Sean Olender

Will Housing Bottom in 2010 or 2012?

The wildcard here is how people feel about housing as an investment. It's not just what people can afford, it's what they want to afford and what they choose to buy. The median American household could afford to pay $10,000 for a small pile of cat poop, but few people expect the price of a small pile of cat poop to rise that high in the near future.

Built into current prices was the expectation of price appreciation of 10% or 15% a year. Strip that out and it's uncertain what a "rational" consumer would pay for a house in any given area. It's also uncertain whether the average consumer will in fact be rational. Most consumers certainly weren't rational for the past eight years. They bet the farm tying themselves down with speculative debt and essentially betting years of future freedom in exchange for the chance to make a bunch of money. It's not unusual for a few people to do that, but for the majority to enter into that sort of speculative behavior is deeply disturbing.

In short, nobody knows where this is going to go because we aren't merely talking about homes returning to "affordable" levels. We're talking about at what price people will want to buy them, which may have only a little to do with whether they are affordable.

Finally, it is very difficult to say how this banking crisis will play out, how the absence of a new bubble to drive economic growth will play out, how the absence of an asset against which to borrow wheelbarrows full of money plays out. There's simply nothing hopeful on the horizon. The three big trends that drove speculative activity and the larger economy since the 1980s was the stock/investment bubble of the 80s, the tech bubble of the 90s and the housing bubble of the 00s. There's a small possibility that we're all out of bubbles.

Pundits have called for a purposeful energy investment bubble because the US economy simply can't operate without bubbles anymore. Sustainable growth is impossible without financial mania. Whether we get an energy investment bubble remains to be seen, but if we don't, what drives the economy from here forward?

If we have low or no growth for a long time, it will make stocks look overvalued by maybe 50%, maybe more. What about the huge unemployment that will likely flow from this?

The way I see it is housing may have started this, but housing is the least of our problems.