Well written, Bill.

Jason, thank you.

Bill Roberts

Not so sure how you can conclude that "Home prices are still going to go up"?

I think the housing market is midway through its severe bear market, if not more. Residential real estate will bottom in price either this year or, more likely, in the first half of 2009. The number of housing starts has collapsed, and inventory is at multi-decade highs, which are both prerequisites for a bottom.

However, housing is an illiquid, discrete market, unlike the stock market, which is liquid and continuous. Thus, the bottom may take longer in housing simply because it takes longer for sellers to adjust their expectations downward. Therefore, the duration of the correction may last longer than I anticipate.

Banks are just beginning to liquidate their inventories of foreclosed homes. As foreclosures pile up, banks will sell properties below par, in some cases substantially, to jettison properties off the books.

Forced sales are beginning to occur, with Lennar (LEN) selling several thousand units well below book value. Anecdotally, I know of one bank in my state that sold property for $0.30 on the dollar. My gut says that forced selling will accelerate, and the market will not bottom until it peaks...and we're simply not there yet.

The downturn in commercial real estate has just begun. It will not be as long nor as deep as the bust in residential real estate since there was not as much over-building. Nonetheless, at the height of the frenzy, loans were written at ridiculous terms. The values of those loans are deteriorating, which is restricting credit in commercial real estate and causing a decline in the value of commercial property.

Beyond the problems wrought by poor underwriting standards, the value of commercial real estate is dependent on the state of the economy. If the economy avoids recession, then the downturn in commercial real estate will be manageable. If the economy slips into a significant recession, look out below.

Paige, I realize that you are in FLA. Things aren't as bad here in San Diego. As for the propects for recession it is very hard to call. Recession can be avoided or postponed if the Fed so chooses. But who can make that call?

My guess is that the Fed will come down on the side of no recession. Interest rates will come down. "Affordability" will increase. Consumer confidence will rebound. And prices will increase.

But it is all just my guess.

Thanks for taking the time for your well thought out response.

Bill Roberts

I tend to agree with you, I got a call from a mortgage broker today saying rates were 5.5% for a 30 year fixed. But with rising home prices and wages not increasing there is still going to be a lot of people left out of the market, who still won't be able to afford the American Dream

Michael, The FNMA 5.5% bond is trading at close to par. That means 5.5% is available to the best borrowers, but I think rstes will come down some more.

Thanks for commenting.

Bill Roberts

Bill:   Well, of course your are right about the interest rates... they will have to go down.   The prices on median sized homes are still going up in my area.  

I guess we could call our friend, the well-known "wacko alchemist" Greenspan and ask for his opinion...  (wacko-alchemist is not original with me... I read it somewhere)  Get him on the phone, put him on the speakerphone!  

Jan, In some ways we would be better off with Greenspan right now because I really believe that he would keep lowering rates until he got what he wanted on inflation (which is his biggest bugaboo).

The important thing is consumer confidence. with that the buyers will be back.

Thank you for your thoughts on this.

Bill Roberts

Exactly.  I just wrote a quick blurb recently along that very line with the FHA Modernization Act.  People will buy houses when they can afford the monthly payment and borrow money.  Plain & Simple.

Jen, you are right, it is plain and simple. Thank you for commenting.

Bill Roberts