After studying this network, I will summarize in this column what the Bubble Bloggers collectively believe about the U.S. housing downturn – where it is leading and key ideas you may want to communicate to your clients. For your future reference, I also will suggest some of the best resources available in the Bubble Blogosphere.

Introducing the Bubble Bloggers

For many years, the United States has had "doom-and-gloomers" who have thought the economy was falling off a cliff. In the 1970s, high inflation supported a school of hard-money monetarists who preached that paper assets would become worthless. The savings and loan crisis of the early 90s created a doctrine of distrust in financial institutions, just as the collapse of Enron and Worldcom produced a crisis of confidence in public companies. Through decades of doom-and-gloom theory, the U.S. economy has continued to roll onward to higher peaks of prosperity.

So, what is different about the Bubble Bloggers? I think the answer has three parts.

Part one: The bloggers are more factual than theoretical, at a time when many economists and analysts are missing or sugar-coating critical facts. For example, through links identified by bloggers, it was easy to foresee a double-digit YOY decline in March existing home sales:

• Data Quick had already reported YOY March declines of 21.3% in California, 40.0% in Las Vegas, 14.9% in Denver, 21.3% in Phoenix and 14.0% in Portland.

  http://www.dqnews.com

• State realtor associations had already reported March YOY declines of 24.5% in Florida, 12.1% in Illinois, 15.7% in Maryland, and 10.5% in Virginia.

  http://www.realmarketing.com/state_realtor_associations.htm

• The site HousingTracker.net tallies weekly inventories of Multiple Listing Services (MLS) homes available in more than 50 metros. This data indicated sharply rising home inventories in March – well above trend and a clear sign of slowing sales.
• Micro-level transaction data reported on the blogs indicated steep price dips on repeat sales of the same houses, slowing buyer traffic, longer sales cycles, and higher rates of mortgage application rejections.

Part two: The Bubble Blogosphere is attracting a growing audience of people who share values that are mainstream, not extreme. Bloggers and their fans believe the housing bubble was created by excessive speculation, easy credit, greedy mortgage companies, and many gullible or careless buyers. In their view, people should not buy houses they can't afford, debts eventually must be repaid, governments should not bail out borrowers, and flippers get what they deserve.

One fascinating blog, I Am Facing Foreclosure.com, was created by Casey Serin, a 24-year old "would-be real estate mogul" from Sacramento. After losing nine houses to forced sales or foreclosures, Serin has kept blogging in poignant detail about the loss of his credit, bank accounts, rent money and even his car insurance. Many people have responded to his plight, and few have expressed sympathy. Like another Casey of American folk lore, Serin has become an object of public scorn for striking out.

Part three: The Bubble Bloggers have great conviction in their views. A few pioneers began forecasting a U.S. housing bubble as early as 2004, and they were early and wrong. But over the past year, official statistics have begun to align with bloggers' forecasts, just as the diverse views of many bloggers have begun to align with each other. A consensus is building in this network about how the housing story will unfold.

Most Bubble Bloggers are not paid much for their work, and you may wonder what motivates them to dedicate hours per day to tasks such as tracking housing inventories. The simple answer may be: They want to be Paul Revere. And they want to be right.

In the rest of this report, I will try to summarize a consensus of their current views.

Cycles in Home Values

According to talking points fed to the media by NAR, U.S. home prices have not previously experienced a YOY decline since the Great Depression, but that's not totally true. U.S. Census has tracked median home prices for more than 40 years, and YOY declines were recorded in 1970 and 1991. You can find this data and a wealth of other housing statistics in U.S. Housing Market Conditions, a quarterly publication of the U.S. Department of Housing and Urban Development (HUD):

• http://www.huduser.org/periodicals/pdrperio.html

Bloggers believe the most accurate measure of historic home value is historic "real prices" adjusted for inflation. For this data, they reference a guru of the Bubble Blogosphere, Yale economist Robert J. Shiller. You can download a graph summarizing Shiller's "History of Home Values" from 1890 to 2006 at:

• http://www.bubblepic.com/thumbnails.php?album=topn

This graph illustrates a home price roller coaster that has taken several historic dips, including declines following U.S. real estate booms in the 1970s and 1980s. In each of those eras, real price declines mirrored in size the run-ups that led up to them. However, both boom/bust cycles were miniscule compared to the decade-long upswing that ended in 2006. Some bloggers believe the best way for homeowners to understand the potential price declines ahead is to ride a "video roller coaster" of the Shiller graph at:

• http://weblog.housing.com/weblogs/news/archives/2007/04/housing_prices.html

Shiller also has helped to develop a set of indices used as benchmarks for futures contracts based on U.S. housing prices. To access index data:

• http://www.macromarkets.com/index.shtml

Recently, the futures contracts priced an expected housing price decline of about 6% in 2007 for a composite of 10 large U.S. metro areas. Some bloggers believe home prices ultimately will decline 20-25% from the 2006 peak, due mainly to a supply-demand imbalance now emerging.

