“Where we've seen serious price declines in the past, they have always involved really serious problems in the job market and outmigration,” Seiders says, recalling the collapse of Houston's oil industry in the late 1980s, and its housing market shortly thereafter.
Hopkins—who believes some local markets could see 10 percent price corrections—says a positive employment picture could keep prices flat, rather than negative. “The areas that are overpriced are still places where people want to go. That will keep demand high,” he says.
But job growth isn't the only variable in this equation. The other wild card: interest rates. Retsinas says severe job losses and a quick spike in interest rates could alter all projections for a gradual, mild housing slowdown.
Led by Greenspan, the Fed pushed short rates up 125 basis points last year, but mortgage rates didn't respond as expected. Rates for 30-year, fixed loans refused to budge much above 5.75 percent, while one-year, adjustable-rate mortgages hovered close to 4 percent. Economists revised their rate projections downward slightly, but they still expect rates to rise throughout 2005.
Just how far up they go may determine how far prices drop, says Mark Zandi, chief economist of Economy.com. “In highly overpriced markets [he includes Boston and San Diego in the group], if the fixed rate rises to 6.5 percent to 7 percent, we will get flat prices or modest declines. If the rate hits 8 percent or 8.5 percent, we may see 10 percent to 15 percent price declines in some markets,” he says.
Hopkins says a gradual uptick is important. As rates rise slowly, buyers can incorporate those changes into their plans and adjust their budgets accordingly, he says.
Builders are sensitive to changes buyers may make based on rate changes. “Interest rates dictate what size home people buy,” Landon says. If rates move up, his company might consider offering smaller square-footage home plans. “It's all about keeping the monthly payment in the area that people can afford,” he says.
Whatever happens to home values in the near term, it isn't bad news for homeowners who bought during the frenzy—if they're planning to stay a while. Thanks to that frenzy, buyers who purchased their homes more than a year ago have “equity buffers in their homes adequate to withstand any price decline other than a very deep one,” Greenspan said in his speech to America's Community Bankers.
The number of speculators aside, Hop-kins says, most people buy houses for different reasons than they buy stocks; they're in it for the long run. “If you're planning to be there for some time, you probably are more willing to ride out a decrease in prices,” he says. “A short-term downturn in prices isn't catastrophic.”