House in a Bubble by Bill Harrison
Steven Jon Kaplan’s prediction about one of the worst housing bubble scenarios is among the most radical of the dozens that have been published on the Internet lately. Looking at the Phoenix example, he says that real estate will drop by 50 per cent everywhere. According to his commentary, Phoenix’s sharp drop wasn’t a kind of outlier, but a phenomenon that will hit the whole world. Is this really possible?
Kaplan carefully observed U.S. areas after the housing bubble crash and found:
The most important observation is that six of the 25 areas have suffered average housing losses of more than 51%, with the other 19 regions experiencing declines of less than 37.5%. Not a single region in September 2011 experienced a total pullback of between 37.5% and 51.0% — not even one! This is precisely the opposite of what you would expect from a traditional bell-shaped or Gaussian curve, in which the most frequent behaviour occurs roughly in the center of the range — rather than at both extremes with literally nothing in the middle.
Yes, those numbers are far away from Gaussian curve, but we still shouldn’t jump to conclusions. The Gaussian curve describes the normal distribution of data that is used mainly due to its simplicity, but it doesn’t mean that statisticians expect every data set to be normally distributed and if it is not, there is something wrong. The author just noticed that declines aren’t normally distributed. Moreover, expectations that shortly after the crisis, data will behave "normally“ aren’t so reasonable. He went deeper and tried to find the reason for such unexpected behaviour.
[…] However, if your mortgage exceeds the value of your house by 20% or 25%, then you’re much more likely to conclude: “If I keep making my payments, I’m just throwing good money after bad. I hate to become delinquent, so I’ll see if I can arrange a short sale which I’ve read is better for my credit rating in the long run. Once I eliminate this debt burden, I can get on with my life with a clean slate.” In my opinion, that is why prices which are down more than 35% usually quickly end up down 50%-65% or more, as many people simultaneously reach the same conclusion.
Mortgage Document by Colin
This seems to be a very simple reason. Of course, the decision to unload homes at bargain prices after a mortgage exceeds some border of house value is natural and probably supports the following declines. But the author forgot to take into account the circumstances that pushed home values into such low numbers. The drop in house prices usually leads to a weakening economy, but when the economy slows down even more, prices continue falling, as we could see with recent Greek figures. Higher unemployment rate, rising inflation, uncertainty in the market and home prices easily cross the border of sustainability and go on falling.
As long as prices are not down very much, people will remain hopeful and continue to make their mortgage payments. As soon as they reach a certain level of loss, which is slightly more than one third of the peak price, people simultaneously give up and conclude that getting out at any price is the best option. Whether people decide this from talking with each other, or independently, or a combination of both, is an interesting question, but either way it appears to be a universal phenomenon which I expect will become the standard around the world.
I can hardly imagine how this panic spreads all over the world. Homeowners aren’t financial speculators — at least most of them — and it isn’t so easy for them to abandon their houses. We can hardly predict the number of those who will decide as Kaplan expects, but I don’t believe they will cause a sharp drop in prices. However, the economy’s performance that could lead to such a situation can easily result in quick price changes.