Ten signs of a real estate apocalypse

By Sara Clemence

updated 3:42 p.m. ET March 21, 2006

NEW YORK - If California slid into the sea, would it take the U.S. housing market with it?

After a few years of real estate boom, which spread dramatically higher prices to many (though not all) parts of the U.S., the market has recently seemed to change course. On Thursday, the U.S. Census Bureau reported that housing starts were down 7.9 percent from January to February and had declined 4.8 percent from February 2005, indicating less demand for new construction. That came three days after the National Association of Realtors predicted that this year would bring "a more level playing field for buyers and sellers on the heels of a five-year sellers market."

This won't be a crash, but a soft landing for the real estate market, it appears. But that made us wonder: What would it take to make things really go off the rails?

War, pestilence and natural disaster have always been bad news for human civilization; that would seem to suggest that they are bad for home sales as well. While conflagrations like World War II and economic declines like the Depression are rare, they do happen — as do lesser versions of conflict and crisis.

We talked to a number of experts about hypothetical events that could send the U.S. real estate market into a skid, from highly unlikely scenarios such as a military confrontation with China, to the types of predicaments we have faced in recent years, like natural disasters and terrorist attacks.

Turns out, there are lots of ways to hit the housing market.

"Prices will certainly plummet if we have significant loss of house buying power," says James W. Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University.

Higher interest rates that make mortgages more expensive, an employment decline that results in loss of income, or an increase in the costs of other goods (think oil) can all divert money from real estate.

"Anything that throws the economy into recession will throw the real estate market into recession," says Susan M. Wachter, professor of real estate, finance and city and regional planning at the Wharton School of the University of Pennsylvania.

A truly dramatic plunge in the real estate market could be precipitated by a crisis, whether economic, natural or, as in the case of war, man-made, that lasted.

"It's the long-term impact stuff we have to worry about," says Delores Conway, director of the Casden Real Estate Economics Forecast at the University of Southern California Lusk Center for Real Estate. An earthquake may be devastating, but if it only lasts a day the market can recover. A prolonged economic crisis can have a far more profound effect.

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