while help out the US consumers who are in debt to either pay off the debt by selling their houses or refiance at a lower interest rate because FED will keep it low. Basically, the gov’t will inflate people out of their debt problems. Thus, I see a braking action of falling home prices……

    I hope I’m wrong

  7. 7
    greater context says:

    if the bubble was due to psychology + low interest rates, the best bust prediction will be based on the same.

    considering that the average american has a negative savings rate + debt coming out the ears, I’d say we’re a pretty optimistic lot.

    so, what will it take to dampen our optimism?

    I’m not sure if falling values will do it. According to MSN Money, we repeatedly overextend ourselves when buying cars despite definite double-digit depreciation:

    http://articles.moneycentral.msn.com/SavingandDebt/SaveonaCar/StretchingToMakeCarPayments.aspx

    So, future value may not matter for much of the market.

    As long as we are optimistic about our personal futures, I think we will continue to pay as much as we can for a house. The only consideration, then, is what loans will be available, at what rates, and how much income people will have to spend.

  8. 8
    James Moore says:

    SunTzu – I don’t get the combination of high inflation + low interest rates. Aren’t they mutually exclusive? The Fed’s power has definite limits. (If that’s really going to happen, borrow as much money as you can at fixed rates – assuming you can find anyone to loan it to you.) In any case, letting things ‘creep’ isn’t going to solve the immediate problem – things are moving too fast in the next year or two for inflation to make much of a difference.

    I think the best case outlined above is too optomistic. Problem is that there’s no reason to pay sky-high current prices if you think prices are going to stay relatively flat. Sensible people rent under those conditions.

    I think whatever the endpoint is, we’re going to get there quickly. It also seems unlikely that inflation is going to make enough of a difference; the time scale is just too short. Too many people can’t afford their current payments on adjustable mortgages, and it’s going to be game over when they reset to the non-teaser rates.

  9. 9
    TJ_98370 says:

    My opinion is worth exactly what you (the reader) paid for it, but I agree somewhat with SunTzu. I think inflation is going to be a major factor on how things play out. I just can’t get around the fact that after every military conflict that the U.S. has been involved in for the last century there has been a bout of inflation. Why wouldn’t we see a repeat as a result of our current involvement in the Middle East? Maybe it really is different this time around, but the difference isn’t obvious to me.

  10. 10
    sniglet says:

    To clarify, I think we will see LOW Fed rates and US treasury bill yields. However, I fully expect the rates for anything but the safest of safe mortgages to be much higher than we’ve seen in many years. If you can get a loan at all that is.

    So I guess that I agree there will be higher interest rates, from a certain angle.

    In general, I think we will see the spreads between treasuries and all other forms of debts rise, and the riskiest borrowers will see interest rates rise dramatically.

    Just look at what is happening with the LIBOR rate right now. The LIBOR initerest rate is actually RISING even though the Fed funds rate haven’t risen and US treasury yields are falling. This is the first time anyone has seen such a divergence between the LIBOR and the Fed funds. My prediction is that this is just the beginning and that we will start to see interest rates of all types diverge a great deal from the Fed funds.

    The Federal Reserve can drop rates to zero and it won’t help. We are embarking on the vicious side of the credit cycle now.

  11. 11
    SunTzu says:

    Inflation is price increase, thus any sort of price increase is inflation. It means that fiat money is not worth as much as it used to therefore to purchase the same good of some intrisic value you’d have to use more money. By keeping interest rate low (i.e. fed fund) the FED is increasing money supply in circulation thus more money means they are less valuable.

  12. 12

    I agree with what patient said. Basically we will return to lower than trend line and see small upward growth for the next 15 years.

    Best case: housing prices decrease by 50% from their high, but growth in other areas prevents a major recession (but still probably a recession).

    Worst case: prices decline 70%, massive job loss and a lack of credit leave us completely stagnant a la Japan in the 1990’s.

  13. 13
    biliruben says:

    It all depends on your definitions.

    If you see inflation as the increase in the amount of money and credit in circulation, we will see deflation as the the credit bubble deflates. Whether that leads to decreases in actual asset prices (as it should) is a harder question.

    I’ll come out with a strong opinion as say it might. ;)

  14. 14
    JohnnyBigSpenda says:

    people still have to live somewhere. and it will be a long time before any of us talk our wives out of owning a house and moving back to an apartment. if any of these scenarios are true (and you already own), your best hope is if you make and save more $ than the average pineapple seller… otherwise, when the time comes, you’ll be living on the streets just like the rest of america will be doing since none of them can afford their homes either…

    trust the man sometimes folks… it will all work out.

    somepeople say the best time to buy is when everyone things there is NO hope for the future… sounds like soon?

