By Mark Kiesel

Based on the current outlook for housing, I will likely be renting for one to two more years. While many factors that influence housing prices have turned negative, I suspect we have not yet hit bottom. In fact, housing prices should head lower throughout the rest of this year and next year as well. Why? Housing inventories remain high, delinquencies and foreclosures are set to rise as homes purchased over the past few years by speculators and individuals with teaser-rate and adjustable-rate mortgages come back on to the market, affordability is low, and sentiment and risk appetite has shifted negatively. Most importantly, the availability of credit is set to take a turn for the worse as lenders tighten credit standards.

This is all great news for renters and buyers who are patient. Over time, housing prices and interest rates should decline, resulting in improved affordability. This adjustment, however, will take time and occur over a period of years, not months. Housing is illiquid and prices are sticky. As a result, potential buyers should exercise patience and not jump back into the housing market too early. A year ago, I described the state of the U.S. housing market as “the next NASDAQ bubble.” The NASDAQ took over 2 ½ years to go from peak to trough. I suspect that housing prices could display a similar pattern, and we are still over a year away from the bottom. Given these risks, I prefer renting versus owning, and an investment strategy which favors defense versus offense.

Unwinding the Housing Bubble

Housing was an asset bubble influenced by bullish sentiment, robust risk appetite and speculation, lack of fundamental analysis, cheap money, inflated appraisals and easy lending standards. These factors helped to drive housing prices up to new levels and the unwinding of these conditions is expected to drive housing prices down. Never before have we witnessed so many people lever-up real estate with so little money down or “skin in the game.” This growth in mortgage debt and risk appetite helped fuel consumer spending and corporate profits. As such, the unwinding of this bubble will have broad consequences for the overall economy.

As the housing bubble unwinds, what are the implications for the overall economy and credit spreads? The U.S. economy will likely experience sub-par economic growth for the next year as declining housing prices lead to weaker consumer spending, slower corporate profit growth, a decline in business investment and less job creation. This environment favors reducing credit risk, especially to cyclical industries and lower-quality sectors of the market. As lending standards tighten and risk appetite turns more conservative, housing prices are likely to face a further leg down.

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The U.S. Supreme Court upheld the opinion of Watters v. Wachovia, allowing Michigan mortgage companies operating as subsidiaries of national banks to be exempt from registering with the state financial services regulator or complying with state mortgage lending laws. While the Mortgage Bankers Association is applauding, NAMB is criticizing the decision.

Even now, the ads on television, radio and the internet continue: "Is your credit bad? Don’t worry, we’ll provide the loan for the home of your dreams …" What those commercials should, but do not, add is: go through the small print with a toothcomb. Or else you, too, could be swept up in America’s subprime mortgage crisis.

Just as in Britain, homeownership is a traditional goal of American society. But as interest rates have climbed and the housing market has slumped, the number of what are politely called "delinquent" loans has soared. And as home repossessions grow, civil rights groups and presidential contenders alike are stepping into the row over the high risk, or subprime, mortgage market.

In the most sweeping call yet, a coalition of civil rights organisations have demanded a six-month moratorium on foreclosures. They want lenders - whose reckless and sometimes predatory policies are largely blamed for the crisis - to help victims refinance their mortgages, or face law suits.

"We know that there are safe and affordable loans that meet the needs of our communities," said Janet Murguia, the president of the National Council of La Raza, the biggest Hispanic civil rights group in the US, noting that minority groups were especially hard hit by the crisis. Lenders should "match families to the sustainable loans that they should have had in the first place", she added.

The subprime crisis has erupted over the past few months as borrowing rates have turned upwards while house prices have fallen steeply in many parts of the country. All sectors of the mortgage market have been affected but none more so than subprime loans, extended to borrowers with shaky credit histories.

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Dark clouds are converging over America’s economy. Here are three scenarios on how they could develop into a serious storm that could hit you.

Fishermen and sailors must be constantly on the lookout and prepared for changing weather. Smooth sailing can quickly turn into a fight to keep one’s head above water. Likewise, today’s breadwinners must be prepared for abrupt changes in the economy. Good times can quickly turn into recession; high-flying stock markets can crash; and as history clearly shows, all bubbles eventually pop. Often, fat years are followed by lean years.

As economist James J. Puplava has said, “Economic and financial conditions never remain constant. They are as seasonal as the weather. Forecasts change depending on the patterns that emerge” (Financial Sense Online, March 15, 2001).

Financial meteorologists and prognosticators identify two looming, yet self-induced storm fronts threatening America’s economy: deflation and inflation. However, like climatologists trying to predict the weather, many disagree as to which poses the most immediate danger. Further, some identify a third and even more powerful economic storm brewing.

Although the outcomes of these coming storms are predicted to be very different, their origins are similar.

Mounting Debt Levels

Like a downdraft of dense freezing air, virtually all levels of American society have become weighted down and pressured with debt. Personal, corporate, state and federal debt levels are all at or near record highs.

U.S. consumer credit debt hit an all-time high of $2.4 trillion last September, soaring 80 percent since 2000. Similarly, the amount of household and mortgage debt as a percentage of disposable income is at its worst level in over a quarter century. For the past two years, Americans on average spent everything they made and then some. During 2006, people spent 1 percent more than they earned. The only other time in history America’s savings rate was in negative territory for a full year was during the Great Depression.

In corporate America, debt has become so endemic that there are now more companies with “junk” credit ratings than with investment-grade ratings, says credit rating agency Standard and Poor’s.

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