The Growl of a Housing Bear
“John Talbott warned that home prices were ready to fall back in 2003, when he wrote the best-seller The Coming Crash in the Housing Market (McGraw-Hill). A former Goldman Sachs (GS ) investment banker who sold debt for clients including Fannie Mae (FNM ), Talbott criticized the managements of the housing-finance giant and rival Freddie Mac (FRE ) for enabling noncompetitive forces to boost home prices. In this year’s followup Sell Now! The End of the Housing Bubble (St. Martin’s Griffin), Talbott’s take is: “We are in for a fairly rough ride in the housing market for the next five to seven years.””
“What do you think is happening to the housing market right now?
The smart money is getting out. The inventory of homes for sale is increasing dramatically across the country. That’s typically what happens before you see price declines…. The investors who are flipping homes for profit, like non-owner occupied condominiums, those are the people you would expect to sell first. You’re already seeing that happening.”
“How much do you think prices will decline, and how long do you think it will take?
I think that it’s a worldwide phenomenon, and in the 25 cities that have had price run-ups, which make up 40% of the market, we’ll see corrections of 40% to 50% in real terms over the next six years. It has already started, and you’ll see it happening in more cities in the May-June time frame.”
“How did housing prices get so high?
The banks have made a terrible mistake in how they calculate how much to lend. In the early 1980s, about a third of your income had to go to your mortgage and those worked out fine. Today, they’ve increased that limit to about 40% of your income, and they think those should work out fine, too. But the banks have actually been lending too aggressively.”
“We’re seeing hints about the housing market all over the place. When and how do we know what’s really happening to it?
Because of the cyclicality of the business, prices have been down in most places four months in a row. Most cities have seen slight declines in December, January, February, and March. What typically happens is when the weather warms up in spring, people want to move their children during the summer before school starts. The buyers start to come out and then prices start to shoot up in May and June. Those are the two key months. The question is what happens in May and June. Will there be a flood of for sale signs — people trying to get out at the peak? Or will buyers return to the market?”
“What role does the Federal Reserve play?
The Fed messed this up. They had a bad situation with the Internet bubble in 1999 and 2000, and to keep that from turning into a recession they lowered the federal funds rate down to 1% and held it there for four years. That created this real estate bubble. “