I’m always interested when I see analysts who are willing to put a number on how far they think home prices are likely to fall. Myself, I’m hesitant to put a number on how far I think housing prices are likely to drop because of the state of the economy and the foolishness of all the government interventions. Ordinarily I’d go with a reversion to the mean (after a slight over-correction) but a severely damaged economy could result in a permanent shift of the mean.
One analyst, Jeff Nielsen, recently speculated that home prices could potentially drop another 75%– the most bearish figure that I’ve seen. That seems rather pessimistic, even to me, but the analyst pointed out the following: (Thanks L!)
The average wages of Americans have been falling (in real dollars) since 1970, making 1970 house-prices a reasonable point-in-time to look at as a possible, long-term equilibrium point for prices. That implies that U.S. house-prices will fall another 75% from current prices. Indeed, with the average American now earning (in real dollars) what their great-grandparents earned during the Great Depression, 1970-prices suddenly look much less far-fetched.
Also interesting was how long Nielsen felt this correction would take:
[T]he U.S. government continues to delay the real, necessary correction in prices. Instead of this crash being spread over merely five to ten years, the U.S. government is ensuring a full generation of slow, steady decay.
I agree that the government is delaying the correction in home prices. I don’t think, based on what I’m currently seeing, that another drop of 75% seems likely. I must say though that given the stupidity of U.S. economic policies, anything is possible.