The Ratchet Theory of Real Estate

January 21, 2009 at 9:38 pm | Posted in General, Rants | Leave a comment

A friend once said in 2005 that real estate prices, especially in California, would never go down a lot, since a “ratchet effect” would make homeowners stay in their homes rather than sell at a loss. The latest report from the California real estate market has home prices down 38% year-over-year and 49% during the last 20 months – people were losing 2.5% a month in home value. I believed that prices in 2005 could only be maintained by an appropriate rise in income, and that wasn’t happening. With the market collapse, tight credit, and rising unemployment, it will only get worse this year.

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