Zeev's Turnips Patch-No Politics (ZEEV)

[Newly2b]

I think what happens in housing will be a result of what happens in the larger economy. I believe we will get both inflation and then deflation, in that order.

In times of inflation people buy "hard" assets and, while illiquid, housing is a "hard" asset. If interest rates rise significantly, unemployment increases or any number of other scenarios unfold and cool the housing market, prices usually fall. However, in a period of rising inflation, prices may simply stabilizing in dollar terms while the value is, in fact, falling.

BTW, I think the reason the high-end market is hit first when the housing market slows is because high-end buyers are usually move-up buyers, more experienced and in general better educated and more astute than the average homebuyer, thus they recognize the dangers more quickly than their low-end counterparts.

Adding foreclosures to the market puts additional pressure on home prices. Banks need to resell these homes quickly to get them off their books (especially in a market where prices are dropping), so they price them lower than the market in general, driving prices of other homes down to maintain competitiveness. Lenders have now gone so far overboard (IMO) making loans to people who really cannot afford to own a home, that I would expect a higher volume of mortgage defaults and foreclosures even than we saw in the early '90's when prices fell 30-35% from the high in '89.

So, what do I think will happen? What goes up must come down. I expect the housing market to slow down significantly by mid-2005 latest. I'm not familiar with the Newport Beach market, but homes being in short supply only supports the price if there are more people who want to buy them than there are homes for sale. Here in coastal L.A. county, the supply is now outpacing demand and we are beginning to see the less-saleable listed homes getting one or two price reductions and taking longer to snag a buyer. The primo properties are still selling at the ask price within a week or two of listing -- so far.

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