U.S. Housing Slump Has ‘Just Begun,’ Says Forecaster Talbott
Feb. 6 (Bloomberg) -- Let’s say you own a $1 million home in Santa Barbara,
California.
The house seemed like a steal when you bought it with that adjustable-rate
mortgage in 2005. You still love the white beaches and those yachts bobbing up
and down in the harbor.
Then you awaken early one morning, troubled that your monthly payments will
soon double. You go out to pick up your newspaper and see for-sale signs on
five houses on the street. One identical to yours just sold for $500,000.
Are you going to pay the bank $1 million plus interest for your place? John R.
Talbott, a former investment banker for Goldman Sachs, poses that hypothetical
question in his latest book of financial prophesy, “Contagion.”
His answer: “I don’t think so,” he says. “If I’m right, then this housing
decline has only just begun.”
Talbott is an oracle with a track record: His previous books predicted the
collapse of both the housing bubble and the tech-stock binge before it. A
friend who runs a New York steak house introduces him as Johnny Nostradamus, he
says.
What sets him apart from other doomsayers is his relentless emphasis on simple
arithmetic. He walks you through the numbers to show how U.S. house prices got
so out of kilter with wages, rental prices and replacement values -- the cost
of buying a property and building a home. (“Homes in California by 2006 were
selling at three to five times what it would cost to build a similar home from
scratch,” he writes.)
Five More Years
Talbott’s latest predictions are sobering. The U.S. is only halfway through the
total potential decline in housing prices, he says. Home values will continue
to deteriorate for four to five years, he forecasts. Adjustable-rate mortgages
issued in 2004 and 2005, for example, are only now resetting for the first
time, he notes.
Bankers may “try to blame the crisis on poor Americans with bad credit
histories, but that is not the real cause of the housing crisis,” he says. “The
greatest home-price appreciations and the homes most subject to price
readjustment are in America’s wealthiest cities and its glitziest
neighborhoods.”
At the end of 2008, a record 19 million U.S. homes stood empty and
homeownership sank to an eight-year low as banks seized homes faster than they
could sell them, the U.S. Census Bureau said this week. Almost one in six
owners with mortgages owed more than their homes were worth, Zillow.com said
the same day.
By the time the crash ends, Talbott predicts, homeowners will have lost as much
as $10 trillion, with investors and banks worldwide losing almost $2 trillion.
And just as the U.S. starts getting over a prolonged recession, the first big
wave of baby boomers will retire, depriving the economy of their productivity
(and high consumption), he says.
Back to 1997
So how far will the price of your home on the range fall? Citing historical
data and trends, Talbott concludes that real prices should return to their
average 1997 levels, adjusted for inflation. Why 1997? A 120-year historical
graph shows that real home prices in the U.S. stayed relatively flat for 100
years, then began rising in 1981 and surged from 1997 to 2006.
A return to 1997 prices “would get us out of the heady, crazy days from 1997 to
2006 in which banks were lending large amounts of money under poor supervision
and aggressive terms.”
How did we get into this mess? Talbott blames everyone from average Americans
who caught “the greed bug” to hedge funds and credit-default swaps. The single
biggest error, he says, was for U.S. citizens to allow their national
politicians to take large campaign contributions from big business and Wall
Street -- a theme Kevin Phillips developed in “Bad Money.”
‘No Accident’
“This crisis was no accident,” he says. It began, in Talbot’s view, because the
U.S. government was “co-opted” into deregulating the financial industry.
Politicians were “paid to deregulate industry,” taking billions of dollars each
year in campaign contributions.
His investment advice for this prolonged recession: Hang on to cash and invest
in gold or Treasury Inflation-Protected Securities, or TIPS. If he had to
invest in stocks, he would put his money in China.
Living in smaller houses with their savings gutted, U.S. baby boomers will face
yet another big challenge, Talbott says:
“The toughest job to get in the future will be the elderly person greeting you
as you enter the local Wal-Mart.”
“Contagion: The Financial Epidemic That Is Sweeping the Global Economy . . .
and How to Protect Yourself From It” is from Wiley (256 pages, $24.95, 15.99
pounds, 19.20 euros).
