Those of you who had the misfortune to live through the dotcom crash will recall that I and other analysts correctly predicted that there would be a slowdown and shakeout, but drastically underestimated its severity and duration. All the way down, we kept revising forecasts (read: cutting estimates) to previously inconceivable levels, and each time we cut them, we reiterated our expectation that the inevitable trough and upturn was about six months away. It wasn't until two years after the shakeout began, when half of online advertising revenue had evaporated and more than 75% of the companies in the sector had keeled over that the downturn finally ended... And by that time, most of us were so demoralized that we'd stopped predicting that there would ever be an upturn.
Housing obviously won't experience as deep a correction as the dotcoms did, but I haven't heard a single persuasive argument explaining why this downturn won't look like every previous housing downturn: i.e., will last a lot longer and drop much farther than most people think--until price/rent and price/income ratios return to or below their long-term trend. Instead, all I hear are arguments like this one, which are based not on long-term historical trends, but on short-term bubble-year pricing and price trends (arguments I am very familiar with, having made similar ones in late 2000 and early 2001):
WASHINGTON -- The National Association of Realtors again lowered its U.S. housing market forecast for this year, saying the market remains "soft." In its latest forecast for the real estate market, NAR projected that existing home sales will fall 4.6% this year to 6.18 million, compared with its previous forecast of a 2.9% decline. New home sales are expected to plummet even further. The NAR said new home sales are likely to fall 18.2% to 860,000, compared with the prior forecast of a 17.8% drop. While near-term prospects for housing remain fairly grim, NAR said sales should pick up toward the end of the year.
"Overall housing levels are historically strong, but sales remain sluggish compared to the recent boom," said Lawrence Yun, NAR senior economist, in a statement. "Home sales will probably fluctuate in a narrow range in the short run, but gradually trend upward with improving activity by the end of the year," Yun added. Existing home sales are projected to rise 3.7% in 2008, to 6.41 million, according to NAR's forecast.