bank failure
With a good run on the stock market and even some good news about housing sales I think its time for an example before anyone gets too cozy that the worst is behind us.
To play it safe you need to think about where we are in the economic cycle the same way as an important scene in the movie Titanic. This is the scene where the ship, which has been slowly sinking for about an hour, suddenly levels off when the submerged part of the boat (partially) breaks away. Everyone is relieved that they are floating level when all of a sudden they get pulled down in a rush to the bottom. The sinking part of the housing market just (partially) broke away and everyone is giving that sign of relief. Strike up the band!
Here is why we are in for that second more hellish ride straight to the bottom. In the short term the credit markets will get a swift kick when we finally have a large bank failure come to light. Give it 3-6 months and my FDIC insured money is on Bank of America (eventhough they passed their “stress” test). There goes the financing revival. Second of all housing will get another kick in the pants in two years when interest rates have to start going up again (to combat eventual inflation). We have seen the recent good news being the result of lower interest rates so what happens when those interest rates go up?
Also as any real estate agent will tell you “location, location, location”. Well while prices have begun to level in the outskirts like Vallejo they haven’t really begun their fall in Silicon Valley and the Peninsula. Right now people here think “whew that wasn’t so bad” (only a 10% drop in value) but in reality what these market movements (dramatically falling median home prices) presage is a large fall coming to the Peninsula this year. Yes everyone is buying homes in the cheaper areas of the “bay area” which is what is driving down the median. That means less buyers on the Peninsula (in which you can’t find any homes close to the current depressed median). Its only a matter of time before it finally hits here.
My prediction (or is that a “sinking feeling”) is that this summer will feel “soft” on the peninsula and that will prick the confidence bubble leading to the same panic here that happened last year in the suburbs. This is when 30-40% price drops (peak-to-trough) become a reality in Palo Alto by summer 2010. Additionally the bank efforts to artificially restricted supply of foreclosures will finally give way as all banks decide they need to get out before its too late.
Impossible you say? Remember it was once said that the housing market could not possible crash the same way the NASDAQ did during our last bubble. Really?? Have a look at this graph which offsets the NASDAQ peak to correspond with the peak in Bay Area housing prices.
Oh and lets not forget that the housing market is permeated by many myths that are proving to be quite untrue (and therefore won’t be there to save this market). For a detailed analysis of these myths please point your browser here.
