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Marketplace
Ask Money

Prediction: Home prices fall 20%

Scott Jagow Apr 5, 2007
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TEXT OF INTERVIEW

SCOTT JAGOW: Ah, it’s springtime. The flowers are blooming, lawns are turning green. This is when people love to sell their homes. But this spring could be a bit of a downer ’cause prices might start tumbling down. Our economics correspondent Chris Farrell is with us. Chris, what do you think’s gonna happen?

CHRIS FARRELL: I think part of what’s going to happen is just a realization. There’s still this sense of, ‘OK maybe I should cut my price a little bit but I’m gonna try and put it out there and see what happens.’ I also think that Bill Gross, he’s the legendary bond manager at PIMCO, the Warren Buffett of Bonds, came up with a pretty interesting calculation about how far home prices could fall. If you take 2003, you know the market was reasonably price. I mean, yeah it had been up, but driven by the fundamentals of lower interest rates, demographics, but boy it really went off the Richter Scale, all the speculation in 2004, 2005. So all we’re talking about is getting back to the 2003 level. But that suggests, at current interest rates, home prices will fall over some period of time by about 20 percent.

JAGOW: Twenty percent?

FARRELL: Twenty percent. Now, if interest rates decline, alright, it might not be that big a decline.

JAGOW: So you think that this spring, when a lot of people usually sell their homes, it’s going to smack them in the face that hey, there are a lot of homes on the market and nobody’s buying.

FARRELL: I really do see that what’s going to happen is the stories get out about ‘oh you know prices are going lower’ and ‘this condo’s not selling’ and ‘that townhouse is not selling’ and ‘prices are coming down.’ And just as you had a conversation as prices were skyrocketing, you get the reverse conversation. And so I think a lot of homebuyers are going to sit back and say, ‘hmmm, you know I think it’s too early for me to come into the market, I want some more realistic pricing.’

JAGOW: And then you think that after the prices start to fall, the Fed may step in and cut interest rates?

FARRELL: That’s what I think is going to happen. I mean, look, despite all their talking about inflation, they well know come spring or after the spring and when they look at that home-buying season and look at what’s happening to prices, the Fed’s gonna cut.

JAGOW: Alright, I’ll hold you to that.

FARRELL: I know you will, I know you will. You write these things down

JAGOW: That’s right, thanks Chris.

FARRELL: Thanks a lot.

JAGOW: That’s our economics correspondent Chris Farrell.

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