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No Housing Bottom Yet

If you believe real estate bottomed during the February fiasco, don't look down.

Editor's note: As a special feature for April, offers a 20-part series on virtually everything about real estate. This installment is part 20


I know -- you're about as sick of hearing about the housing market as you are of Rosie O'Donnell and her recent antics.

But while your life will go on just fine if you ignore the Rosie noise, you may be personally affected by the housing market's behavior, so listen up.

The housing market has not hit its bottom yet and probably won't until some time in 2008.

Yep, I said it.

I can feel the email coming already. Look, I don't like to be doom-and-gloom. I'm Marcia Brady -- the glass is always half full in my world, but there are too many reasons to believe that we still have a way to fall.

The Inconvenient Truth

To start, we're completely overextended. According to data gathered by the Federal Deposit Insurance Corporation (FDIC) from the end of 2001 to the end of 2006:

  • Loans secured by real estate are up 76% to $4.51 trillion.
  • Residential mortgages for one- to four-family homes jumped 57.7% to $2.18 trillion.
  • Commercial real estate loans rose 58.8% to $904 billion.
  • Home equity loans are up 203.4% to $559 billion.

So it should come as no surprise that foreclosures are up, too. National foreclosure filings were up 47% last month from a year ago to 149,150, according to RealtyTrac, an online marketplace for foreclosed properties. That's one foreclosure for every 775 households.

Sure, you can blame the subprime market for some of it. Those loans seem to be defaulting every minute. Moody's

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projected that average losses on pools of subprime mortgages from 2006 would be as much as 8% -- that's one-third higher than what they expected just six weeks earlier.

But residential loans are not the only culprit. Construction and development loans were up 144.1% to $565 billion, according to the FDIC. But because projects are not being completed and new ones are not happening, many construction loans are defaulting as well.

And that really hits home because it's the local banks that made those loans to the local contractors. "A year ago, I warned about the shabby lending standards of the community banks over the past five years and how that could have many of those banks falling like dominoes," says Richard Suttmeier, a

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We Look Like Japan

Regardless of the dismal stats, many argue that as long as employment stays strong, everything will be just fine. That's definitely something Marcia Brady would say.

But not when home prices were rising much faster than our paychecks.

Case in point -- look at Japan's recent housing boom/bust.

"Japan is the classic case study because the country had high employment through its housing boom and things came crashing down," says Mark Grinis, a partner at Ernst & Young's real estate, hospitality and construction group.

There are a lot of parallels between our housing boom and Japan's. For nearly a decade, beginning in 1981, Japan's housing market experienced years of rapid price appreciation.

"Relaxed lending standards, strong employment growth in export manufacturing, an exceptionally high national savings rate and the reaction by the Bank of Japan to curb such dynamic growth were all contributing factors in Japan's unsustainable run-up in housing prices," notes Grinis.

Sound familiar?

The national average home price in Japan increased 85% over 10 years beginning in 1981 while the national average in the U.S. increased 75% over 10 years beginning in 1997, says Grinis, who recently did a case study comparing the two housing markets.

But Japan's market came crashing down? Will ours? What can we learn from them?

"The biggest lesson is that the price of a home must ultimately correlate to what individuals can afford," he noted in his study. "If prices advance significantly ahead of wages, over time there will be a price correction. Since interest rates are a key determinant in housing affordability, the

Federal Reserve

will likely lower rates in the near term, particularly as a slowing housing market begins to impact the broader economy."

Because wages have not kept up with the inflated housing prices, we're due for a fall and, contrary to popular belief, it hasn't happened yet. "The typical cycle is about four years and we're only a year and a half in," notes Grinis. "It will be late '08 before the dust settles and you can call a bottom."

Japan's correction lasted 10 years. Its doubtful ours would last that long. Everything just moves faster here. A subprime lender starts to struggle, he files for bankruptcy a week later. Families start to grapple with making their mortgage payments, the house goes on the market that weekend. We don't wait around for much here in the states.

It's Still All About Perception

But even if you don't believe any of the above, you should worry about the perception. In the end, what matters is how people feel about their current financial situation.

And if the foreclosures snowball, that will have a serious impact on a homeowner's psychology. If you live in an area with $500,000 homes but your neighbor had to foreclose on his home and sell it for $350,000, that's a huge chunk of equity that just vanished from the neighborhood.

And when people start to panic, hysteria sets in and the effect of that might actually be worse than the dismal stats.

Tracy Byrnes is an award-winning writer specializing in tax and accounting issues. As a freelancer, she has written columns for and the New York Post and her work has appeared in SmartMoney and on CBS MarketWatch. Prior to freelancing, she spent four years as a senior writer for Before that, she was an accountant with Ernst & Young. She has a B.A. in English and economics from Lehigh University and an M.B.A. in accounting from Rutgers University. Byrnes appreciates your feedback;

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