  15. 15
    David says:

    I tend to lean toward flattening to 0% year over year appreciation, or more likely a small amount of depreciation, over the next three to five years, followed by a return to moderate increases. I primarily see this as the case because I still think the economy has a lot of resiliency, and I lack the imagination to envisage a catastrophic downturn in the housing market, as has been suggested by many of the comments. Just because Jumbo loans or zero down loans become more difficult to obtain, I doubt they will be “impossible” because it is money left on the table. Will the mortgage industry resort to amputation to cure a broken leg?

    But take my words with a grain of salt; I hope prices stay level for a while, since I recently got into a townhouse. (Please don’t throw rocks).

  16. 16
    jcsc says:

    Lower interest rates create demand for debt and is thus inflationary. Raising interest rates cuts the demand for debt. SunTzu, you have stated succinctly what I’ve been thinking. CPI tracks to rents and excludes food and energy so I believe that a great deal of the inflation has already happened but has simply not been quantified.

  17. 17
    Jeff says:

    So I sold my condo early this summer and made a good profit. We have been looking for a house but not gotten one yet.

    We have been looking for a house in the

  18. 18
    sniglet says:

    David,

    How can we avoid a major downturn if housing appreciation approaches zero for any length of time? Do you think that all those equity deficient masses (with exotic loans) are somehow goinng to be bailed out?

    This is where the “soft-landing” scenario falls apart in my view. The simple fact is that we have fostered a whole mess of home-owners who DEPEND on appreciation to allow them to build equity and refinance. So, if deprecation stops, the whole refinance game will come to an end.

    Further, let us not forget that there a big wave of mortgage resets is starting this fall, carrying through the end of 2008. Even the lenders (like Countrywide) admit that most of the people facing resets won’t be able to keep making payments if they can’t refinance.

    Just what will happen to the real-estate market when these people start defaulting?

    If I am missing something here (i.e. how most of the people with negative equity will survive if they can’t sell or refinance) please tell me what it is.

  19. 19
    Kime says:

    I was formerly waitinginmarysville, but we got tired of waiting and bought a house at the top of the market, but we don’t consider it a financial investment. In fact, we expect it to lose up to 50% of its value, but we don’t have a mortgage and we expect to live here till we die.

    Eleua, If housing prices go back to ’97, then we will be seeing quite a reduction of the money supply, seeing as how about 90% of the increase in the past 7 years has been due to the housing boom. Check out the increase in mortgage debt. The housing boom is the cause of the inflation we have been seeing in the last few years. The bust will have the opposite effect; it will be deflationary. Inflation is dependent on having willing lenders and borrowers, OR on the velocity of money increasing. We are already seeing a decrease in the willingness of lenders, just the tip of the iceberg, IMO. I don’t think velocity will increase while housing is deflating, but velocity is hard for me to understand.

    I agree with Eleua AND Sniglet about interest rates. T bills will stay relatively low, but mortgages will have high interest rates. The spread will increase considerably.

    I think the drop in housing prices will go up to at least a negative 10-15% a year at some point because there will be a capitulation point where the sellers who have to sell, do so, and they will have to meet the buyers prices. Don’t forget that if prices have gone up 100% they only have to come down 50% to be where they started, (Or up 33%, down 25%, for another example.) so 15% on the way down is bigger than on the way up.

    I expect that there will be a depression and the government will do everything it can wrong, as usual, by interfering instead of letting the correction happen so that we can get it over with instead of messing around trying to create more bubbles or taking money from successful businesses to “create” jobs instead of letting the businesses use the money to grow and hire more people. Standing back and letting corrections happen does not get votes.

    I also expect the stock market to have a severe bear market. I expect the DJIA to come under at least 3000 at some point, and the NASDAQ to lose at least 70%, maybe 90% from where it is now. I expect that gold and commodities will also drop as people sell them to raise cash. In other words, I expect a general deflation and depression. You can’t expect the economy to escape from the biggest, longest credit bubble of all time, that has worked its way into pretty much every asset class, without a lot of pain.

  20. 20
    jcsc says:

    I predict a 20% decline in house prices over the next 3 or 4 years followed by stagnation and declines in real terms. I’ve been preparing for stagflation.

  21. 21
    Kime says:

    TJ_98370, the war is only a fraction of the housing bubble when it comes to inflationary power. The increase in debt from mortgages is 10 times higher than the (stated) cost of the war at least.

  22. 22
    B&W Nikes says:

    I see debt people…

  23. 23
    jcsc says:

    Kime, Why the housing bubble and why now? I think this idea that Greenspan wanted to baby tech investors and bail them out as the reason for this mess is completely ludicrous. The reasons why this happened will affect how it all plays out, but no one wants to talk about it other than to call Greenspan an incompetent.

