The Five Stages of Bubble-osity

THE FIVE STAGES OF BUBBLE-OSITY….Here in paradise, the housing boom is over:

Southern California home sales fell to their lowest level in nine years last month as price appreciation continued to decelerate, data released Tuesday showed.

….The figures could rev up the debate over whether the Southland’s housing market will be able to navigate a “soft landing” that produces only moderate price declines, or face a brutal correction.

….At the very least, “current trends suggest that the market is heading into a lull,” DataQuick analyst Andrew LePage said.

This “soft landing” stuff is all the rage lately, and it reminds of nothing so much as Elisabeth K?bler-Ross’s five stages of grief. It goes something like this:

  1. We’re not in a bubble. Prices are just recovering from years of underappreciation.

  2. It’s a bubble, but it’s a sustainable bubble because the fundamentals of the market have changed in the past decade. People need to recognize this. (Note: this stage is usually recognizable by an explosion in the popularity of increasingly desperate and bizarre financing options.)

  3. Yes, growth is slowing, but we think we’ll navigate a soft landing. It’s absurd to think that housing in [fill in area where you live] will actually lose value.

  4. This is a disaster! Somebody better step in and do something! People are losing their life savings!

  5. Buyers have learned a permanent lesson this time. Homeowners need to accept the reality that the bubble of the past five years was a one-time fluke and we’ll never see it happen again.

The same psychology that keeps prices rising during a bubble also mercilessly drives them down when the bubble is over. After all, who wants to buy a house if it’s not going to appreciate? We should expect bumpy weather ahead.

UPDATE: I know that making predictions is stupid, but here’s mine anyway: home prices in Southern California will drop 10-20% and bottom out in 2008, after which they’ll start to rise again.