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.