  24. 24
    Nick P says:

    I was on GinnieMae website which hosts a “rent vs. own” calculator. One of the choices for the calculator was “Yearly Home Value Increase Rate:” which would not let you put a negative number on your home ownership. HA.

    Here is the link FYI:
    http://www.ginniemae.gov/rent_vs_buy/rent_vs_buy_calc.asp?section=YPTH

    My Prediction?
    Feds continue to print off free money.
    China pulls out of USD.
    Interest rate drops help drop the dollar.
    And some people still continue to buy homes thinking “housing market must be bottomed out by now”

    Worst case scenario is my prediction.

  25. 25
    sniglet says:

    Jcsc,

    I don’t blame anyone in particular for the housing bubble. It is simply an inevitable consequence of generational cycles where people slowly become inured to risk and adopt increasingly dangerous behaviour (i.e. because no one can remember the last time there was a real disaster).

    Sure, Greenspan’s actions may have contributed to the bubble, but if he hadn’t followed the policies he did someone else would have.

    Was any particular policy maker responsible for the 1870’s depression, or the Dutch Tulip bubble? No. Manias run on a steam all their own and sweep up everyone in their wake.

    Have no fear. Once we get through the coming depression we will have another good 70 years or so to go before we hit another one.

  26. 26
    jscs says:

    I personally believe that a future position relative to oil reserves is vital to our national security. The housing bubble is the price that we needed to pay. In past wars, people were asked to sacrifice and ration. We were asked to spend, spend, spend.

  27. 27
    jcsc says:

    In past wars, people were asked to sacrifice and ration. We were asked to spend, spend, spend. I completely disagree that this was random and “just happend”. We’d already entered a recession on 9/11 and needed to show our strength and position ourselves relative to future oil reserves. But wait, oil isn’t really important to our economy. We should just give it all to China.

  28. 28
    sniglet says:

    jcsc,

    I didn’t say this bubble has been “random”. In fact, I think it is entirely predictable as part of a generation economic pattern. Yes, we were asked to “spend, spend, spend”, but that was all part of the lack of concern all of us have had about risk. Don’t forget that our politicians and policy makers are part of society too. It was inevitable that policy makers would make the kinds of decisions they did which contributed to the bubble just as it was inevitable for buyers to stop worrying about buying homes they really couldn’t afford.

  29. 29
    TJ_98370 says:

    Kime said: TJ_98370, the war is only a fraction of the housing bubble when it comes to inflationary power. The increase in debt from mortgages is 10 times higher than the (stated) cost of the war at least.

    Kime – I’m not sure I get your drift. What I think will happen is that the collapse of the real estate / credit bubble will be somewhat cushioned by inflation due to increased money supply as a result of financing the war.

  30. 30
    jcsc says:

    sniglet, Given your argument, why did Greenspan keep interest rates so low for so long? Why did Bush say that it was patriotic to consume and challenge financial institutions to make the American dream a reality for everyone? Why did housing bomb immediately after 9/11 and then immediately become the engine for our economy? I think your point about generational risk is completely valid, but the timing on this one was too fast and relied upon very low interest rates, creative financing, etc., etc. Inevitable is an awfully strong word, and I don’t think that your argument can hold water unless you believe that Greenspan and the gov’t economists are a bunch of idiots who truly didn’t see this coming long ago. Most of the posters on this blog saw this coming. Do you really think we’re smarter than the folks at the Fed?

  31. 31
    sniglet says:

    jcsc,

    It’s not a matter of being “smart”, it’s a matter of being able to go your own way without being caught up in the crowd. Even today there are plenty of Wall Street types who recognized there were issues, but felt they’d might as well just play along and make as much money as they could while it lasted.

    Even the CEO of Countrywide has commented that he can’t see how his firm would have done anything different even if he had a crystal ball as to what was going to happen. In fact, Messr Mozillo made some very insightful points about how taking actions to reign in lending at Countrywide several years ago would have meant almost going out of business since competitors who didn’t care about prudence would gladly take up the slack.

    Greenspan couldn’t do anything to prevent the credit bubble. If he had taken severe actions to stop credit formation in the mid ’90s (as things were starting up) he would have been hung from the yard-arm, and unceremoniously fired as Fed Chairman. Policy makers can only take serious actions AFTER a crisis. Otherwise your life-span is severely shortened. No one will thank you for preventing a crisis that never happened…

    Further, I don’t believe this bubble started in 2001. The machine of debt securitzation and expanding credit began back in the ’90s. I thought we were in a housing bubble in ’97! Everyone acknowledges we had a “stock” bubble in 2000. Well, it never really went away and migrated into other spheres. In fact, we never had a “stock” bubble to begin with. What we’ve had is a CREDIT bubble.

