Well, I've been expecting this for over a year. We had a credit bubble and a housing bubble. It's popping. Even here in the "special" Bay Area where all of the fools (especially realtors) were saying things like, "Real estate never goes down," is experiencing significant
price drops. We are 12.5% down in prices from a year ago and we have a 47.3% increase in housing inventory here.
See this
site for details about why buying a home is for suckers and has been for years in the
Bay Area.
This is just the tip of the iceberg. Once the Tech Bubble of the 90s was over, Greenspan had to create a new bubble or face the music, a terrible recession. So what did he do? He lowered interest rates and increased money supply to ridiculous levels so that we had stupid amounts of credit for even the most unfit borrower. Lending institutions liberalized their lending rules and suddenly many people who would have never qualified for mortgages could lie about their incomes, or not even report them at all, and take out "suicide" negative amortization loans. This created the largest sub-prime mortgage market ever. It was a house of cards designed to fall at the first sign of an economic downturn.
There is a saying, "What goes up, must come down." Nowhere else is this more true than how this saying plays out in our modified capitalistic economy in the USA and the world. People were buying homes that they couldn't possibly afford believing the Realtors (Realwhores) that home prices only go up, they never come down. All people had to do is look it up to find out that this is not true, especially in California where real estate is prone to cycles of boom and bust.
But alas, people drank the purple kool-aid that the Fed had prepared and swallowed those sub-prime suicide adjustable negative amortization loans on houses they couldn't possibly afford. And mortgage interest rates are INCREASING for jumbo loans (the loans you need to take to buy anything in California). So all of these idiots are sitting on jumbo loans watching their house lose value so that suddenly they owe way more than the house they have mortgaged is actually worth. And the interest rates are increasing on these adjustable loans making the payments skyrocket. And real income (adjusted for inflation) hasn't increased for your average worker in well over 10 years and the well-paying jobs are leaving for India, China, and elsewhere. So people are stuck with the same real income they had 10 years ago, with rising payments on their mortgages. Guess what's happening? They're defaulting and foreclosing in record numbers all over the country.
This is just the beginning. Greed has ruled for too long. The middle class has been squeezed for too long so that those at the top could milk more profit out of it. If you don't have workers who can buy your product, you don't have an economy. No economy, no profit... Eventually even the rich lose money because profits decline because no one can afford to buy anything because their income in real dollars is stagnant while prices have risen exponentially on just about everything. This could not be sustained forever.
If the damn Fed leaves this alone, we will have the corrections needed. Prices will fall to be in line with what people can afford and the economy will sustain. Or some of these rich asshole CEOs will see that by denying their workers a real living wage, they are losing their own customer base bringing down their stock options, salaries, and perks because stock owners (who are now regular working people more and more through 401ks) won't be willing to pay these rich asshole CEOs what they have been used to making if their companies are tanking...
So, sit back, and ride this out. Pay off your consumer debt. Don't buy anything you really can't afford. Basically, if you don't have the money to buy it without credit, don't do it until the market starts showing signs of recovery. Most likely we're going to be in recession through 2010, if what I've been seeing in the markets holds true.
Oh, and those Baby Boomers who are going to retire soon? Well, they're going to want to sell their McMansions in the suburbs in order to "cash in" on their nest eggs that are tied up in their McMansions. This will create even more downward pressure on real estate prices because of the simple rules of supply and demand. There will be way more people wanting to sell than there are who can actually buy these places. The next couple of generations aren't making as much as the Baby Boomers did and there are less of us too. So, this will affect Baby Boomer retirement and perhaps real estate prices will become sane again in 10-15 years.
Strap yourselves in and hang on... Enjoy the ride...