In their evaluation of the financial health of US banks, Treasury is making certain assumptions about the future of the economy, including real estate values. They are applying two scenarios. The baseline "consensus" scenario envisions real estate values will fall 14% this year. Considering values fell 18% YoY in January, that assumption says that the rate of decline will flatten out and decrease before the end of the year. The more pessimistic scenario assumes a 22% drop, which means the rate of decline would actually accelerate downward from the January numbers (yikes!). Deceleration would probably not happen until late 2009 or early 2010. Who knows when we would reach the point of flat or increasing values? (mid- to late-2010, is my guess)
Think about that: if we are going to average a 22% drop in real estate values for the year and we are currently at 18%, then there will have to be some months this year when real estate falls more than 22% YoY. To put that number in perspective, the highest monthly increase that Shiller has recorded since 1987 was just over 20% (late 2004). The biggest decrease was a little over 6%, recorded in 1991. We are in an era of unprecedented volatility. To put it another way, the expected annual decrease in real estate values in this scenario is more than the average down payment on a home, which means that Treasury is predicting in this scenario that most people who bought a home in 2008 will be underwater in 2009. Hello, foreclosure spike!
I guess the good news is that if Treasury is right, we will reach bottom a lot faster than we reached the peak. Gotta find a silver lining somewhere.
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