    And now, the whole thing is going to start to come appart.

  32. 32
    incessant_din says:

    Best Case: Flat nominal home prices after falling through mid-2008. Price rises begin again in 2010. Probability: 15%

    Most likely case: Prices fall to the inflation-adjusted low from the last cycle, 1996 in most markets. This happens by 2010, with recovery beginning in 2011 or later. Probability: 50%

    Worst case: Economic depression. Prices fall and get a brief bounce in 2008, followed by a complete collapse that turns the U.S.-Mexico immigration to the same magnitude as in 2006, but in the opposite direction. Home prices fall 50% nominal, 80% real by 2012. Probability: 10%

    Japan-style deflation is about a 10% probability, and is second-worst case.

  33. 33
    jcsc says:

    I absolutely agree that this is a credit bubble and that it began before 9/11. My argument is that the depth and breadth of the housing bubble bears a direct relationship to 9/11, the war, and Bush’s call to consumption as patriotism. I’ve placed my bets on stagflation for the next decade based on this thinking. That I could be completely wrong is a possibility that I haven’t ignored.

  34. 34
    jcsc says:

    sniglet, I completely agree that this is a credit bubble and that it began before 9/11. My argument is that the depth and breadth of the housing bubble bears a direct relationship to 9/11 and Bush’s call to consumption and patriotism. Given this thinking, I’ve placed my bets on staglation for the next decade. That I could be completely wrong is a possibility which I haven’t ignored.

  35. 35
    jcsc says:

    I also think that willingness to take on risk had as much to do with desperation to fund pension plans and retirement accounts as it did with a generational shift in attitudes towards risk (though I do agree with this point). Also, above I meant consumption as patriotism (not and)

  36. 36
    crashcadia says:

    I am not sure how this will all play out.
    All I can go on is my memory of the stagflation of the 70’s.
    Yes I am that old.
    I remember how we would visit the car dealerships on the weekends.
    They would offer free hot dogs and soda just to get people in.
    It became one of our essential food groups.

    Best Case:
    Dealer Dogs for everyone.

    Most Likely Case:
    Pretzels

    Worst Case:
    What dealerships.

  37. 37
    george says:

    Worst case scenario: Snakes. On a plane. During an earthquake. etc. Aghhh!

    Best case: Regional economic growth keeps coming to the rescue! Slower growth but no downturn. Bank error in your favor!

    Likely scenario:

    The Seattle market is reportedly overvalued over 30 percent based on historic fundamentals. Things do change of course so that number is probably high.
    Real issue is how long does it take to play out? My hunch is a long time. Lot of sellers won’t believe it at first.

    So starting in early 2008 we see drops; overcorrects to the downside by around 2014. 25 percent lower? Back up to where we are now by 2017-2018.

    Conclusion: Renters will do the best in real estate over the next decade.

  38. 38
    Yawn says:

    Predict that Yahoo, RIM, MS, and Google will all move to downtown Bellevue. Salaries and traffic will increase. Housing prices within the 3×3 downtown grid and redmond continue to climb.

  39. 39
    JohnnyBigSpenda says:

    Tell you what…. when your house in Wallingford drops by 30% give me a call..I’ll buy it, no matter what is going on.

    There is a piece of the puzzle missing. I agree that the US market has some very fundamental flaws. I also agree that the world is different that it ever was. Something tells me that there is a knight in shining armor that no one here can visualize… something global… if the whole market drops like what you all are saying then I am on the wrong blog…. we should be on the ‘next great depression blog’ trying to figure out how we are going to survive the next 10 years.

    I still don’t buy a 50% decline scenario…

  40. 40
    deepcgi says:

    Having lived in Japan and Houston, I can tell you, when the real estate market crashed in Houston in the early 90’s the values dropped precipitously in the first years of the downturn – followed by a slow, painful climb back to today’s levels. Your most likely scenario is much too rosy a picture. Being forced to guess, I would say that California, Florida, Nevada and Arizona will see the breaking point in February ’08 when the curve of ARM resets takes its first steep turn. Consumer confidence will plummet in those areas followed by our first truly statistically meaningful price drops. Lagging behind those states by approximately 12 months, by the end of next year, Seattle will be down at least 10% from its current position and the Big Four will be down 25%

  41. 41
    Greg Perry says:

    Eleua wins the prediction competition. How can anyone top this?

    “We will have mid-90s prices with a borderline recession-depression”

    Inflation will suck most of the savings out of Americans’ checkbooks.

    Bravo! Recession and inflation in the same post!