The Supply of Available Houses

Collectively, bloggers have done their best work tracking the huge inventory of homes flooding the U.S. market. The most conventional method is to log weekly and monthly changes in MLS listings, market by market. For example, the site Bubble Markets Inventory Tracking logged 59,616 MLS listings on the Phoenix market in April, an all-time record and 33% above year-ago inventory. The same site logged a 14-month supply of homes on the market in Las Vegas (26,794) in late March.

The anonymous blogger at this site (who goes by the name "OCrenter") also has explained in several insightful posts why MLS listings don't capture the volume of today's growing inventory. In one downtown San Diego apartment building he documented 14 units in various stages of foreclosure, only three of which are yet MLS-listed.

Other bloggers have observed that the U.S. now has a record 2.1 million vacant homes for sale (according to the Census), some of which are not listed on MLS. Many FSBOs (for-sale-by-owner homes), private auction sales, public foreclosure sales, and lender-owned homes (REOs) are not captured by MLS data. An estimated 10% of all single-family rental units are vacant, according to Census, and may have to be sold to avoid foreclosure.

Altogether, blogger data indicates that the U.S. could soon have total single-family inventory equal to 6-7 million homes potentially up for sale ? and a growing number of sellers in desperate need of a buyer.

Demand for Homes

Among professional economists and media analysts who believe the U.S. housing market is near a bottom, few have identified expected sources of increased demand. Bloggers paint a picture of demand across four segments: 1) first-time buyers; 2) second-home (vacation) buyers; 3) investors/flippers, and 4) traders.

Although traders account for the majority of existing home sales, they have little impact on the supply-demand balance because they sell one home to buy another. As the market has cooled in late 2006 and 2007, investors/flippers have become scarce on the buy side. Vacation buyers remain plentiful, but bloggers believe this segment will dump more net supply on the market than it absorbs over the near term.

That leaves the most pivotal segment of all, first-time buyers, who provide liquidity for traders, investors and flippers. In normal markets, demographic trends suggest that about one million first-time buyers per year flow through the pipeline, with an average age of first purchase in the early 30s.

However, bloggers believe that there are fewer qualified first-time buyers available today than there should be because "the pipeline was raided" in the buying frenzy of 2004-2006. Many first-time buyers were lured into an overheated market with easy credit, even though they weren't qualified to buy. Now, having been steered into costly subprime mortgages, a growing number face foreclosure. With their credit in tatters and tighter credit standards in place, this "lost generation" of former homeowners may not be able to re-enter the buyer pool for years.

U.S. Census data supports the view of a depleted first-time buyer pipeline. Homeownership rate among householders less than 25 years old increased from 21.7% in 2000 to 25.7% in 2005. Bloggers believe it will take several years to rebuild the pipeline of qualified first-time buyers to a normal level. They also believe professional economists and analysts have consistently and inexplicably missed the importance of the depleted first-time buyer pipeline in trying to explain why buyer traffic has been so thin this spring. It isn't the weather!

Troubles Ahead

Bloggers also are sounding alarms about troubles on the horizon. None of these problems separately may become as big as the savings and loan scandal of the early 90s or the Enron/Worldcom debacle. But collectively, they will be a costly mess to fix.

• Negative amortization – Many Option Adjustable Rate Mortgages (ARMs) give homeowners a choice of not paying scheduled mortgage interest but rather adding it to the principal balance at a higher interest rate. Mortgage lenders then may report the deferred interest as current revenue. But what happens if massive amounts of negative amortization principal eventually default? For the answer, visit iTulip.com and read the blog of Aaron Krowne, who has dubbed this scandal-in-the-making "Lendron."
• Pre-foreclosure to foreclosure ratios – The first official step in the foreclosure process is a Notice of Default (NOD) sent to the homeowner. The final step is a Notice of Trustee Sale (NOT). Traditionally, less than 10% of all pre-foreclosures (NODs) become foreclosures (NOTs). But the ratio has been soaring recently in some markets – indicating higher foreclosure impact ahead. For example, according to Foreclosure.com, California currently lists 23,905 foreclosures and 61,017 pre-foreclosures for a 39% ratio. Keep watching this site's tally of homes currently in foreclosure as a barometer of in-process inventory. For reference, it stood at 167,869 on 4/3/07.
• Auctions – As a sign of troubled real estate times, massive auctions are now being advertised to liquidate inventories owned by lenders (REOs). For example, the Real Estate Disposition Corp. is auctioning 290 homes this month at three sites in Southern California. Bloggers say big auctions will be a key test of whether bargain basement home prices can stimulate fresh demand. (Many think not.) But the auctions can create problems even if they succeed. They can steal sales from MLS properties, while dropping the floor on local market prices. Also, they require winning bidders to enter contract on-the-spot, even before negotiating financing or conducting due diligence. Complaints are already rising about auctioned properties with clouded titles, back taxes owed, or structural defects.
• State tax revenues – California, which has been hard hit by the real estate downturn, reported January 2007 tax revenue $1 billion below estimates. Brevard County in Florida expects total property tax rolls to drop by $1 billion this year, equal to 3.3% of assessed value. In addition to lower property taxes, states stand to lose tax revenue from lower mortgage recording ("doc stamp") taxes, lost sales tax revenues on construction projects and furnishings, and lower income taxes from construction industry layoffs.
• Class actions – Bloggers have reported class action lawsuits filed against mortgage brokers, packagers of mortgage-backed securities, appraisers who inflated home values, and lenders who steered borrowers with prime credit into subprime mortgages (to earn higher fees). Anticipate a boom market ahead for real estate lawyers.

