Economists say the decline, which could be foreshadowed in a widely followed government price index to be released this week, will probably be modest from 1 percent to 2 percent but could continue in 2008 and 2009.I dunno. The article is accompanied by the chart below (with some additions in red) and it's sure hard to believe that the downturn is going to be as small as the chart suggests. Housing prices are a full third higher than historical trendlines predict, and I still haven't heard any compelling reason why the housing market should have changed drastically and permanently starting in 1996. Sure, in a few big cities like Los Angeles you can argue that there's just no more room to build and that's driving a long-term change, but what about the rest of the country?
....Unless the real estate downturn is much worse than economists are expecting, the declines will not come close to erasing the increases of the last decade.
It's all very mysterious to me. I tend to believe in long-term trends unless there's a really compelling reason to think that fundamentals have changed. But while housing fundamentals might have changed a little bit (buyers are obviously willing to spend a bigger percent of their income on housing than we once thought), it sure seems like prices were propped up mostly by falling interest rates, a credit bubble that's bursting as we speak, and the same kind of hysterical buying and selling we saw in the dotcom boom. Housing may be inherently more stable than the stock market, but even so, it sure seems like we're due for a correction of more than few percent. Stay tuned.