  42. 42
    deepcgi says:

    JohnnyBigSpenda:

    I’d like to believe you’re right, but the fundamentals are staring us in the face. How much of your monthly income are you willing to pay on a house that will not appreciate for 15 years? You won’t buy the house when it drops 30% because you’ll know it’s a poor investment. Cities will buy up unfinished condo ghost towns and try to repurpose them, maybe, but rich knights in white armor won’t buy the land, because there are much better investments (and people who won’t sell still live on small bits of the land they would need). The truly sweet land will hold its value better than most, but mile after mile of oversold neighborhoods will fall into disrepair. There are however always unseen events looming. Punctuated Equilibrium it is called in Evolutionary Biology. On the negative side, it is the occasional terrorist attack, volcanic eruption, asteroid collision. On the positive side it is the discovery of electricity, movable type, the microchip, gun powder. Here’s hoping for good news.

  43. 43
    Greg Perry says:

    Er….
    I should have said “depression and inflation” in the same post!

  44. 44
    bigdollardog says:

    best case: 50% of all Government workers will get laid off and fired, when the tax assmts come down with home prices,(king co. #1 income supply) they will have to go get …..real jobs

    worst case: City of Seattle and King Co. invents a new tax on renters, so all the government workers can keep thier jobs,, oh no!

  45. 45
    Buceri says:

    We will have an economic slow down, and unemployment will climb. 70% of our economy is consumption (everyone hitting the mall on weekends). Our debt level is unsustainable. Many households that counted with 2 incomes to make ends meet (even with good credit) will face foreclosure. The market will bring prices down to where the average household income can afford. Snohomish last month saw a 0.9% increase YOY.

    This is a “things will turn out OK” country. “You’ll land on your feet”. No matter how hard I tried to teach them differently, my children take every comfort for granted. This is what drives high debt. Nobody remembers hard times; nobody lived through really hard times. Just look at our politicians, they campaign on abortion, and gay marriage. Health insurance? Ehhh, only 15% don’t have it. Poverty? Only 13%.
    Does not look good for 2008, 2009.

  46. 46
    finance says:

    The Tim – Your math is a little off (must be new math?). 10%+20%+50% = 80% TOTAL…doesnt your precentages have to add to 100% of your prediction estimations, lol?

    Your best case senerio is a little low…3% for 10 years? I think the best case would be that the market has a moderate decline for a year or two (maybe 3 at the most) then the market appreciates for 5% for several years.

    The market never holds near the mean, its usually either much higher or lower and can be volitile.

  47. 47
    Kime says:

    “Kime said: TJ_98370, the war is only a fraction of the housing bubble when it comes to inflationary power. The increase in debt from mortgages is 10 times higher than the (stated) cost of the war at least.

    Kime – I’m not sure I get your drift. What I think will happen is that the collapse of the real estate / credit bubble will be somewhat cushioned by inflation due to increased money supply as a result of financing the war.”

    I am saying that the cushioning effect will be small because the increase in the money supply from the war is tiny compared to the probable loss in the money supply from the housing bust.

  48. 48
    Kime says:

    JSCS said,

    “Kime, Why the housing bubble and why now? I think this idea that Greenspan wanted to baby tech investors and bail them out as the reason for this mess is completely ludicrous. The reasons why this happened will affect how it all plays out, but no one wants to talk about it other than to call Greenspan an incompetent.”

    I don’t understand your question. I never said that Greenspan was the reason for this mess, I just said that the government would do the wrong thing by meddling. I never said anyone was incompetent, I just said that they do what gets votes. The Fed Chairman is not elected, but he gets pressure from elected officials. I think this mess is part of a normal cycle, as someone else mentioned, that happens as everyone dies off who remembers the last bust cycle. No elected official can stop the cycle, because it is caused by mass sentiment. If an official tried to stop the cycle before it reached its natural ending, the official would be removed and another one put in place who would play along with the public sentiment.

  49. 49
    Greg says:

    Reality will be better than your best case.

  50. 50
    Greg says:

    JSCS – Read “Bubble Man – Alan Greenspan and the Missing 7 Trillion Dollars” – the author makes a very compelling case why Greenspan is in fact the cause of the housing spike. The ridiculously low interest rates used to bailout the equity market, which Greenspan effected, started the whole thing.

  51. 51
    The Tim says:

    finance said,

    The Tim – Your math is a little off (must be new math?). 10%+20%+50% = 80% TOTAL…doesnt your precentages have to add to 100% of your prediction estimations, lol?

    You should brush up on your reading comprehension skills, finance. I didn’t say “these are all possible scenarios.” I said those are what I consider to be the best, worst, and most likely scenarios. There are many other ways this could all shake out that make up the remaining 20% of probability.