Impact on the U.S. Economy

In the debate over whether the real estate slump can be contained or will have negative impact on the U.S. economy, a chasm exists between Bubble Bloggers and most mainstream economists. The bloggers believe housing is so fundamental to the economy that a bursting bubble is bound to ripple. They observe that whenever U.S. housing starts have climbed above two million per year, a recession has followed. (The shaded areas in the chart below represent recessions.)

http://research.stlouisfed.org/fred2/series/HOUST

Bloggers also argue that many homeowners in their markets are overburdened by debts and rising expenses – especially property taxes, medical costs, utilities, gasoline, homeowner's insurance and college tuitions. In the months ahead, as home prices decline and Americans feel less wealthy, bloggers believe mortgage equity withdrawals will shrink dramatically. Then, they think housing weakness will radiate into other segments of the economy as consumer spending declines. Already, they say economic data points to weakness in building materials, home furnishings, automobiles, consumer electronics, personal computers and advertising. They believe housing weakness will soon spread to retailers, restaurants, travel and entertainment, commercial real estate, and even government services.

In addition to the indirect influences of a real estate slowdown, bloggers believe two types of events will have direct negative impact on the economy:

• Lower housing starts – Due to the failure of homebuilders to accurately forecast the downturn, starts have stayed stubbornly above the long-term U.S. average rate of 1.5 million units per year. Bloggers believe starts must decline to a rate of below about 1.0 million and then stay there for more than a year if the industry is to solve the supply/demand imbalance and keep home prices from plummeting. Each housing start is a mini-economy unto itself, stimulating employment, sales of goods and services, and government tax revenue. Whenever starts fall below 1.0 million, recessions usually result. (See the graph above.) If bloggers are accurate about where housing starts are heading, several builders may not survive the steep slowdown in starts that lies ahead.
• Increased foreclosures – Bloggers' forecasts for future U.S. foreclosures and short sales – up to 500,000 per year for the next five years – are higher than those of most mainstream economists. (In a short sale, the lender forgives part of the debt when the home is sold.) Bloggers also are focusing attention on the economic impact of each foreclosure including an average direct financial loss of $80,000 per home, destruction of the borrower credit, reductions in neighborhood home values, higher divorce and alcoholism rates, and vandalism or arson in abandoned homes.

One invisible cost of foreclosures is the fact that they define the bottom of a market's price range, because mortgage lenders tend to minimize losses by selling fast and cheap. Thus, heavy foreclosure volume drags down the resale value of other homes in the same market. A second invisible cost is the displacement of a new home start in the supply/demand chain – because most defaulted houses quickly flow back onto the market.

How much damage could a sustained housing downturn inflict on the economy? According to a recent study conducted by Nouriel Roubini, a Professor of Economics at the Stern School of Business, and Christian Menegatti, at economic analyst at the RGE Monitor, "wealth effects" from a combination of declining real estate prices and a lagged effect of slower mortgage equity withdrawals could cut about 2% from U.S. GDP later in 2007. For an abstract of this report, see:

• http://www.rgemonitor.com/blog/roubini/191959

Almost all bloggers agree that future interest rates are of critical importance as several million ARMs reset over the next five years. In addition to making ARMs more expensive for homeowners, higher rates would discourage first-time buyers from entering the market. If the bloggers are right, the health of the U.S. economy hangs by an interest rate thread.

