“Housing Meltdown” is the cover story of the current issue of Business Week.
Do you believe another 25% decline in home prices over the next 2 to 3 years?
Whether you do or not, the moral of the story seems to be “live within your means.”
While a 25% decline is unprecedented in modern times, some economists are beginning to talk about it. “We now see potential for another 25% to 30% downside over the next two years,” says David A. Rosenberg, North American economist for Merrill Lynch (MER), who until recently had expected a much smaller slide.
Why might housing prices plunge violently from here? Remember the two powerful forces that pushed them up: lax lending standards and the conviction that housing is a fail-safe investment.
Now both are working in reverse, depressing demand for housing faster than homebuilders can rein in supply. By reinstituting safeguards such as down payments and proof of income, lenders have disqualified thousands of potential buyers.
And many people who do qualify have lost the desire to buy. “A down market is getting baked into expectations,” says Chris Flanagan, head of research in JPMorgan Chase’s (JPM) asset-backed securities group. “People say: I’m not buying until prices are lower.'” He predicts prices will fall about 25%, bottoming in 2010.