    The market never holds near the mean, its usually either much higher or lower and can be volitile.

    So, your argument is that after 5-10 years of far above-mean performance, a volatile market is going to remain higher than the mean, rather than turning “much lower” to correct for the high times? That makes no sense.

  52. 52
    jcsc says:

    I love the irony of thinking that the anti-war protesters/real estate speculators funded the war while railing against it, and I’m overstating my case. Many causes, not one.

  53. 53
    Sniglet says:

    Greg,

    But what choice did Greenspan have when the tech bubble was blowing up? If he hadn’t dropped interest rates we may have had a full-blown recession. That would have been political suicide and Greenspan would never have been re-appointed by Bush. A major recession also would have ensured that Bush would never have won a second term.

    I remember back in 2001 that EVERYONE was demanding lower interest rates. Especially after 9/11. Had Greenspan not lowered rates after 9/11 he would have been the first against the wall in the revolution.

    In short, it was IMPERATIVE that any measure possible be taken to avoid a recession with the equity bubble implosion of 2001/2002. It’s one thing to say that lowering rates was a bad policy decision, but when you put yourself back in the context of the time it’s hard to see how any central banker could have done anything different.

    Keep in mind that the primary reason Greenspan was able to remain as Fed chairman for so long was precisely because of his willingness to play ball with politicians. Presidents kept re-appointing him because he kept coming up with the economic goods, allowing them to get re-elected. It is silly to even imagine that we could have had a Fed chairman with a back-bone who would have defied the political masters.

    Don’t forget that Volcker (perhaps the soundest Fed chairman of all-time) was appointed by Jimmy Carter, one of the weakest presidents of all time. Carter cared more about doing what was the “right” thing than the politically expedient and look what that got him (i.e. a short stay in the White House).

    It was inevitable we would wind up with a snivelling Fed chairman who made bad policy decisions, and it was inevitable that we would create even bigger problems by attempting to avoid a recession in 2001.

  54. 54
    Greg says:

    Sniglet –

    I think what Greenspan did was appropriate at the time, and I believe, as you said, that it prevented a significant recession. But still, that is what caused the housing speculation. And he certainly did play ball with the politicians. But this is the man that, after famously stating the market was usurped by “irrational exuberance,” did nothing while the equity market skyrocketed to unseen P/E ratios. He just sat there and enjoyed the party, right next to the punch bowl.

    Monetary policy can extend beyond rate manipulation. There are a host of things that could have prevented the stock bubble from bursting – margin calls, IPO regulation, etc. Greenspan came close but stopped short of anything effective.

    Which brings up an interesting salient point: Will Bernanke play ball, especially going into an election year? I feel he will.

  55. 55
    Old Ballard says:

    Worst case: Nothing happens and everything stays the same.

    Best case: The bottom drops out of the economy and there’s a deflationary spiral across the board on all commodities. President John Edwards become the next great Franklin Roosevelt leading the American people in the second Socialist Revolution.

    You don’t think the American people are ready and willing?

    Look at the poll numbers on Universal Health Care. What killed the Bush presidency wasn’t the failed Iraq occupation so much as his attempt to privatize Social Security. The conservatives in this country have been trying and failing to privatize the public utilities and schools for the last forty years. American’s understand that the private sector can not be trusted with the most fundamental aspects of daily life. They will want their homes made just as safe as their drinking water.

  56. 56
    Old Ballard says:

    Oh one more point.

    American’s will see the socialist European governments reforming their economic systems to stabilize home ownership as well as rentals pricing and they’ll demand the same action from their own government.

  57. 57
    patient says:

    I think housing is in for a bath but I’m not so sure that the overall economic impact will be a disaster. The most common number of mortages mentioned to be at risk in the US is ~2 million. If you assume an average occupancy of 3 you get 6 million impacted. This includes people who have made risky re-financing or risky purchases. That is just 6/300 = 2% of Americans. Is 2% in financial hardship really going to bring down the US economy? I would guess not. It will cause temporary pain but not armageddon. It sounds more like scare tactics originating from Wall street to get rate cuts and other bailouts. I’m not sure Bernanke is buying it either.

  58. 58
    Marc says:

    “American’s will see the socialist European governments reforming their economic systems to stabilize home ownership as well as rentals pricing and they’ll demand the same action from their own government.”

    Are you kidding me? PLease allow me to be the first to contribute to the cost of moving you to the “socialist European” county of your choice. I imagine one checked bag should just about do it since you’ll be living in a rent controlled apartment complete with a mattress on the ground, a table and chair, and four blank walls waiting for your artistic touch. But don’t get too artistic or your fellow comrades might turn you in for your avant garde ways.

    Meanwhile I’ll be shopping in that wasteland known as Home Depot.

