Housing plunge: The worst is yet to come

Thanks to commenter sailor7x for calling attention to the housing analysis at MoneyandMarkets.com of Martin D. Weiss, PhD, founder and president of Weiss Research Inc. and an expert on domestic and international financial markets with more than 35 years of experience.

... everything I see tells me that, despite the sharp declines already recorded, a steeper plunge in home values is dead ahead.

The reason: So far, most of the troubles in the housing market have been caused by bad mortgages going sour. Meanwhile,

-- the more common causes of housing slumps — high interest rates, rising unemployment, and recession — are just starting to kick in. And …

-- the most powerful causes — depression and deflation — are still on the horizon.

In the boom leading up to the Great Depression of the 1930s, most Americans did not borrow money to buy a home. Variable rate mortgages didn’t exist. And Wall Street investors rarely got involved in the business of financing homes. Home prices did fall dramatically. But those price declines came mostly after the stock market crashed, after the economy shrunk and after millions of workers had lost their jobs.

The crux of the problem today: That phase of the housing crisis still lies ahead.

Is Weiss too doom and gloom? Or on target?

-- Lauren Beale

Thoughts? Comments?

Photo: People gather across the street from the New York Stock Exchange in New York on Oct. 24, 1929. Thousands of investors lost their savings in the stock market crash on Oct. 29, 1929, after a five-day frenzy of heavy trading. The Great Depression followed. Credit: Associated Press

Comments

[happy for obama]

it's hard to tell "how" bad exactly this is going to get...but what is certain is this recession will be a long one....

[k2polo]

AS a realtor in Riverside county, Palm Springs area, I see amazing things. No, the prices are not done dropping. However, the homes priced under $200,000 that are in great shape, great location, being sold by banks are being snapped up..and believe it or not, some by realtors/investors who are "flipping them!" I think the prices to tank next will be in the over $500,000 prices down here..people bought on golf courses as a vacation home and those loans are coming due or the mortgages just do not support the huge decline in value. Watch out for falling prices this season..most of my Buyers are watching and waiting...

[Jeff S]

The breaking of a mega-bubble never ends in a spectacular fashion. It ends much longer and deeper than even the pessimists expect especially in time.

It isn't until the general populace loses interest and doesn't pay attention anymore that prices can start to rise. It happened in emerging market equities, in Japanese land, the US depression, etc.

When this blog is ignored and land is no longer viewed as a speculative vehicle to time then the bubble will have finally deflated and the new one will start.

I would say we are still many years away. Almost every day I think about buying but know it is a futile endeavor.

[mike]

this is the kind of hype that hurts and does not help. how about a blog on how many homeowners nationwide still own houses on regular mortatges and have not fallen victim to predatory lending practices????

[Nelcisco]

If doom and gloom wakes people up to whats ahead so be it, Weiss on target unfortuneatly.

[John McLeod]

I've learned that it's a good idea to take the M&M gang seriously, especially when they are freaking out about something obscure.

Very early on, August 11, 2006, Dr. Weiss' partner Mike Larsen was furiously ringing alarm bells over this:

"Fremont released a dreadful earnings report rife with evidence of credit problems among its subprime borrowers."

Would it have been we should have paid more attention to these guys then!

Here's what I posted at the time (complete with caveat suggesting I thought Mike was too worried)

http://housingdoom.com/2006/08/14/alt-a-surge/

[qwerty007]

No, he's on target. This is a given, and I think will overshadow the Alt-A and Option ARM resets next year. Notwithstanding, many homes are still "unaffordable".

[Tim]

Think about this. After we reach the bottom there will be thousands of people hopelessly under water. Now, when they realize that it will be years and years before they break even they will walk away. It is like a huge reset button. Will all the bailouts, workouts, and modifications the feeling will be to walk unless you get what you think is a fair deal. The easy come house buyer will become the easy go renter.

[Madashell]

Down and out in Beverly Hills - Bring on the pain! It's time for the greedy to be punished and the sinners to be purified by fire. Seriously, let's stick a fork in this bubble once and for all and let the puss out so the infection can be treated.

