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No matter how precisely the real estate debacle described in Conquer the Crash falls into place, the media always seems to conclude that the a bottom is at hand. Here’s how CTC described the start of the big event:
In the initial stages of a depression, sellers remain under an illusion about what their property is really worth. They keep a high list price on their house, reflecting what it was worth last year. This stubbornness leads to a drop in sales volume [and the spike in supply covered in the article to the left]. At some point, a few owners cave in and sell at much lower prices. Then others are forced to drop their prices, too.

If you read this article at left closely, you’ll see that all the elements of Stage #1 are in place. Fannie Mae’s projection of the first annual decline since 1975 combined with economists’ assurances of a bottom in the second half of the year indicate very clearly that home prices have much further to fall. One of the ironies is that the longer sellers wait to lower prices, the more they undercut their prospects of minimizing the damage because the pool of available buyers is shrinking due to deteriorating consumer finances and stricter underwriting by borrows. For more on this, just punch the words “Subprime mortgage” into Google news and press enter. Stories about a “subprime mortgage storm” are now hitting the wire at a fast and furious rate.

Stage #2 calls for an all-out decline to commence. In November, EWFF reported that this stage was underway, but we added that it had to really take off because of one missing ingredient: “This phase should coincide with a more cautious approach on the part of lenders, but that’s not happening so far. Thanks to the miracle of modern financial engineering, the mortgage spigot continues to flow.” According to the latest article on the subprime lending market, that situation is finally changing. Lenders like HSBC, a British bank that was a big player in the home loan market, are reining “in aggressive lending practices.” As this process works its way down through standard mortgages for all real estate, the depth and breadth of the crash in real estate prices will become apparent. 

Was it really less than a year ago that the big real estate issue was “affordable housing?” The graphic above is actually from a March 2006 article about the problem of housing affordability. “Something has to be done,” concluded the piece. As is their wont when things get badly out of balance, the markets will level the real estate playing field. Unfortunately, another irony of real estate adjustments is that as affordability returns lenders and creditworthy borrowers get more averse to risk, and thus contribute to the downward spiral commences. By the time it unwinds, houses will be shockingly affordable.

November 2006, EWFF
In a recent interview with Kate Welling, David Levy of the Jerome Levy Forecasting Center explains that lenders are still patching up the cracks in the wall of burgeoning defaults with additional loans and other gimmicks. “lenders have been working very aggressively to maintain good loan performance statistics by taking loans that begin to be troubled and doing whatever they have to refinance borrowers in the midst of foreclosure proceedings—to keep them ‘current,’” says Levy. “But eventually, lenders will be forced to tighten standards, which will only intensify problems in the housing market, increase the drag on consumer spending and worsen household debt woes.”