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July 26, 2007

Will social networking make "negative cycle" more vicious?

Economy.com's Mark Zandi is no zealot, so if he is using terms like this "negative cycle" homebuyers ought to take note:

"There is a substantial risk that the mortgage market will devolve into a self-reinforcing negative cycle," Zandi said in a release this morning. "Mounting credit problems could beget more restrictive underwriting standards, which would weigh heavily on the fragile housing market as potential borrowers become unable to obtain credit, and existing borrowers facing large payment resets are unable to refinance. Foreclosures would mount, leading to weaker house prices, falling homeowners' equity and even more substantial credit problems. The cycle repeats with more intensity and the mortgage market corrections unravel into a crash."

Thanks to the Boston.com's new real estate blog for posting the quote above.  We discussed the same worse-case scenario yesterday with NECN, but used the word -- "vicious cycle" -- an economic term some might substitute for the "negative cycle" above. 

My question is whether social networking and unfiltered consumer access to real estate data make the downcycle more vicious?"  Not through lack of civility, but data transparency that allows home buyers to make more informed decisions, putting further downward pressure on prices.  To see what I mean, visit our new MLS access which allows users to easily compare asking prices to price trends and more on Zillow.com.

Here's what we wrote two years ago about the coming negative cycle before Economy.com issued it's warning today:  From froth to foreclosures:  You ain't seen nothing yet!"

When the market really cools, things will get worse, potentially much worse.  A recent New York Times article called the magnitude of interest-only and adjustable rate mortgages "The Trillion-Dollar Bet" because "$1 trillion of the nation's mortgage debt - or about 12 percent of it - [will] switch to adjustable payments in 2007."  Will foreclosures spike then?

An upcoming article in the July / August 2005 issue of The Atlantic Monthly, entitled "Countdown to a Meltdown, speculates that the situation could become so bad that "repossession riots" will occur in some areas.  Do you think that fictitious forecast is irresponsible fear mongering, or foreshadowing a falling market that will make current home buyers look foolish; or worse, candidates for foreclosure in the future?

Cross-posted in the forum of The Real Estate Cafe's social networking site.  Please join the discussion with other home buyers and sellers there.

Bill Wendel | 01:26 PM in Foreclosures, Housing forecasts, Market trends, Price trends, Real Estate Bubble, Social Networking, Timing the market | Permalink

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I thought the statement in yesterday's New York Times that there is "an unprecedented drop in house prices" was entirely out of context. The context is that the current drop doesn't begin to match the rise in house prices that occurred before the bubble burst, a rise that was truly astronomical and unprecedented. Here in Boston, even many professional, well-paid people still can't get into the housing market if they didn't own a home prior to the steep price climb; the drops so far haven't nearly compensated for the steepness of that climb. The disparity between incomes and home prices is still great. I can't help but wonder if the people who are so concerned about housing prices falling are people who already have substantial assets, including homes. What about those of us who haven't yet won the coveted prize of home ownership? Speaking for myself, I'd like to see the drop in prices come a lot closer to the rise that preceded it.

Posted by: Wendy Stevens | Jul 26, 2007 2:29:01 PM

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