Ideas You May Want to Communicate to Clients

I encourage you to visit the leading blogs (some of which are profiled at the end of this article) and form your own opinion about how valuable their information and insights may be. Then, you may want to discuss some of the following ideas with your clients:

• Cash is king – Some bloggers believe U.S. housing is only the first shoe to drop in a global asset deflation caused by excess money supply and credit growth. Although this scenario is debatable, it can be smart for clients to heed bloggers' one and only recommendation for protecting personal finances: "Hold plenty of cash." This may be a good time to remind clients of the importance of a cash cushion equal to at least six months' mortgage payments.
• Credit is king, too – If we've learned anything from the subprime meltdown, it's the value of maintaining a strong credit rating. Some homeowners are now facing foreclosure because their credit wasn't quite strong enough to qualify for prime mortgages. To obtain a prime mortgage in the future, borrowers may need a nearly spotless credit history and a FICO score of 700 or above.
• Defer home sales – In most areas, this is not a time to put homes on the market unless absolutely necessary. Clients who planned to sell out and capture home equity for retirement may need to go back to the drawing board and defer their golden years. Encourage these clients to monitor home inventory levels in their market and wait for a sign of supply/demand balance and price stability before posting the For Sale sign. MLS inventories by market can be monitored at: http://www.realtor.com
• Don't try to bottom-fish now – This also may not be a good time to buy a home. Even "bottom-fishers" may pay too much in 2007, because the bottom of any market may drop lower later.
• Savings are necessary – Whether or not home equity adds to personal wealth, it shouldn't be used to finance current expenses or lifestyle needs. To make up for any equity lost in the downturn, clients should renew commitments to save real cash for retirement and other future goals. Most new homebuyers will have to save up a down payment the old-fashion way.
• Real estate makes a good investment only if you buy for the right reasons and at the right time – Real estate has been a good investment for many people who bought several years ago and occupied their own properties. But it's become a nightmare for buyers who entered the market recently with the goal of renting-out or flipping. Dozens of regional "flipper-in-trouble" blogs have documented direct financial losses on such properties of $100,000 or more, and that doesn't count closing costs, negative cashflow, or damage to personal credit. Most investment ideas that sound too-good-to-be-true eventually become losers, and in this debacle the personal losses are enormous.

In summary, it's hard to ignore the Bubble Bloggers because they are reporting and analyzing what they see with their own eyes – and growing numbers are seeing the same trends across different markets. While you may not welcome or agree with all they say, it's smarter to understand them than ignore them.

Remember what made Paul Revere famous. Not only did he ride at midnight. He was right!

Recommended Resources of the Bubble Blogosphere

Wikipedia U.S. Housing Bubble - A thorough and well researched essay often referenced by bloggers; all the background you need to decide if there is or isn't a bubble. Contains many links and charts.

• http://en.wikipedia.org/wiki/United_States_housing_bubble

Zillow.com Quarterly Reports – This link downloads Zillow.com's most recent quarterly report (in Excel format) for historic and current housing prices in 75 metro areas. Excellent for tracking historic price trends.

• http://www.zillow.com/quarterlies/QuarterlyReports.htm

Still Renting by Mark Kiesel – This essay by a PIMCO Executive VP has become a kind of bible for many bloggers. It represents perhaps the best writing on the bubble to come from a mainstream U.S. investment manager.

• http://www.pimco.com/LeftNav/Global+Markets/Global+Credit+Perspectives/2007/U.S.+Credit+Perspectives-+5-2007.htm

HousingTracker.net – Current housing inventory (from MLS) and pricing data for more than 50 metro markets, updated often.

• http://www.housingtracker.net/old_housingtracker

Bubble Markets Inventory Tracker – This blogger loves to cull through public records of Western U.S. markets, tracking valuable data and uncovering interesting stories. He's not afraid to "out" ambitious flippers who fell flat.

• http://www.bublbtracking.blogspot.com

The Housing Bubble – Blogger Ben Jones posts capsules from local press reports, market by market, with a keen eye for trends bubbling up. Read this blog daily and you'll understand what's happening in housing. The large volume of reader posts are as insightful as the blog itself.

• http://thehousingbubbleblog.com

The Mess That Greenspan Made – Blogger Tim Iacono is among the best at meshing trends in real estate and the general economy, with the slant that years of easy-money Fed policy led directly to this housing bubble (and other asset bubbles to come).

• http://themessthatgreenspanmade.blogspot.com

Housing Bubble Bust – This blog has many interesting graphs, data sets, and articles – a housing reference library accessible on a Web page. Check out the Housing Bubble Graph showing the historic relationship between U.S. housing valuation and GDP.

• http://www.housingbubblebust.com

Nouriel Roubini's Blog – Roubini has the best credentials of any blogger. He often appears as the guest "perma-bear" on CNBC's Kudlow & Company, where he has consistently forecasted a hard-landing recession for the U.S. economy in 2007. Daily posts on this blog lay the foundation for his housing-led recession thesis, brick by brick.

• http://www.rgemonitor.com/blog/roubini

RealtyTrac – If you want to know how bad it is in your local market, this is the place to go. You can look up the number of pre-foreclosure, auction and bank-owned properties available market by market, with property-level details available via paid subscription.

• http://www.realytrac.com