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How Much Will Home Prices Correct, IF They Correct?

Lined Up Houses

Here’s the best answer: Nobody has a clue.

BUT – I can say that it will be a lot less than in 2008, and this is why:

Prior to the meltdown in 2008, financing was far too easy to obtain, particularly with respect to investment properties.

Homebuyers could buy with no income and no asset verification, as most people know, but they could also buy with no down payment.

Because they put no (or very little money) down, they had nothing to lose by walking away from their properties when their equity disappeared.

Because of this, tens of thousands of people walked away from their homes, creating an enormous supply glut when all the foreclosures hit the market over a short period of time.

House ConstructionThe supply glut was exacerbated because of the enormous number of homes built, as housing permits approached two million per year in the years leading up to the meltdown. Currently, about 1.2 million permits are pulled per year; and in “normal years,” several years before the meltdown runup, permits averaged about one million per year.

Because financing is now so much harder to obtain (especially with respect to “flips” and investment properties) and because builders are not building new units with such reckless abandon, it is extremely unlikely that we will see a repeat of 2008.

In 2008, values plummeted by as much as 50% in many areas, particularly in bedroom communities far from major employment centers. But again – that was because of the enormous supply glut.

In other corrections, such as in the early 1990s or early 2000s, values dropped by 10% to 20% at most. And again – the outlying areas farther from employment centers seemed to get hit the hardest.

When “normal corrections” do come, they never last long and housing invariably comes roaring back at some point so there is much less to worry about than most people realize.

We discuss when the housing correction may happen in this blog.

 

Jay Voorhees
Founder/Broker | JVM Lending
(925) 855-4491 | DRE# 01524255, NMLS# 335646