[MyLessThanPrimeBeef]

When you factor in the death of Bretton Woods 2 and the coming shift away from the dollar, he should be considered as being too optimistic.

I imagaine the Internationalists, the Globalists amongst us have contemplated a world currency issued by the UN.

[356man]

Unforunately I think Weiss is on target. The worst is yet to come. Unemployment/underemployment is going to increase, and now we just passed a tax hike!

[Rhea]

On target. There are more mortgage rate resets on the horizon, as well as more companies laying off people and going bankrupt. The ripple effects will be enormous.

[dclogang]

Mike wrote:
"this is the kind of hype that hurts and does not help. how about a blog on how many homeowners nationwide still own houses on regular mortatges and have not fallen victim to predatory lending practices????"

Um... this is laughable..

First lets define the word "Hype" from Dictionary.com:

HYPE:
1. Excessive publicity and the ensuing commotion: the hype surrounding the murder trial.
2. Exaggerated or extravagant claims made especially in advertising or promotional material: "It is pure hype, a gigantic PR job" Saturday Review.
3. An advertising or promotional ploy: "Some restaurant owners in town are cooking up a $75,000 hype to promote New York as 'Restaurant City, U.S.A.'" New York.

And my favorite which really applies to the mortgage mess...

4. Something deliberately misleading; a deception:

Second:

What WAS hype was lenders Real estate agents and speculators all saying.. Housing will only continue to rise.
What a bunch of bologna!

Third:

What is happening now and what is being reported in the news and on this blog about the housing market and world economy is NOT HYPE. It is actually happening and it's hurting a lot of people and it is going to get worse
whether or not it is talked about..

We'll just have to wait till all the bad stuff is out of the system and then everything will go back to normal and hopefully will more regulation and punishment will be implemented.

It will take a number of years for sure and that's no hype!

[tew]

This time will be different. The government is committed to keeping asset prices, particularly home prices, inflated to continue the flow of consumption and consumer debt payment. The government will ramp up spending to support home prices - additional tax breaks, direct subsidies, mortgage insurance, you name it. The net result will be staggering requirements for government borrowing payable by an increasingly narrow taxpayer base. Further dollar devaluation will also help mask asset price declines.

[CompaJD]

Doom and Gloom is not the word. The housing market here in California will not recover for a decade. It's all psychological now. How long can people keep thinking their 700sqft house is still worth over 400K. I predict at least another 100K price drop in median home sale prices over the next year.

[Mary]

IT'S THE AFFORDABILITY STUPID!!!

The problem isn't falling prices, the problem is that housing prices got WAYYY too high, due to the fraud and greed inherent in the biggest ponzi scheme the world has ever seen.

It is simply INSANE that Congress and the FED is trying to keep prices at completely artificially high levels and think that solves the problem.

Prices have to fall back into line with their historical relationship to wage and rent fundamentals or this will drag out painfully for years.

LET PRICES FALL, and allow people with good credit and money to establish a solid foundation of future homeowners.

[aldo818]

It does seem bit too pessimistic to me. But not by a whole lot.

I agree that home prices will continue to drop for the same reasons that Weiss gives. I just think that this economy is much too different to drop as much as he seems to be insinuating (sp?). Also, every market is different. I think that LA county will be hit harder than those areas where ARMs were not sold as much.
The picture he paints almost seems like armageddon doesn't it? So far, unemployment hasn't really soared either. I kinda expected it to be around 8% by now but it seems to be holding on at 6.1%

[anonymous]

We live in a global economy. We are not isolationist. Given that, I think with the Obama win we are in for a slow recovery. If McCain had won, I'd agree with the remark about a depression.

My bet is still a bottom next summer.