  59. 59
    Greg says:

    More foreclosures = lower monthly costs renting = more discretionary income = more consumer spending.
    It’s self-correcting!

    (except for that credit thing)

  60. 60
    jcsc says:

    sniglet, I actually completely agree with you but was on a tear yesterday (too busy). However, the housing bubble is distinct from the stock bubble in that a lot of mortgage debt is ultimately insured by the govt. Investors can lose their shirt (thus my prediction of short term deflation) but when govt backed debt takes a hit there will be a fresh bout of money printing. Not enough leeway to stimulate the economy, thus my prediction of stagflation. In sum, short term deflation while investors take their hit, a decade of stagflation as the govt is forced to inflate themselves out of the mess.

  61. 61
    Old Ballard says:

    Marc, the “love or leave it” retort? That’s the best you can do? You’re a real John Wayne, cowboy. Is it your way or the highway? Too bad you didn’t have any GOOD ARGUEMENTS clearly demonstrating to me and everyone else just how wrong I am. How American’s would NEVER accept changes to our economic system, the so called “free market,” limiting the volatility of basic essential like housing and other good or services, like rentals. So maybe you could tell me why attempted privatization of public utilities and schools have failed so miserably. Do you blame it the Media or was it Bill Clinton fault?

  62. 62
    jcsc says:

    Almost forgot, worst case scenario? Everyone’s renting a place from the Federal govt.

  63. 63
    uptown says:

    I think we can already see how things will play out. Look at Colorado, Florida, and Southern California. This may be a national bust, but because of the time lag, the effects will still be regional. By the time the ’08 resets happen, the markets will already have adjusted the pricing of outstanding loans accordingly.

    Everyone’s renting a place from the Federal govt.
    Aren’t we doing that already? Fannie Mae, Freddie Mac, FHA, and VA loans?

  64. 64
    Old Ballard says:

    “Everyone’s renting a place from the Federal govt.”
    “Aren’t we doing that already? Fannie Mae, Freddie Mac, FHA, and VA loans?”

    Yes, and on the way to “home ownership” the middle man must be paid off so he can buy a home bigger than yours, and vacation home in the country, and a condo in the city, and on and on.

  65. 65
    Explorer says:

    I look at what brought the macro economy OUT of the recession/depression of 2001-2004/05 credit access acelleration/loose standards, applied to Real Estate primarily. The ‘street’ economy, based upon wages did not benefit. Most of the new jobs are connected to RE, at least in the PNW.

    There is no new wealth, and has not been, since the early 80’s. The pie has not grown larger, but those who gain do so at the expense of others. No where is it more stark than in housing, but also in other necessities. We have not seen this type of credit bubble since just before the Great Depression. We now know it is/was all hot air, and hot air evaporates quicker.

    Worst case: Depression, social unreste, people rioting, not just walking away from property, but destroying it out of anger and/or insurance money–don’t laugh, many are pissed NOW.

    Best Case: Stagflation, with severe political repercussions. Housing costs revert to the mean: 1996, Federal WPA-style work programs to restore neglected basic infrastructure.

    Most likely case: somewhere between the two above.

    My two cents from the street.

  66. 66
    Explorer says:

    I look at what brought the macro economy OUT of the recession/depression of 2001-2004/05 credit access acelleration/loose standards, applied to Real Estate primarily. The ‘street’ economy, based upon wages did not benefit. Most of the new jobs are connected to RE, at least in the PNW.

    There is no new wealth, and has not been, since the early 80’s. The pie has not grown larger, but those who gain do so at the expense of others. No where is it more stark than in housing, but also in other necessities. We have not seen this type of credit bubble since just before the Great Depression. We now know it is/was all hot air, and hot air evaporates quicker.

    Worst case: Depression, social unreste, people rioting, not just walking away from property, but destroying it out of anger and/or insurance money–don’t laugh, many are pissed NOW.

    Best Case: Stagflation, with severe political repercussions. Housing costs revert to the mean: 1996, Federal WPA-style work programs to restore neglected basic infrastructure.

    Most likely case: somewhere between the two above.

    My two cents from the economic street level.

  67. 67
    Explorer says:

    Sorry for the double post– cranky router it seems. Tim, you can remove the first one.

  68. 68
    Mademillionsinrealestate says:

    Stupidity! This is the best buying opportunity since 2002. Professional investors will clean up while the amatuers will sit on the sidelines with fear. 80% who post here are probably renters, the rest have no clue. The market will stay strong, its the dollar thats dropping.

  69. 69
    Mademillionsinrealestate says:

    This is the most prosperous time in the history of the world. If you think otherwise your probably a liberal and liberalism is amental disorder.

