Housing Bear Growls

From BusinessWeek:
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. “

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41 Responses to Housing Bear Growls

  1. Anonymous says:

    Th housing Bubble is bursting.

    Boycott greedy sellers and starving realtors.

    Tell’em NO MAAS to ripoff prices.



  2. Anonymous says:

    40% – 50% reductions? That is absurd.

    The fact that everyone is talking about a bubble tells you that the bubble is over.

    This guy is just trying to squeeze a couple more bucks out of his bygone book.

  3. anon:

    Figuring that 5 years ago you could buy houses for half of what they go for now is absurd as well.

  4. grim says:

    While people are certainly talking about it, very few people actually believe it. Your comment is a perfect example of that.

    Second, your assessment of timing is flawed. The timeframe in which housing cycles plays out is quarters, or years, not months. During the 90’s we saw plenty of these false bottoms. For example:

    Bottom of the Housing Slump Is Seen in the New York Area
    Published: March 1, 1991

    The New York area’s housing slump may have finally hit bottom, or come close to it.

    Lenders say that in the last two months, during what is normally a winter lull, demand increased for mortgage loans. Brokers report a sudden surge in sales contracts and say that more people have been attending open houses in New York, New Jersey and Connecticut.
    (Great piece by the way, read it when you get a chance.)

    The real value of housing continued to fall for 6 more years after this piece.

    I’ll point you to an “Oldie but goodie” over at AngryBear.

    Housing: After the Boom

    Great analysis of 3 prior bubble bursts: Los Angeles, San Antonio, and Hartford.

    City/Real Decline/Years
    L.A. / 34% / 6.75
    San Antonio / 33% / 4
    Hartford / 39% / 6.5

    We’re hardly 3 quarters past what I called as peak for Northern NJ. Judging from prior cycles, it’s a bit premature to be calling bottom already.

    Caveat Emptor!

  5. Anonymous says:

    100% up in 5 years is absurd.
    1/2 a miillion for 55 year old
    2 bedroom 1 bath crap boxes is absurd.

    The Price plunge will start anyday now.

    Boycottt Houses RIPOFF!



  6. Anonymous says:

    Peak Summer 2005.

    Japanese housing market 9 months after peak barely trended lower…….BUT about 9 months past the peak the FLOOR FELL OUT for about 18-24 months. The Bulk of the drop occurred in this perod….of course it did grind lower for another several years afterwards.





  7. Anonymous says:


    Prices about to plunge.

    DO NOT RUSH IN IT TAKES at least 18 -24 months Past the peak to correct down.

    If you can’t afford using a rational loan you have to wait anyway.

    Go ahead buy with a NIGHTMARE LOAN you regret later. It’s not worth IT!

    bababababababa Boycott HOUSES



  8. Richie says:

    I was amazed at the huge number of open houses yesterday.

    It was even funnier seeing only one car in front of most of those houses.


  9. Anonymous says:

    When people say you should spend 1/3 of your income on housing, do they mean pre or post-tax?

    Also, are there any good rules-of-thumb to estimate upkeep costs for a house?

  10. Anonymous says:

    GSML Inventory going up EVERYDAY!
    And this does not include For sale by owner FSBO

    may 22 29,496

    may 18 29,260

    may 4 28,209

    April 12 26,582

    March 6 24,111

    Gluts of inventory continue to pile up. NO shortage of ripoff homes for sale.




  11. grim says:

    Can’t put my finger on why, but it certainly feels like today is going to be another Laphroig day.


  12. Metroplexual says:

    What I don’t get is I have seen this as a bubble since 2002. There are supposed to be alot of bright people in finance and economics who seemed to not see this. What the hell? I am no economics major only had 3 courses, but jeez. If I could see it happening and bankers didn’t, well I just don’t have much faith in the banking community.

  13. Anonymous says:

    to anonymous 8:10am:

    Banks used to qualify people using a 28/33 ratio – you could borrow 28% of your gross (pre-tax) income and only if overall debt did not exceed 33% of your gross income. Over the past several years banks have become way too lenient in their lending standards which is part of the bubble problem. When house prices start falling even more than they already are, banks will have to tighten their standards again. All of these exotic loan programs will shrivel up and go away when prices stabilize at a much lower level and the flippers move to another asset class to trade. (tulips perhaps?)

  14. Anonymous says:

    “..flippers move to another asset class to trade”

    Most of these flippers/spec. are going to get the scare of their life as housing prices plunge anyday now.

    Most of these wantabe RE moguls are going to find the dangers of leverage.

