Joy to the world, the ZIRP has come.
Now that ZIRP has arrived, I'm wondering how that affects everybody's most likely scenarios.
Here's mine from September last year:
Here's mine from September last year:
Now it's looking like somewhere in between the worst case and the most likely case I put forward back in '07. What do you all think?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%
Comments
Uh, how about death spiral...
Mortgages go bad -> credit markets falter -> consumer spending falls -> recession news fills the media -> stock prices fall -> businesses cut spending -> job losses mount -> more mortgages go bad
Repeat.
Regarding housing in Seattle, I think a 30% decline from peak is equilibrium (approx $300k median home in King County down from $450k). Until that point, price declines do little/nothing to improve sales. We dip temporarily lower (perhaps much lower) than the equilibrium before increased sales allow the market to recover overall. Note, this depends on a "relatively" mild recession, where unemployment hangs below 8% and the whole thing is over near the end of 2009. If the recession is deeper, then I'd revise my guestimates down.