[anonymous]

The Fed this time is back to 1% yet mortgage rates aren’t responding. Why? Because they are actually operating in reality now. They are now checking income and guess what? Folks don’t have the cash. Even with modest 10% down payments the market has come to a screeching halt. Think about it. The median household income in California is slightly over $60,000 yet the median price is $285,000. They would need $28,500 saved up to purchase a home. Given that after taxes a family making $60,000 a year is pulling in $3,500 to $4,000 tops a month, they would need to save $2,375 a month for one year or $1,187 for two years. Given this economy do you think people have that disposable income?

Even if folks start today (good luck with our negative savings rate) they would have enough in maybe 3 years. At that rate they would need to save $797 a month to have the downpayment. That is more doable. This is how people bought homes in the past. We are going to have to learn to do it that way once again. At the earliest, we won’t see a bottom until 2011.

[Galt]

"Californians Voting with Their Feet"

http://www.city-journal.org/2008/eon1023lm.html

Outward migration will drive CA housing demand down further reducing home values more. How can CA dig its way out of this without big changes in its expensive state government?

[coakl]

Any attempt at a bailout to prop up housing or consumer spending will fail. You can't rebuild the economy on top of quicksand.

The bottom line is that this bubble needs to be deflated, no matter the level of pain and suffering this will require. We need more foreclosures, not fewer. We need Americans to rethink their wild spending habits and learn to save. In this respect, the credit crunch is a blessing: if you can't control yourselves, then the reduction of HELOC and credit card limits will do the job for you.

Given that that this bubble enjoyed six years of happy growth, we're likely in for six years of deep recession.

[OzAl]

On target but will be MUCH bigger.
When over/bottom. Who knows-can't be
predicted. To many variables.
The more PTB try to fix, the longer it'll last.
Their the same crowd that didn't see this coming.
New change in word perception..
Savvy = Stupid

[Jane Quatam]

A single match didn't start this fire. To try to lay a single factor to blame this broken economy on is very difficult and usually inaccurate. There were many things done badly, sometimes illegally, sometimes stupidly, and sometimes all 3.

Factors people should try to understand, are deregulation and lack of oversight on financial institutions, the gutting of Glass-Steigall , the manipulation of markets by speculators, the gutting of american manufacturing and the collapse of the middle class. The onerous debt burden created by an unregulated credit card industry and the collapsing earning power of the middle class, combined with inflation in housing and energy during a time of stagnant wage growth, only helped to magnify and accelerate the crash.

The aging of the baby-boomers changing the demographics of investment and home ownership should be considered influences as well.

Whilst a single or even several of these situations could most likely have been overcome, the relentless onslaught of so many diverse and yet intertwined actions along with the general attempt by both the media and those in government and business to ignore or even hide the evidence of such problems, meant that they would become enormous and out of control rapidly.

A week before the 750 billion dollar wall street bailout, Bush Bernake and Paulson were all singing the "economy is in great shape and we're just going through a little rough patch" - were they liars or just ignorant? You judge....

[sailor7x]

HEY TEW!

The government isn't going to save the market! The banks are not going to save the homeowners. JP Morgan, Chase and Bank of America are not going to re-work hundreds of thousands of mortgages. It would take hundreds of years to sit down and re-work all of the mortgages that are infected. Yes, I said infected. It's an infection, and there is no easy cure. For many, this infection will kill the patient. Homeowners will lose their homes and homeowners will walk away from mortgages. There are several issues the article fails to address properly . . . (1) prices are much lower than what the banks want to admit, (2) prices are still falling, (3) unemployment is rising, (4) rents are falling, (5) down payments to buy a home now require 20%, (6) mortgages are packaged up to the point where for most of them it is difficult to determine who owns the mortgage and who has the right to re-work it. And finally, dealing with millions of homeowners and their attorneys and the bankers, is a recipe for disaster.

[Caylin]

I agree with Galt, Californian's has a serious problem with outward migration that's only going to get worse.

I don't see a lot of optimism in California anymore. The grass is looking greener in other states, I totally get why people wouldn't want to buying a house now and committing themselves to stay in the state for another 5-10 years. Renting gives you more options.