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.