  70. 70
    The Tim says:

    Awesome. Those comments above are legit, and totally hilarious.

    I love that yesterday I’m accused of being a Tim Eyman-loving Republican, and today I’m a mentally deficient liberal.

    You guys crack me up!

  71. 71
    Tom says:

    The sky is not falling, at least not in the mid to long term. Every time we are at the crest of a market rise, whether housing, commercial real estate or technology, some people begin to panic at the first signs of decline and make unrealistic projections like what I read above about a base case scenario where prices will drop annually for 7-15 years. That is simpy ridiculous, especially as a base case. If we ever see prices dropping consistently in ANY market for 7-15 years, then we are all in major financial trouble, or the product that created the market in the first place is completely obsolete. I don’t see housing become obsolete anytime soon. Shelter is a fundamental need for survival. The housing market in Seattle is slowing and the slowing will continue until (1) the financing markets come back around and lenders gain confidence in the consumer’s ability to service a mortgage at prevailing rates (we may have to wait for most of the existing ARMs to reset and stabilize before confidence is regained) (2) new supply (i.e., high-end condos) burns off and projects in the pipeline are shelved and (3) consumers regain confidence in the market’s stability (equilibrium). This should all happen within 5 years, at which point it will slowly but surely begin to become a seller’s market again. In places like the Midwest it may take 7-8 years for this to occur, but in Seattle, which has lifestyle draws which produce net in-migration even in less than ideal economic situations, the housing slump will be somewhat mitigated by population growth and barriers to entry for new supply. This pattern of boom / bust repeats itself in markets over and over and over. To think that we are expecting declining values for the next 7-15 years is simply ridiculous and way too reactionary. I work in the commercial real estate business and witnessed the collapse of the commercial real estate market in the late1980’s. I vividly remember hearing and reading stories about there being a 20-year overhang of supply in the market. In reality, it took about 7-8 years for the markets to fully recover from one of the worst cases of overbuilding in the history of the modern building environment. Markets seem to find a may to balance themselves much faster than we are giving them credit. I would be willing to bet that the value of good quality residences in good locations priced in the $300K-$1.0M range will be the same or more than they are today come 5-6 years from now.

  72. 72
    bitterowner says:

    The mere presence of a significant credit/asset bubble in the first place makes it practically a given that the extent to which said bubble deflates will be underestimated by just about everyone – even on this blog.

  73. 73
    Kime says:

    I do think you are right in thinking that we should be at or close to a bottom within 5 years, but I think you are underestimating the time of recovery. We are looking at a 20 year credit bubble, maybe more than 20 years, and a RE bubble that has affected not only most parts of the US, but many parts of the world. NOBODY alive has seen anything like this, It far surpasses the 1920’s. The fallout is hard to predict because we have seen nothing quite like it, but to think that the real estate prices are going to recover completely in 1-3 years from the bottom, isn’t realistic, IMO.

  74. 74
    johnnybigspenda says:

    Question: what happened to house prices in the 80’s when interest rates were 18% +? People are freaking out over a 1 % increase… how did people afford to live anywhere? I guess everyon must have rented?

    (ya right)

  75. 75
    johnnybigspenda says:

    Article in the Seattle PI about WA vs. the rest of the US foreclosures and delinquencies:

    http://seattlepi.nwsource.com/business/330697_mortgage07.html

  76. 76
    Ron says:

    Mademillionsinrealestate said,

    on September 6th, 2007 at 8:59 pm

    This is the most prosperous time in the history of the world. If you think otherwise your probably a liberal and liberalism is amental disorder.

    FIRST OFF: Mademillionsinrealestate: The Name implys a Dream… not reality- Reality is ALMOST anyone who Made the wealth of millions doenst need a screen name to prove it.. your remarks or Not Wealthy Remarks to say the least.. your passage has the financial ramblings of some 20 something thats caught up between MTv and Kiyosaki- Anthony Robbins.. your just not sure who yet.. Maybe the beer Binges from Thursday to Saturday night better spell your investor prospectives.

    This is the most prosperous time in the history of the world- (Well there Might be some truth to this depends on which side of fence your on~!)

    I was going to start off by Beating down each remark however- I dont want to spend so much time trying to educate someone thats apparently still to build a Rocket Ship out of Plastic.. The moon is still very far away unfortunatly. Why even waste my time.

  77. 77
    Ron says:

    Tim I have to make the remark that this Website spends to much time focusing on The Issue of just Seattle.. The Real estate Market given the Finacial Situation of the Lending, Banking Industry Not Really as Much about Seattle.. This is not Local this problem is National.

    Really as everyone here pretty much knows this is what the issue is going forward. I think thats where the Focus should be~ as far as im concerned.

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