For those that think we are in some sort of housing vanguard and think housing can never go down I ask that you only need to look back 10 years. Many folks are baffled as children watching a magician pull a white rabbit out of a hat because housing sales volume has fallen through the floor recently yet prices are still going up. Just take a look at the headline from this month’s housing report via DataQuick:
“January 16, 2007
La Jolla,CA----Southern California's housing market continued to send mixed signals last month as prices reached a new peak while sales volume remained at a ten-year low, a real estate information service reported. DQNews.com”
There is a brief history of the California housing bubble over at History of Housing Bubble and I think it is worth your time to read. I have posted the key headlines in bold below but also encourage you to focus your attention to 1989. As you can see below, it is parallel to what is occurring right now. Prices climbed in the first part of the year but sales continued to drop precipitously as the year trailed on. We see sales prices climbing until May but slowly decrease after summer. How can the parallel be so uncanny? Well the answer is two fold and part of the nature of housing. First, most folks plan on selling homes either late spring or early summer. Anyone that has worked in real estate knows that these are peak selling seasons. Second, in a healthy market this is when inventory moves at a good pace but what you see happening below is that a glut of housing hits the market while folks stand on the sidelines. By the end of 1989, we begin to see a continued drop in sales and finally a price decrease statewide. This is how a housing bust begins. Don’t expect bells and whistles to go off; the housing crash will occur one home at a time. Most perma-housing bulls would like you to believe this time is different; well I’d like to believe the Easter bunny will give me some Lakers tickets tomorrow but I somehow doubt he will.
The point being is that housing goes through cycles that are rather predictable over a long horizon; I’m talking about decade long cycles but most folks now a days especially the NAR want to use scare tactics to make folks buy homes. “Buy now or be priced out forever!” is the rallying cry of these warriors. Yet the one thing that we have not seen in past bubbles is the massive amount of credit and risky mortgages that we currently see flowing through the rivers of urban blue and red USA. Yes, risky mortgages were part of the game in the last boom/bust but not to this extent. In addition, never had we placed so much reliance and faith on one sector of the economy that really doesn’t produce something new or increases our productivity. Do you think trading houses all day is going to make us a stronger nation? I’m waiting for a poster of Uncle Sam to pop up with him holding a home pointing to Joe Public with the caption, “buy now, only homeowners are true Americans.” Keep in mind in the 90s we had the technology boom that shouldered much of the economic prosperity after the housing market busted. But what will come to save the market of today? Clearly we are on the same path as below but the magnitude has never been so incredible; maybe we should all buy some perma-bull glasses and zone out for five years!
1985-1986: Housing is booming, inventory is low.
1987: Housing still booming, prices increasing, inventories low.
1988: People start to question the boom. Realtors assure us the boom will continue. Houses aren't like stocks afterall.
1989: Prices are very expensive; affordability an issue. Sales slow and prices drop. Mention of risky loan types.
Housing Prices in State Climb 3% in February
Furlong, Tom; Los Angeles Times; Mar 29, 1989; Vol. 108, Iss. 116; 4; pg. 1
Stock of Unsold Homes Drops Dramatically
DAVID M. KINCHEN; Los Angeles Times (pre-1997 Fulltext); Apr 2, 1989; pg. 9
How First-Time Buyers CAn Get Their Piece of the Dream
Myers, David W; Los Angeles Times; May 21, 1989; pg. VIII1
State's Home Sales Drop 14% Median Price Tops $200,000 for First Time
Crouch, Gregory; Los Angeles Times; May 25, 1989; pg. IV1
Sales of Existing Homes in State Fall During May
Furlong, Tom; Los Angeles Times; Jun 23, 1989; Vol. 108, Iss. 202; 4; pg. 1
Orange County Home Sales Drop by 22% in May
TOM FURLONG; Los Angeles Times (pre-1997 Fulltext); Jun 23, 1989; pg. 1
Realtors Tackle New Topic: How to Handle Slow Housing Market
Myers, David W; Los Angeles Times; Oct 1, 1989; pg. VIII1
Prices Drop, Sales Slow in State's Housing Market
TOM FURLONG; Los Angeles Times (pre-1997 Fulltext); Nov 29, 1989; pg. 1
Housing Affordability Rises Outside L.A., Orange County
Kristof, Kathy M.; Los Angeles Times; Dec 06, 1989; Vol. 109, Iss. 3; D; pg. 1
Survey Cites Four California Banks With Possibly Risky Realty Loans
JAMES BATES; Los Angeles Times (pre-1997 Fulltext); Dec 30, 1989; pg. 1
1990: Prices take a serious plunge.
1992: No one is buying; housing is an investment that no one will touch.
1993: It's definitely a buyer's market. Some people are saddened by the fact that current prices are 50% of what they were in the 1980's.
1994: Housing begins its comeback. People who had the intelligence to wait for the bottom are buying now at great values.
1995: Some parts of the Southland are recovering others are not. People with "negative equity" are in despair.
1996: A tentative recovery is still in the making.
1997: Finally, housing has recovered.