Housing Bubble Analysis: Interview with Global Economic Trend Analysis (Mish)

is a no nonsense blog that features Mish's insights on everything from housing and the global economy to interest rates and policy decisions. Mish recently sat down with us to share his thoughts on the past, present, and future of housing.

Thanks for joining us Mish. When did you first become interested in the housing market?

I started watching housing as a bubble phenomenon in 2003 or so. Housing was clearly in a bubble already but that bubble soared exponentially in 2004 and 2005. I was lucky to have called the precise top in the summer of 2005. I did so on the basis of the cover of Time Magazine 'Home $weet Home'. The subtitle was 'Why we are gaga over real estate'
I looked at that and said 'That's it'. At the time people were camping out overnight in Florida for a chance to buy a condo. Prices were rising every day. That was another key signal. When things get that nuts there are no buyers left.
Here is an interesting picture that I created, overlaying my thoughts on top of a chart of Japanese land prices. Each arrow was put out real time. The hardest arrow was the first one. It seemed like a top was coming but it was not confirmed until much later although I was sure I was right that summer. I have not updated the chart for a while now

Have you ever seen a U.S. bubble that is comparable to this one?

There has never been a housing bubble in the US as big as this one, on a national scale. Perhaps some international bubbles have been as big. Vancouver Canada is going to implode like Florida did. Spain and the UK are huge problem areas right now. The bubble in Japan was arguably bigger and it took 18 years to unwind.

What are the three biggest reasons why we ended up in this mess, and is there anything we can do to reverse the damage that has been done?

We ended up in this mess because of bad policies from Congress, bad policies from this administration, and bad policies from the Fed, all compounded by consumer greed. That is a toxic mix. Starting with Congress we have had policies that encouraged housing via tax breaks. That is a violation of sound free market policies. We had the creation of Fannie Mae. There were 300 some odd programs to make housing affordable.
Well, guess what happens when you go pushing houses on everyone and handing out tax breaks? Prices go up. The more programs that were created to make housing affordable the higher prices went. Illinois Governor Rod Blagojevich went off the deep end with a program guaranteeing mortgage loans for illegal aliens. The peak of insanity was when Alphonso Jackson, Housing and Urban Development Secretary actually went so far as to send this message to private sub-prime lenders: 'I am absolutely emphatic about winning back our share of the market that has slipped away to subprime lenders.' Look at the insanity. Government was talking about winning market share from the private sector on housing.
Then of course we have Bush's Ownership Policy making renters feel like second class citizens. Government has no business promoting one form of housing over another. The Fed's role in this was slashing interest rates to 1 percent in an inane attempt to prevent deflation in the aftermath of the last recession. At the same time Greenspan openly endorsed ARMs right at the bottom of interest rate yields. Greenspan is a man who was wrong at every major turn. History will not treat him kindly. The role of consumer greed should be obvious.

How long will it be before housing finally hits bottom? And where will prices decline the most?

It took Japan 18 years to hit bottom. I suspect it will take at least 5 to 7 here and 5 is very optimistic. It could easily take 10 years or more. My best guess is 7 but it all depends on what the Fed does to fight it. Ironically enough, the more the Fed fights it the longer it will take. That is what happened in Japan and it will likely happen here. Prices will decline most in the bubble areas: California, Florida, Phoenix, Las Vegas, Boston. Some of the rust belt states where masses of jobs were lost will also get hit hard. The process has already started. Florida is a disaster already: ground zero of bubble busting.

Could states like California and Florida be pushed into a recession because of the price drops?

Of course. The entire country is headed into a recession. Here is a chart I put together on housing and recessions
The thing to keep in mind is that housing permits lead housing starts. Housing starts provide jobs. The rest of the economy is showing severe signs of stress already with the latest GDP at 0.6 percent. Look at all the jobs associated with housing: carpenters, brick layers, appliance manufacturing, shipping, lighting, grass seed, trucking of everything to the new house, furniture, etc. How can it not have an impact?

You mentioned in a recent interview that the peak for sub-prime ARMS re-setting is going to be in November of this year. How do you think that will affect foreclosure rates, and in turn, the housing market?

Yes. Treasury rates have barely budged. In fact they are inching up. It is already too late for 430,000 people. That is how many foreclosures we have had in the first quarter alone according to RealtyTrac. Also remember that credit standards are getting tighter on top of this all. And finally some will be unable to refinance because they are too far underwater. When banks take bank property in foreclosures they will dump those houses on the market. That will further depress prices.

What do you think about the proposed sub-prime bailouts? Will they help or cost more money than they are worth?

Government intervention is one of the causes of the housing bubble. It is axiomatic that the problem cannot be the solution. Note that Congress acted too late anyway.
Government always does. The market already imposed its solution to runaway credit and ridiculous lending standards: the market's solution was a subprime lending blowup and forced tightening of lending standards. If the free market is given a chance to work it will. Bear in mind some will say the free market caused this reckless expansion of credit in the first place and government is needed to clean it up. That is ass backwards. Remember my answer to what caused the problem? It was government intervention compounded by the Fed that allowed subprime lenders to wreck havoc.

What else could the government do to ease the pain of the market correction?

The best thing for Congress to do at this point is nothing. They will only make the problem worse.

Do you have any advice for investors and would be buyers hoping to make a buck off the housing debacle?

Well it's obviously too late to short many of the subprime lenders that have now gone bankrupt. I think the best advice here is to not get too cute. We are still relatively early in the debacle. There are no tremendous bargains out there (especially for novices) to be thinking of snatching properties at foreclosure auctions. The people that buy now looking for bargains are simply too early. Inventory is still building, the economy is slowing, and we are headed into a recession. I would caution the real estate buyer to be patient. Better opportunities will come down the road

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