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Housing Market Crash Predicted in 2003

This article was written by in Real Estate and Home. 28 comments.


In 2003, John Talbott predicted the housing market crash, in a way. It’s true that when the real estate market is exuberantly celebrating an uncharacteristic increase in home prices, you can predict a crash and just wait for it to come true. Here’s what Talbott, a former Vice President at Goldman Sachs and author of The Coming Crash in the Housing Markets (2003) and Sell Now!: The End of the Housing Bubble (2006), said in an article on CNN Money in August 2003 about the “worst-case scenario” in housing.

… Rising interest rates drive down home prices, leaving an alarming number of homeowners — particularly those who’ve cashed out or borrowed against their equity — holding more debt than their house is worth. If they sell, they would actually owe money.

Under this scenario, foreclosure rates jump as high as 5 percent, pushing down home prices and wreaking financial havoc all the way to the top of the housing food chain at Freddie Mac and Fannie Mae. With the collapse of these financial behemoths, investors would lose money, taxpayers would be stuck paying for a bailout and confidence in the banking industry would be as good as gone.

And your home? A 30 percent drop in home values isn’t inconceivable.

“It’s 1929 all over again,” said Talbott… “This is big Depression-type stuff.”

It didn’t play out exactly as Talbott predicted. The latest housing crisis probably didn’t occur due to high interest rates. The primary driver was more likely excessive speculation; as prices continued to rise throughout a bubble, more investors wanted to get into the market with the goal of selling at a higher price. Credit was freely available, even to risky individuals, because banks felt they could sell the debt to investors on the other side of the coin, passing off the risk to another party.

The signs were there.

Your home: Worst-case scenario, Sarah Max, CNN Money, August 8, 2003

Published or updated February 12, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 9 comments… read them below or add one }

avatar KC

Indeed the signs were there…if you have common sense. I remember a conversation I had with a woman in her 50s in 2007 in Florida. She was saying how she really feels for her kids (early 20s) cause they won’t be able to buy a house and “start” a life. My husband and I bought our first, small home in 2000 and we paid a nice price, but not the inflated price we would have paid 3 years later. The more I thought about her comments the more I realized she was right. If I had been buying my first home in 2003-2008 I would have felt completely overwhelmed. As I was talking to her I kept thinking…something’s got to give, it just has too – housing can’t continue to increase at this rate. Common sense.

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avatar frugalCPA

Yeah, I remember the predictions, and I remember believing them. I did not, however, think that more than the housing bubble would burst. It’s strange to see how interconnected everything has become, and how the entire economy has been affected in diverse and far-reaching ways.

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avatar Pev

I remember this as well and did believe it; wasn’t so sure how it would go down – But what I knew at the time was that what comes up will have to eventually go down.

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avatar sf

I though his name was “John Talbott”.

By the way – brilliant book.

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avatar Luke Landes ♦127,505 (Platinum)

Thanks sf. You’re right, it’s John, and I fixed the post above.

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avatar The Weakonomist

I can’t remember his name, but Meredith whitney’s mentor predicted the current recession back in 2000. People called him a fear monger and a pessamist. People didn’t listen to him and ignited whitney for years. Finall in fall of 2007 we started listening.

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avatar thomas

Really, this stuff shouldn’t come as a shock to smart people. The real problem is that the signs were ignored or nobody wanted to look into it. I just hope I have the ability to ride it out and not lose everything in the process.

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avatar Tim

I predicted the housing crash and mortgage crisis in 2001, ask any of my friends. Do I get a cookie?

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avatar Sean

How could you not see this craptastic unfolding of the worst housing meltdown in US history?
I remember in 1998 a friend of mine had a house built for $145,000. 2 years later it was
worth $309,000. Property taxes sky rocketed. How can an economy sustain this type of
ludicrous increase in home prices? It can’t. Garbage scheming loans are what drove up the price. In an Open Arm, Alt-A type loan, you may have the house for 5 years. Then the payment doubles when it resets at the 5 year mark. That’s when the homeowner bails.
CYA!!!!!

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