I was wondering what anyones predictions on how much prices should fall over the next 2-5 years.

I used this chart as a historical guide and as a best guess as to what to expect in the future.
http://mysite.verizon.net/vodkajim/housingbubble/los_angeles.html

My observations or analysis are that prices go up faster and take about 2 times as long to bottom. I have been conservative and followed the same pattern as the 1987-1997 pattern. Prices went up for 3 years and then went down for about 6 years. If you apply the same angle of price declines from 90-97 to nominal prices should be down by 20% (conservative) by 2012. I also noticed that in the first half of a downturn, the prices fall 2 times as fast as the second half.

Of course if you factor in inflation housing should be an even worse investment.

Anyway, do my predictions make sense given that I a trying to follow the pattern of the last downturn and that the last run up in prices was more of a bubble, so my predictions are pretty conservative that whatever homes are on the market now, I should expect to get for about 20% less nominally in a few years?

As far a LA being unique in the “fact” that it has a great economy, weather, and a growing population, wasn’t that true also in 1990-1997? Prices still went down then.

I love your site & your insights. As a buyer who is sitting on the sidelines (and growing my future downpayment), I thought it would be interesting if you created a chart of what the median house price would be if we held appreciation constant through this bubble.

I can’t attach the simple spreadsheet I created, but for Burbank (where I live), the Nov. 2000 median house was reported being $256,400 (compared to LA county at $200,00). If I then do some simple compounding at 6%, the “expected” value of that $256,400 home in Nov. 2007 should be $385,531. Obviously massively lower than the median house value in LA county.

I would love to hear your thoughts. Obviously the “fair market price” for a house in Burbank will be whatever the market settles on after the inevitable “crash” or “burst.”

Thanks!

The same issue occurred in Japan with their real estate bubble. In their situation, they dropped rates to zero percent, and still the asset deflation kept on going. After all, with many of these implosion happening in the subprime sector, they are already much higher than prime.

@liberal,

As you can see from the video link above, Cramer has shifted his stance on real estate. He has done this many times in the past. Remember the tech bust? Many of his followers blasted him for pumping stocks that tanked. I’m thinking he learned his lesson and is trying to cover his bases. He is smart guy and strikes at any opportunity. My belief is Jim views the impending housing bubble bursting and wants to be seen as an expert in the field. Claiming that they should “plow” the IE is an interesting approach but we’ll see if he maintains his stance. If he comes out like this on cable, then I’ll believe that he is serious. But having what he said only online via streaming video is not reaching a large enough audience.

@rob,

It is hard to ignore the character. He is fun to watch and does have some good tips. I’m not sure if his philosophy is long-term investing; more like momentum trading.

@the north cosat,

Glad to see two Chicagoans on the site. It seems that this bubble has played out very similar in many metro urban areas. Traffic is an issue that any densely populated area will need to face. Even the book Life 2.0 examines the flight of many folks into smaller towns to avoid this quality of life issue including high housing prices.

@jimatlaw,

I’m not a transportation expert but each year, traffic seems to get worse by 5 minutes. Typical commutes that took 25 minutes now take 35. I’m not sure if widening the roads would provide any relief in the short-term since it will take years to get this accomplished; two-level highways would take much longer. Maybe in the meantime we can do what Mexico City does and allow only certain license plate numbers on the freeway during a given day of the week. I’m sure that’ll go over well.