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I don't know about the rest of the country, but here in San Diego there was significant appreciation from 1995 through 1999. Then, on top of that significant appreciation, things came unglued and home prices doubled from 2000 through late 2005 while the rest of the economy was inflating at perhaps 2% a year.

Now the non-housing part of the economy is experiencing significant inflation and lenders are functioning like real lenders, so people have less to spend on housing. Demand for housing has also been suppressed by the financial death of the flippers. The supply side of the equation has been stoked because after 2005 builders, being builders, continued to build and the forclosure rate has increased.

Under these circumstances, why is anyone surprised that prices have returned to 2004 levels. Why should anyone be surprised if prices decline to the levels of 2002 or even 2001. Standing atop the 1995-1999 inflation, the inflation in housing prices in the first five years of this century was not based on any permanent change in market fundamentals. It was based on increased demand which was stimulated by unsustainably easy credit and a speculative frenzy (at least here in San Diego).

The response of the potential sellers in the market has been retreat and, in some cases, denial. Very few homes are being listed for resale. In my entire zipcode only 15 or so homes were listed during the first quarter of this year. Some were priced in a way that may come close to recognizing reality. Others were priced as if we were still living in 2005. Very few have sold.

This market has a bottom. Very clearly we have not reached it.

Some markets are reporting more than a year of inventory for sale at current sales rates but if they included the number of houses pulled from the market due to market conditions the real number is much higher. Some people can afford to wait out the storm but divorce, job loss, illness, and other reasons are going to force many people to sell at the worst time.

IMO, yours is one of the wisest and best stated posts on any of these housing threads. I think everything you said is accurate and true.

It is not as if RE is a bad investment over the long-term. Those who bought years ago and didn’t extract any equity from their homes will still be in good shape when the bottom comes in.

Your post was great. Everyone should read it twice.