Housing

OK, I'll admit that I've predicted 12 of the last 3 housing corrections so my track record may seem a bit alarmist. As such I've restrained from commenting on the latest news until now. Last week, when New Century was imploding, analysts were all saying that the sub-prime market may be in a bit of trouble, but everything else is fine. I didn't, and don't see how that could be so - it's not like sub-primes are the only mortgages that are on properties whose prices have risen meteorically over the last few years. Prime borrowers can get themselves under water as easily as sub-prime borrowers can if they extend themselves enough. Where is this going? Guess:

Most economic forecasters in a new WSJ.com survey believe recent turmoil in the subprime mortgage market is likely to spread to the broader mortgage market and they expect a widely followed index of home prices to fall this year. But they still think the U.S. will avoid a recession and even a significant rise in unemployment.

It's a depressingly familiar story that appears again and again in (bad) crisis PR: minimize the problems until they pass you by. In this case, it goes like this, "The sub-prime market is toast, but the prime market will be fine. Whoops, what I meant to say is that the sub-prime market is toast, the prime market is toast, but you know what, spending is fine, we won't go into recession. Whoops again, what I meant to say is that of course the implosion in the housing market pushed the country into recession, after all housing appreciation was the engine that drove consumer spending. Once that dried up, where was the spending going to come from? What were you thinking listening to us?"

And here's why I think it'll happen: Banks have been too loose in their lending (knowing that they can sell many of the mortgages on the open market) and as these loans start to go bad they will tighten lending requirements. Being human, they will over correct the other way and dry up the mortgage market. If people can't buy, then people can't sell. If people can't sell, they are stuck in a house where they've (likely) extended themselves though equity lines of credit or they had anticipated moving on before the term on their ARM expires. If they get stuck, they're screwed. If they're screwed, they aren't going to spend any money. If they aren't spending any money, the economy tanks.

I also think it will happen much more quickly than people think. Recession by Q3 2007. Bank on it. I've called 28 of the last 6 of those.