A Bear Turns Bull: There Is No Trigger For Another Housing Crash

foreclosure_massacreHome prices are basically back to where they were at the peak of the housing bubble, so why aren’t people afraid of another housing crash?

Larry Roberts, one of the most popular “bubble bloggers” explains:

I have a challenge for housing bears: outline a realistic scenario where prices crash from here. I’m an old housing bear; I would be happy to carefully and loudly pontificate on an upcoming market crash, but I simply can’t come up with a realistic scenario whereby it occurs. Sure, there are implausible scenarios, mass investor exodus, suicidal lender policy changes, sudden interest rate spike to 7%+, but nothing that seems very likely — or possible at all.

The premise of the original housing market collapse went something like this: People took on mortgage debt which couldn’t be sustained by current income; those borrowers were going to default, lenders would foreclose, lenders would liquidate their inventory, and the resulting flood of must-sell inventory would push prices lower quickly. For the most part, the bust played out in that fashion until the rules were changed — mark-to-fantasy accounting, loan modifications, shadow inventory, long-term squatting. Once the rules were changed, lenders were able to gain control of the flow of inventory, and house prices bottomed and the bubble reflated strongly. With all these measures in place, and with no pressure to remove them, a housing bust with rapidly declining house prices is very unlikely in the foreseeable future.

I don’t see a crash coming any time soon. As long as supply continues to be restricted and the percentage of all-cash purchases is high, prices simply won’t go down. Sales volumes may continue to decline, but prices will remain suspended where more buyers can’t afford them unless something changes at the banks and they begin approving more short sales or foreclosing on their delinquent borrowers rather than modifying their loans. At some point, we may see a medium-term slow-burn decline like the mid 90s, but a 00s type crash isn’t forthcoming.

Back in 2005, there was a trigger for a collapse: resetting subprime loans. Borrowers had to either sell or be foreclosed on, causing inventory to spike and prices to begin their tumble. Today, however, there is no trigger. Most troubled loans have been modified to the point where owners have zero interest in ever selling. Instead of homeowners being incentivized to sell, they are incentivized to stay. The result is that our normal housing inventory is down by 50-75% across the Bay Area. 

It makes sense that, at some point, prices will become so high that even people with modified 2% interest rates will decide to cash out. At that point, we should see inventory normalize and the rally cool off. 

That point doesn’t appear to be coming any time soon.

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4 thoughts on “A Bear Turns Bull: There Is No Trigger For Another Housing Crash”

  1. This makes sense. It’s also consistent with the POV of OC Housing News, which I consider to be the most insightful of the RE market conditions blogs.

    But here’s a possible wild-card: the drought? Meteorologists are saying the cause (“unmovable” ridge of high pressure) is unprecedented in modern (last 200 years) meteorological history. If things haven’t changed by next winter, the result could be severe water rationing, power problems, a dead agricultural economy and a suffering non-agricultural one, a sense of panic, and net emigration from California. Hard to believe this scenario wouldn’t impact home prices.

  2. Bob,
    Yeah I would imagine a situation that extreme would certainly have an impact, though the odds of that actually happening are pretty darn small. Still, wild-cards to happen.

    For the time being, it’s all about the crushing imbalance of supply and demand. This will be the best Spring for sellers in history, even better than the peak in Spring of 2006.

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