Real Estate Forecast for 2012

It is clear that we are in a declining real estate market. In an interview on On The Edge (discussion starts at 19:40 in the interview), Karl Denninger of Market-ticker.org has predicted that housing prices may fall another 50% or more over the next 2-3 years. “My expectation is that over time, the deflation in housing prices and the deflation in that sector, along with most other sectors, is going to continue. I don’t think that there is any bottom anywhere in sight in the United States. The foreclosure mess is still there. The holding of assets with unrealistic values is still there; and until we see that start to clear out, we’re not going to be able to find out where a bottom actually is. But it would not surprise me, over the next 2 or 3 years, to see another 50% come off house prices in the United States alone.” When asked to clarify if he meant another 50% move down in real estate, Denninger said, “Entirely possible, and possibly more…”

How would a 50% decline in home prices affect an average home in Whittier? According to Realtors® Property Resource, the average home value in Whittier’s zip code 90603 is currently $363,000. If values decline 50% in three years, such an average home would then be worth only $181,500. So, if you are thinking of selling for top dollar, the sooner you sell, the better.

A further decline of 50% in home prices would be disastrous for the economy. Counties and municipalities would have their property tax revenues slashed, which means they would further have to cut jobs. Some may even declare bankruptcy. More businesses would falter and close, leading to more unemployment.

Denninger is not the only one who predicts falling home prices. Over the last year, every zip code in Whittier has seen a decline in home values.

It is clear that housing prices need to be in line with what the average wage earner can afford. In the 1950s and 1960s, it only took one wage earner to support a family, and that included the ability to make the payments on a home loan. Today, due to declining wages, it typically takes 2 wage earners to support a family; and often there is not enough money to pay for a mortgage. The only way real estate prices can go up is if wages and salaries increase across the board. Today’s unemployment statistics show that, as more competition for jobs increases, wages are driven lower and lower. CNBC's Diana Olick talks about the high levels of homes that are underwater, including California, which has over 2 million.

I don’t know what will happen in the future. I do believe prices will decline further; I just don’t know how far they will decline. The status of the world economy is far too complex to discuss here; and perhaps far too complex for anyone to really know.

What would such a fall mean for someone who wants to buy a home right now? It depends on the reasons for buying. It may still make sense, if it would cost more to rent a home than to buy one; and if you plan to live in the home for the next 10 years or longer.

I have given a lot of thought as to how it would affect my business, and come to the conclusion that no matter what happens, people always need to buy or sell homes; and it is my job to help them during those transactions. I cannot decide for them whether to buy or sell, but I can help them once they make a decision.