    BOYCOTT RIPOFF house prices



  15. grim says:

    India’s stocks recover after largest-ever fall

    MUMBAI (Reuters) – Indian police are watching out for possible suicides by brokers and investors after a steep market slide wiped out billions of dollars in share values, officials said on Monday.

    Indian shares clawed back to close nearly 4 percent lower on Monday, helped by buying from state-run mutual funds and financial institutions, after the biggest one-day points drop that halted trading for an hour.

    The 30-share benchmark BSE index closed provisionally at 10,536.79 points, or 3.67 percent down, its lowest closing since March 9.

    The Bombay Stock Exchange Ltd. and National Stock Exchange suspended trading for an hour after the market fell more than 10 percent at one point.

  16. Anonymous says:

    The Indian Stock Market has gone through what we went through in the late 90’s-2000. Lots of hype, without the revenue to support it.
    There are no Pets.com’s but there are many companies, especially the IT consultancies, which are way way overvalued.

    As for the real estate bubble we have today, there’s a bit of a difference from the early 90’s. There wasn’t the same level of national awareness of a real estate being overvalued back then, as there is today. The end result, I think, will be a faster collapse of this market than we’ve ever seen before.

  17. There wasn’t the same level of national awareness of a real estate being overvalued back then, as there is today. The end result, I think, will be a faster collapse of this market than we’ve ever seen before.

    I have to wholdheartdly agree, I bought in 89 without any idea at all of what was happening around me in the housing sector, All I saw was people making money and housing going higher, and I heard the buy now before you can’t get in crap that’s being dished out now. But the internet has changed all that. Even as an insider I don’t see what I see by turning to the internet. This information that I get on these boards has influenced my real estate decisions much more than what I see in my own little insider world.

  18. Anonymous says:









  19. Anonymous says:


    the other guideline was 2x or 2 1/2x your annual gross for the total maximum you could afford. It also was based on one salary which was a more conservative method.

    Based on that most people in this area should really be able to afford a $100K to $300K house, not $400-$800K.

    That doesn’t take into account a large down payment, other factors. This is why these ARMs, IOs are so bad for the market. They give a false sense of affordability.


  20. RentinginNJ says:

    What I don’t get is I have seen this as a bubble since 2002.

    First, most people in finance and economics have a vested interest in a strong economy and strong economic growth. You make money by selling stock or mortgages or brokering tulip bulb deals. There isn’t a whole lot of money of being a bear.

    Second, many people in economics or finance are afraid of a self-fulfilling prophecy. No one wants to create panic. After all, if you ask NAR, the real danger isn’t that houses are out-of-line with fundamentals, it’s that people are talking about a bubble. Many economists see it as their duty to keep their mouth shut, even if they privately believe there is a bubble. All of this talk of a “soft landing” by economist is less of a real prediction and more of an attempt to influence the future direction of the market.

  21. skep-tic says:

    “the other guideline was 2x or 2 1/2x your annual gross for the total maximum you could afford.”

    2x income has never been realistic in the NYC area. 4x is closer to reality (and a long way from where we are right now, which is about 8x median income)

  22. Anonymous says:

    History lesson:

    Job Hoppers Take Losses On Housing
    Published: March 28, 1990

    But now that fewer jobs are being created, demand has slackened throughout the region and brokers say prices have flattened or, in some instances, dropped as much as 30 percent.

    While that may be good news for potential buyers, a lack of optimism that values will rise soon prompts them to keep their price ranges conservative. Houses stay on the market months longer than before, and inventories of unsold homes have swelled.

    TALKING: Default Sales; Foreclosed Property Bargains
    Published: April 15, 1990

    A GROWING number of residential properties are being offered at below-market prices by lenders who have foreclosed on defaulting homeowners and troubled developers. The Dime Savings Bank of New York, for example, has 600 foreclosed homes available, and other banks also have large stocks of seized houses that they want to sell quickly.

    Most of these foreclosed properties can be obtained for 60 percent to 90 percent of what similar houses and apartments would bring in today’s market.




  23. Pat says:

    Anon 10:13:

    Information access does seem to be having a hastening effect on price drops this time around vs. ’80s.

    But I’m not sure about the assumption that there wasn’t the same level of national awareness back then that homes were overpriced. People got newspapers, and read the sales.

    There was awareness then as well.

    Maybe the difference has to do with the ratio of investors/landlords to owner/occupants 1985 vs.2005.

    Homes were filled with boomer families. Where were they going to run with all their kids?

