What will 2008 be like?

As we look back on 2007 I think we can all agree it was a very interesting year. There were many predictions made in late 2006, few of them were remotely close to hitting the mark. Most economist or organizations that offer these predictions have a financial interest in Real Estate market. This obviously drives them to publish forecasts that are heavily skewed in their behalf. I guess we can’t blame them for that but some of these predictions were made after it was obvious that the Titanic was going to sink. Some of them were so bad that you can almost picture Muhammed Saeed al-Sahaf (Saddam’s minister of information) standing up reading them.

• In January 2007, the chief economist at the National Association of Realtors said, in regard to the state of the housing market, "The steady improvement in [home] sales will support price appreciation ... [despite] all the wild projections by academics, Wall Street analysts, and others in the media."

• Former Federal Reserve Chairman Alan Greenspan and his successor Ben Bernanke, after reviewing home sales and mortgage rates in fall 2006, were hopeful that the market had bottomed out. "It may be too soon to say that it's over. It may not be too soon to say that the worst is over," said Greenspan in an October 2006 speech in Richmond, according to press reports.

• In a November 2006 speech, Bernanke said he saw some "encouraging" signs in recent housing reports. "Although residential construction continues to sag, some indications suggest that the rate of home purchase may be stabilizing, perhaps in response to modest declines in mortgage interest rates over the past few months and lower prices in some markets," Bernanke said.

• Ed Leamer, director of the UCLA Anderson Forecast predicts California real estate will remain sluggish for a long time — at least five years — but with little price deterioration other than the failure to keep up with inflation.

• The California Association of Realtors forecast for 2007 was, “Now, the housing boom is over, with the slowdown expected to continue next year, according to a new forecast by the state’s real estate agents. The median price of an existing California home will decline 2% to $550,000 in 2007 from a projected median price of $561,000 this year, according to the California Assn. of Realtors. Sales are projected to decline 7% to 447,500 units from 481,200 this year.

• New-home sales are forecast at 950,000 in 2007 and 981,000 next year, down from 1.06 million in 2006. The median new-home price should grow 1.7 percent to $249,600 in 2007, following a 1.9 percent increase last year. Housing starts will probably total 1.50 million this year and 1.56 million in 2008, in contrast with 1.80 million units last year. Existing-home sales are projected at 6.42 million this year and 6.66 million in 2008, compared to 6.48 million last year. The national median existing-home price is projected to rise 1.2 percent to $224,500 this year, following a 1 percent gain in 2006. “Although existing-home sales will be marginally reduced due to subprime lending restrictions, they should be gradually rising this year and next,” Lereah says. “However, total sales this year will be fairly close to 2006 because last year started high and ended low.

2007 is in the bag. Mosts economists got it horribly wrong but there were a few that were close. Peter Schiff, Nouriel Roubini and a few other well known economists did see the meltdown coming and were honest and brave enough to say so. In early 2007 they were primarily seen as tin-foil hat wearing crackpots. I doubt they are viewed with same skepticism today.

Of course, here at Housing Kaboom I am more concerned about my little corner of the universe. What goes on at a national level or in Florida, Arizona or Montana may not have any bearing on our little piece of paradise. We know that the IE is in the midst of the biggest real estate crash in it's history. Whether the numbers show it or not all you have to do is hit the streets or log on to Redfin and you can see how far the prices have fallen. The price declines are accelerating as are the foreclosures and the regular listings. The speed of it all has taken me a bit by surprise (I remember that last one and it was nothing like this). We have seen prices go up as much as 300% in the last 10 years, with most of that happening since 2003. How far will they fall? What will 2008 bring?

My predictions for 2008 are nothing more than "more of the same". Home prices will continue to decline as more and more REO's drag the prices down. Many more home owners will walk away from their homes as the values decline and their payments go up. Construction will slow and the builders will start building small homes on tiny lots in an effort to get the price point down around $200K - $300K. The high end homes will be hit especially hard ($600K-1M). Most of these were purchased by regular Joes trying to live the high life. Without the home ATM they are going to quickly run out of cash. There are not enough high income families in the IE to purchase those homes so the prices will quickly crash in order to attract buyers. I think this price point could easily see declines of up to 60%-65% off peak prices.

On the rest of the IE economy I think we will see something similar to what happened in the early 90's. Many of the new shopping malls that were built will see more and more business go belly up (Furniture/accessory and luxury type stores will suffer the most). Restaurants will start to close as fewer people will be eating out. Crime will obviously increase as more and more out of work construction workers start looking for easy cash elsewhere. Anyone remember how many homes were robbed in the early 90s? I do, and it was a lot!

That sure sounds like a lot of doom and gloom, doesn't it. Well, there are going to be some tough times ahead for a lot of families. Unlike many bloggers, I don't think we are in for the next great depression. I don't think we will see millions of people living in cardboard boxes under the 91fwy. Yup people will lose their homes, but they will move into apartments. Prices will come back down to normal levels and then people will buy again. Hopefully it happens fast, the sooner prices fall back the better.

I leave you with one of my favorite "prediction" clips for 2007. I think I saw the long haired freak working at Don's Used Car lot.....