From Charles Schwab:
This time last year, a hot topic at cocktail parties was how high real estate prices could still go. Now, with evidence of falling prices in many parts of the U.S. dominating not only the financial media but the general press and even the tabloids, we’re more likely drowning our sorrows than clinking our glasses. Although the debate still rages over whether housing’s fall will result in an economic hard or soft landing, there’s no debate about housing. A hard landing it appears to be—and it’s not over yet.
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As cited by many a homebuilder CEO lately, there is something very unique about this cycle: It’s the first time in American history that a severe housing downturn has been led not by rising unemployment or falling incomes, but by too much inventory and speculation. For the past century, home prices adjusted for inflation have been relatively stable, with long cyclical swings but no long-term trend. The major anomaly was the sharp spike in home prices over the last decade (up over 80% since 1997), which was totally out of line with the long-term experience. Fundamentals can’t fully explain this spike, so what can?
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Many investors assume the damage to the housing industry is an isolated event (much as it was assumed that the dot-com implosion was an isolated event). I find myself more concerned than the consensus, believing the housing industry is vastly more important to the overall economy than many are currently assuming. Given that prices have yet to fall enough to drain inventories, and mortgage rates have yet to fall enough to stimulate another mortgage refinancing boom, there is still likely more pain and suffering to come before we can close the books on this housing cycle. And the harder housing falls, the harder it will be for the economy to land softly.