By Scott Ronalds

This week we look back to the summer of 2006. The U.S. housing market was at a turning point. The consensus view was that it would be a soft landing. Tom disagreed. Four years later, prices are still down 40-50% from their peaks in some markets. Indisputably, the consensus was wrong on this one.

An Orderly Decline of the Housing Market? Not.
Originally posted on June 22, 2006
By Tom Bradley

It is pretty much conventional wisdom that the housing cycle in the U.S. is going to turn down. The fundamentals point that way and there are now signs of a slowdown. The consensus amongst the analysts, however, it that it will be a soft landing, with only a modest impact on the U.S. economy. That consensus points to a scenario whereby prices will stabilize or decline modestly from current levels and sales and building activity will also pull back. The Chairman of the Federal Reserve, Ben Bernanke, summed it up recently when he was quoted as saying that "it looks to be a very orderly and moderate kind of cooling at this point."

I'm inclined to think the consensus will be wrong on this one. It almost always is wrong at major turning points when a trend has been going on for a long time. I think this cycle is going to end badly and take a long time to find a bottom. I can support my view with lots of charts and statistics, but it is the 30,000 foot view that is most important here. The view is this. (1) The housing industry has been pushed upwards by one of the biggest tailwinds of all time - declining interest rates, unprecedented availability and use of credit, reasonable building costs, robust job growth, positive demographics/ immigration...the list goes on. The problem is, many of these positives are turning into headwinds now. (2) Any chart you look at is at an extreme. This up-cycle has gone beyond where we've ever been before. (3) Long cycles that have gone to extremes always require a long recovery period and never end in an orderly manner. The longer the cycle, the longer the retrenchment. The more extreme the cycle, the more bad stuff that comes out of the wood work during that retrenchment. In the case of this cycle, the bad stuff could be the amount of speculation and financial leverage in the system and/or the amount of inventory that needs to be chewed through.

I thought the U.S. housing boom would have ended a couple of years ago. I've been wrong on that. But by going on longer and climbing to greater heights than many of us expected, it has made a long and ugly retrenchment all the more likely.