Dean, I've followed housing since early 2005 from Central Florida and have written about the approaching storm for a newspaper here. You were one of the first people warning about it and I've read you ever since.
I would like to see your analysis of how severe the correction/recession/depression (!) in 2008-2009 may end up being. And which areas will be hit hardest. That's a loaded quetion, but one can always ask.

The collapse of the bubble is much more a problem than the subprime mortgages. People who took out subprime mortgages in 2002 and refinanced to a fixed rate mortgage in 2004 (which they could do in bubbly markets because the appreciation gave them sufficient equity) are fine. People who took out the same subprime mortgages in 2004 or 2005 got caught in the collapse of the bubble. They couldn't refinance before the interest rate re-set.

Peon,

actually, the real tragedy is that many people took subprime mortgages in 2003 and 2004 and refinanced into ARMs in 2005 and 2006. These folks are at the forefront of those losing their homes now.

I hesitate to state the obvious, but even if folks can manage the mortgage payments on a house bought at the peak of the bubble, many will walk away from an upside down mortgage in order to rent and then buy later when prices have declined.

There was a good reason for downpayments.

Good piece on the real estate bubble in the current Harper's by Eric Janzsen. Many interesting points and an insightful analysis. He posits that 'alternative energy' is poised to be the next bubble..

I think a major cause of the housing bubble is devolution of authority to the Fed, which apparently did not use the powers it was given:

"Members of the Senate Banking Committee said the Fed had power to regulate risky lending practices but did not use it even as exotic mortgages for buyers with checkered credit helped drive up housing prices across the country." (http://seattletimes.nwsource.com/html/businesstechnology/2003631648_loansknown23.html).
Of course, it is Congress which determines the powers of the Fed. If you give discretion to people who are known to be laissez-faire extremists the outcome is predictable. Increasing reliance on the Fed, lionization of the Fed Chairmen and exaltation of monetary policy are all objectives of modern movement conservatism. It is puzzling to me why many centrist and liberal economists go along with these things.
Here's an interesting sidelight I came across:
"The [Tax Reform Act of 1986] increased the demand for mortgage debt because it prohibited the deduction of interest on consumer loans, yet allowed interest deductions on mortgages for a primary residence as well as one additional home. This made even high-cost mortgage debt cheaper than consumer debt for many homeowners." (http://research.stlouisfed.org/publications/review/06/01/ChomPennCross.pdf).
The impact of tax laws regarding interest-rate deductions and capital-gains exemptions on the prevalence of flipping should be carefully considered. Paul Krugman has called attention to the very high price-to-rent ratio, which may be in part a result of high levels of speculation (flipping).

I'm much less concerned with the down payment issue than most people. In California the vast majority of first-time homebuyers don't make significant down payments, and those who do took a loan from the Bank of Mom and Dad. Indeed California has a series of programs that provide down payment assistance to first-time buyers. (The state thereby steps into the position of parents for those who don't have rich ones.)

Most people who buy homes through these programs don't default, even though it may be some years before they have significant equity. The house didn't cost 10 times their income, they didn't get an exploding ARM, and the monthly cost isn't a large multiple of the cost of renting.

After subprimes, option-arms.
So, by far the BIGGEST problem we face is non-recourse mortgages.

Dean,
Asset mispricing is too easily understood as a system malperformance, so 'they' like to leave it out.
Besides bemoaning the darkness, I invite you to use the chart below for light/lightning.

On a real basis, as of mid-Sept. 2007, home prices have dropped ca. 19.5% of the difference between the peak levels in mid-Jan. 2006 and the inferred “WILL return to” levels. See last chart, updated 12/26, at
http://homepage.mac.com/ttsmyf/RD_RJShomes_PSav.html

OT: Call Nancy Pelosi @1-202-225-0100 and DEMAND IMPEACHMENT. DC business hours only, call often and spread it around.

Dean;

The fact is that the root cause of the housing bubble was Greenspan's super easy monetary policy

Fraud and lax oversite made the situation worse but the basic cause was super easy money. -- which was and is supported by the economic and
political mainstream with the exception of Ron Paul.

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