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Originally Posted by host
aceventura3, this time, it is different. The excess has been unprecedented, and the consequences will be in proportion...in the opposite direction:
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You have provided a lot of reading material and support for your view of the market. You are not alone in your view that the real estate market is facing a major correction. You could cite mountains for sources reflecting that view. I don't dispute that one second. I generally come to my own conclusions based on how I see market forces converging. When someone says the sky is falling, I usually look up to see for myself rather than assuming it is true because a supposed academic expert wants to be quoted in the paper or appear on the evening news (we know they have to take extreme positions to get attension).
Here is how I see it.
Real estate markets are local - some markets will experience big corrections others will not be impacted.
There has been a recent influx of high risk loans in the last 3 years - these loans represent a high percent of loans in the last 3 years but a low percent of the total loans outstanding. The impact of default will depend on local markets, but overall will be small.
Very few banks take on large percentages of high risk loans. Most large banks are diversified geographically. Many banks package loans and sell them in the secondary market. Banks manage risk. The folks active in the secondary markets manage risk. The ripple affect of defaualts will be absorbed between diversified banks, the secondary markets, and some federal agencies. The impact will be small. Some argue that the federal agencies have assumed too much risk, but they have the full faith backing of the federal government and they are adjusting their exposure.
When speculators default, new buyers will step in and buy bargins. Millions of long-term investors have money on the sidelines waiting for these opportunities. The downward impact on prices will be short-term in most markets.
People who have no equity are locked into their homes unless they default. Most don't want to default and will do whatever it takes to keep their home. When defaults occur they all won't happen at once. The impact will be small and spreadout. Also banks don't want defaualts. If a bank financed 100% or more of a house, they don't want pennies on the dollar - they will do what it takes to get full value, even if it means being more flexible with high risk buyers on the verge of default.
If our economic growth was in part due to the real estate boom, and the boom stops - other sectors of the economy will pickup, i.e. dollar weakens and exports pick up and foreign investment here increases. The Fed thinks the economy is growing too fast any way, the steps they have taken where intended to cool the real estate boom. If you have faith in our economic policy, thier goal is moderate long-term growth in real estate.
Baby boomers are still in their peak earning years, they want bigger, more luxurious homes, they want vacation homes, they want retirement homes. Those in the baby boomer echo are buying starter homes. Market shifts are occuring, those ahead of the curve will make money, those behind the curve may loose money. The market forces are too strong to ignore.
In the end for everyone who agrees that the real estate "sky is falling" should act now and sell. For everyone who takes a moment and looks at the "sky", they should hold and expand their real estate investments if they are so inclined.