Phase Shift: The Next Leg Down in House Prices

03-24-2011 • OfTwoMinds.com/blog

I submit that the forces acting on price are mutually reinforcing to the point that price will drop rapidly in a second phase shift, with the target noted on the chart: a return to the price levels of 2000. Once we get into the 2012-14 timeframe, then I expect a third phase shift will drop prices back to 1987 levels. As many observers have noted, bubbles don't retrace to historical averages--they over-correct to extremely low values. What forces are working to push housing prices to new lows? 1. As I reported on Daily Finance, new mortgage broker compensation rules are about to wipe out independent, small mortgage originators and brokers. Mortgages will probably become harder to come by and more expensive as the "too big to fail" banks will consolidate their grasp on the mortgage market. 2. Interest rates will rise. Most financial analysts are supremely confident that the Fed can keep interest rates near-zero forever. I suspect their confidence is misplaced. As I discussed yesterday, the Fed has backed itself into a corner, where if it pursues QE3 then it will fire up inflation that will destroy profit margins and household purchasing power. If it ceases to buy U.S. Treasury debt, then interest rates will shoot up. As interest rates rise, the amount of money home buyers can borrow drops. House prices follow this dynamic. 3. Income for the bottom 90% is stagnant. All the bogus "housing is now affordable again" charts floating around all base their rosy conclusions on median income, neatly avoiding the reality that the top 10% has garnered the majority of income gains. Factor out the top 10% and you find real incomes have actually declined for the lower 90%.