U.S. Homeowners Will Lose Up to $10 Trillion, Talbott Estimates Interview by James Pressley http://www.bloomberg.com/apps/news?pid=20601088&sid=ahOc6ZN_3HE0&refer=home Feb. 12 (Bloomberg) -- John R. Talbott, a former Goldman Sachs banker, calls himself both an optimist and a realist. When it comes to U.S. housing, the realist has the upper hand. His new book, âContagion,â predicts that prices are only halfway through a potential decline that will see homeowners lose up to $10 trillion. Values will fall for four to five more years, he says, as defaults move from subprime to prime mortgages. When I reviewed the book last week, some readers called the author courageous. Others accused him of being a doomsayer. I put their questions to Talbott, 54, in a telephone interview. Pressley: Are you spreading doom and gloom? Talbott: While Iâve been an optimist all my life, Iâm also a realist. And for the past five or six years, Iâve been painting a fairly ugly story about how bad this might get. Pressley: One reader suggested that youâre understating the price decline. He says homes that fetched $225,000 to $275,000 in Lee County, Florida, three years ago now sell for about $40,000, which he calls 1970 to 1980 prices. Talbott: He makes a good point. The national average of home prices is already off 23 percent to 24 percent. But realize that this is an average and that the epicenter is primarily in California and Florida, with Phoenix and Las Vegas thrown in. You are going to see areas that are off at least 50 percent and I wouldnât be shocked to find cities that are off 60 to 65 percent. Back to 1997 Pressley: You say real prices should return to average 1997 levels, adjusted for inflation. Why 1997? Talbott: Iâm trying to get back to a more normal time -- before the explosive growth in home prices, before the crazy bank financing, and -- oh, yes -- before the Internet bubble. Pressley: The greatest price appreciations during the boom were in Americaâs wealthiest cities, you say. Talbott: Itâs striking. Middle-income homes in the middle of the U.S. still sell for $100,000 to $150,000. Louisville barely beat the consumer price index over the past 20 to 30 years. Your wealthy cities -- San Diego, Manhattan, Miami, Beverly Hills --went up three- and four- and five-fold in real terms. Pressley: You predict homeowners will lose $8 trillion to $10 trillion. How so? Talbott: There was at the 2006 peak about $25 trillion of residential home value. Today, thatâs off almost 25 percent. That takes it down to the $18 trillion range, which is a $7 trillion loss. But in a deep recession, home prices might trade even lower than fair value given the high unemployment that exists. âSit Tightâ Pressley: One reader in his 30s bought a home during the peak between 2004 and 2007. What do you advise such people to do? Talbott: If your mortgage value isnât terribly different from what you conservatively estimate your home to be worth -- and by that I mean what homes are selling for down the street -- then go ahead, if youâre comfortable in the home, and lock in the interest rates. Make sure you get a 30-year deal at something like 4.5 percent to 5 percent, participate in whatever government plans to lower your principal that Barack Obama and Congress offer, and sit tight. It wonât be the best investment youâve ever made, but it wonât bankrupt you. Pressley: One real-estate broker reminds you that housing slumps donât last forever. Talbott: When I wrote my first book on housing in 2003, I heard from almost every real-estate broker in the country. They all insisted that housing booms do last forever! They are right that housing busts donât last. But thereâs no way prices are going to bounce back to where they were. The reason is simple: Banks were funding houses at eight and nine times a married coupleâs combined income. They were doing that through CDOs and government-guaranteed Fannie Mae and Freddie Mac loans. Those funding sources are gone. Now they are lending at four to five times combined incomes. âPay the Piperâ Pressley: A reader notes that the Fed has vastly expanded the monetary base. Wonât the resulting inflation work against falling house prices? Talbott: Heâs right in the long term. Governments around the world are printing money to try to save their banks. Itâs being masked by real price declines of things like $400 Ralph Lauren sunglasses. And so youâre seeing some deflation. But in the long term weâll have to pay the piper and inflation will reignite. Pressley: One reader says the root cause of the bubble lies in inflated real-estate appraisals, in âmassive fraudâ in the industry. Talbott: The fraud reached its zenith in the real-estate industry, but it was everywhere. The appraisers couldnât have done it by themselves. The most massive fraud was by the rating agencies. Dentists were charging $50,000 for $4,000 worth of work. You name the industry, and we were in a funny world in which everybody so valued money and status that they were doing fairly unethical things. âContagionâ is from Wiley (256 pages, $24.95, 15.99 pounds, 19.20 euros). (James Pressley writes for Bloomberg News. The opinions expressed are his own. This interview was condensed from a longer conversation.) To contact the writer on the story: James Pressley in Brussels at jpressley@bloomberg.net. Last Updated: February 11, 2009 19:00 EST
Informative info; looking into Lee county FLA, $40,00 home Say in many respects thats a well informed banker; And a 20 year loan or less[or cash] may be a much better deal than a 30 year.He also probably realizes, the areas that did not rocket up, may not rocket down so much. Not a prediction
I think the bottom in housing is coming in 2012, 2013 the latest however between now and 2012-2013 we will see areas picking up that are just completely oversold, other areas will trend lower for some time. When the bottom does come in 2012-2013 housing prices will not jump 15-20% a year like some may think. Those days are over, it will take years before a house that was selling for $300,000-$350,000 in florida thats now under $125k to reach that level again. I believe a house that went from from $350k to $125k will take over 15-20 years to reach that level once again. His new book, âContagion,â predicts that prices are only halfway through a potential decline that will see homeowners lose up to $10 trillion. Values will fall for four to five more years, he says, as defaults move from subprime to prime mortgages.
http://online.wsj.com/article/SB123448313158279827.html This is why jumbo prime is defaulting at accelerating rates. The comparison the article misses is that while her rent is $15K , 12K less than buying he doesn't take in to accunt that very few want to put 35% of $5M at risk in a falling market.