  24. Anonymous says:

    More lessons.

    Home Buyers Holding Off Despite Low Interest Rates
    Published: October 27, 1991

    DESPITE a steep decline in interest rates that has brought fixed 30-year mortgage loans to below 9 percent for the first time since 1977, home buyers are holding back across most of the nation in what experts say are stubborn fears that job cuts and other recessionary pressures will persist.

    Elsewhere in the nation, home sales have declined steadily at the very time that interest rates have dropped most sharply.

    In This Buyers’ Market The Buyers Are Edgy
    Published: December 15, 1991

    Indeed, these are tense times for home buyers, brokers, builders and sellers. Sale prices in the Northeast, in defiance of the old “it-can-only-go-up” axiom, have been falling for two years, making many shoppers and new home owners wonder about the real worth of real estate.

    Babababa BOOOOYcoTT Houses


  25. Anonymous says:

    Earlier this month, David Lereah, chief economist for the National Association of Realtors, said the boom is winding down to an expansion, one in which 2006 is a ‘down year’ and 2007 will be up. ‘Where [Lereah] and I may differ is more on extremes. He calls ‘the bubble’ a balloon. But the next time a housing bubble slowly deflates will be the first time a housing bubble slowly deflates,’ said (economist) Joel Naroff.”

    “But if a buyer has read about a slowdown and thinks he can get the unit for $750,000, ‘they’ll offer $650,000,’ he said. ‘What we haven’t seen are the three most dangerous words in real estate: low-ball offer. Not yet. When a market turns and buyers have the upper hand, we see low-ball offers,’ Naroff said.”

    “Unlike Lereah, Naroff expects ’significant price cuts in some markets.’ Looking at West Palm Beach and other Southeast coastal markets, Naroff said many new condominium projects were targeted by speculators. ‘Those are areas that at first glance, run the potential for being under real pressure for the next six months,’ Naroff said.”

    Babababa Boycott Houses


  26. Anonymous says:

    “DESPITE a steep decline in interest rates that has brought fixed 30-year mortgage loans to below 9 percent for the first time since 1977, home buyers are holding back across most of the nation in what experts say are stubborn fears that job cuts and other recessionary pressures will persist.”

    So the bubble in the late 80’s was financed at fixed 30-year rates above 9%?? Amazing. Presumably in that historical climate fewer loans were ARMs and/or interest only than now. Which leads me to fear that the current bubble is much more out of control and the effects of its deflation on the overall economy will be much more catastrophic.

  27. Anonymous says:

    There were no such thing as OPTION ARMs in 1980’s. Most put down about 20% also.

    The current bubble is a leveraged disaster about to implode anyday now.



  28. Anonymous says:

    More Bubble History.


    Residential Real Estate Market Rebounds in New York Region
    Published: January 23, 1994

    After five years of slumping sales and plummeting prices, the residential real estate market in the New York region is starting to rebound, according to housing analysts.

    Though the recovery is not as robust as in other parts of the country, like the Southeast and the Rocky Mountain states, the precipitous slide that saw home values in the region plunge by double-digit rates in the late 1980’s and early 1990’s appears to be ending

    Prices have and will fall again .

    It’s happening now.



  29. UnRealtor says:

    “But I’m not sure about the assumption that there wasn’t the same level of national awareness back then [1980s] that homes were overpriced. People got newspapers, and read the sales.”

    Well, most newspapers today are still not writing that homes are over-priced. They’re about a year behind reality that’s been covered on the Internet.

    Also, sites like realtor.com, zillow.com, domania.com, etc, didn’t exist back then. Today on the Internet people can watch inventories climb and prices drop in real-time, with their own eyes. No need to filter information through a realtor, or a newspaper with huge home builder advertisers (e.g., Star Ledger).

  30. UnRealtor says:

    KL, you’re a good catch as a realtor — definitely rare.

  31. Anonymous says:

    “40% – 50% reductions? That is absurd.”

    These are inflation adjusted.

  32. Anonymous says:


    Not saying it makes sense for this area, but that was a financial planner rule of thumb in the past for what house price you could afford. On the other hand, many people in this area live beyond their means and get into trouble or skirt the edge of trouble.

    I think Chicago has written on the topic of what you really can afford versus what you think you can afford.


  33. Anonymous says:

    40% – 50% reductions? That is absurd.

    Inflation adjusted.

    House selling now for $500,000.
    In 5 years, with 5% annual inflation it should cost $638,000.

    I think the 40-50% reduction is calculated from the $638,000. 40% reduction would be $383,000.

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