When Will the Housing Slump End?

As I have been saying repeatedly, I believe that things in the housing market - and therefore the larger economy - are going to get much worse before any improvement begins to set in. Newsweek is reporting a similar view in this article (http://www.newsweek.com/id/68638) Here are some highlights:

At the height of the boom, author and former Wall Streeter John Talbott warned of the crisis to come. Unfortunately, his latest predictions aren't promising. Talbott is a former Goldman Sachs banker and economic consultant. He's also the author of two books that more or less foretold the pain homeowners are now experiencing. "When I turn on the news, it's as if they're reading out of my books, but in real time," says Talbott, who in 2003 wrote "The Coming Crash in the Housing Market: 10 Things You Can Do Now to Protect Your Most Valuable Investment."

Talbott began writing that book, he told me last week, after hearing that a friend—a teacher in San Diego who earned $45,000 a year—had just refinanced his condominium and borrowed $255,000 against its rising value. From his days as a Wall Street financier, Talbott questioned whether someone with that income could handle such a large mortgage. His friend's experience led him to begin exploring how home prices had risen and lending practices had changed over the last few years. Most of all, he concluded that homes were overvalued.

Near the back of "Sell Now!" is a chart listing the metro areas Talbott believes are most likely to decline sharply. I read the chart with particular interest: my own home is located partway between Boston (no. 19, where Talbott believes home values are destined to fall 49 percent) and Worcester, Mass. (no. 26, with a predicted fall of 44 percent). If Talbott's predictions are accurate, my neighbors and I are in for a world of hurt.

Talbott believes we're still near the beginning of a five-to-seven-year cycle in which home values will fall back to the levels of 1997, when banks and mortgage lenders began letting so many Americans take out so many kooky home loans, which were the primary fuel for the boom. He also expresses surprise that the continuing stream of bad news from the housing market hasn't taken more of a toll on the stock market. Over time, it will.

Recently a congressional subcommittee predicted that the subprime mortgage crisis will result in 2 million foreclosures over the next few years. Talbott wonders if people really understand the magnitude of the suffering that will cause. "When people talk about 2 or 3 million people losing their homes, that makes Hurricane Katrina look like small potatoes," he says. "[And] this is spread out over the whole country."

If Talbott is even remotely correct, the financial pain is going to be extreme and many homeowners will find themselves with mortgage debt far above the value of their homes. Obviously, consumer confidence will go through the floor as that trend sets in.