Jason Calacanis points out there are factors that no one can fully gague that may take the housing market to a hard landing sooner than we think.

"My intuition tells me that there are two X-factors waiting in the wings that will turn the soft-landing into something harder:

1. I think there might be *ramped* mortgage fraud going on. Like people buying five houses on bogus mortgages that say their living in a house.

2. "creative" mortgage options in California coming home to roost. Check out the infographic below from Marketwatch.

The Marketwatch article is actually much scarier than what Jason is saying:

"….About one-third of the mortgages sold in the last year were devised to minimize the initial monthly payment to make it seem as if buyers could afford a more expensive home.

The cost of that Mephistophelian bargain comes later, when the monthly payment is reset to cover all the deferred interest charges, plus, in some cases, the extra principal. "

"On Friday, in a jointly crafted message on so-called exotic mortgages, multiple government agencies warned banks in strong terms to make sure borrowers can pay back the full amount of what they borrow and that homeowners know that a low monthly payment today could be shockingly high later.

America’s real-estate boom may be over now, but millions of homeowners who thought they were borrowing their way into wealth find themselves instead holding a ticking time bomb, a toxic mortgage with a potential payment far larger than they can afford.

 

……Bank regulators knew more than a year ago that lenders were aggressively marketing interest-only and payment-option adjustable-rate mortgages to consumers who didn’t fully understand what they were buying. In July 2005, several government agencies teamed up to write guidelines intended to set lenders straight.

 

In the meantime, the runaway writing of these mortgages went on unchecked, and the fact that nobody in government stood in the way highlights the fact that a patchwork of government bureaucracies was ill-equipped to bring the practice under control, lawmakers and regulators say."

GlobalEconomicAnalysis has a further brakedown on the what’s triggering the housing bubble care of Catholicsinglegirl.  BTW, it seems that there is about double the amount of BUZZ today as there was 6 months ago about a housing bubble.  I’d told all of this really can be described as exhaustion.

• After years of price runups, people started buying homes not to live in but for investment purposes. In 2004 and 2005 a whopping 40% of all homes sold were for second homes or for investment purposes.
• The above happened in spite of the fact that home prices to wages relationships, and home prices to rental prices had both risen 4 standard deviations above norm.
• Credit standards steadily declined to rock bottom levels such that anyone who could fog a mirror could get a loan
• Lenders passed on risk to hedge funds, pension plans, etc who could not get enough of what eventually will become toxic waste, but at the time seemed like a good idea. Risk yield spreads collapsed as people started assuming prices of houses would never decline.
• Fannie Mae lost trillions in derivative hedging as interest rates gyrated but no one really cared.
• Homebuilders provided down payments via charities to those who could not afford to buy a house. The IRS has been looking into this practice and it may be illegal.
• Magazine covers, books, and financial wizards of all sort were touting “Buy now before prices rise further”.
• All sorts of creative financial products were unleashed on the unwary.
• As the pool of eligible and willing buyers shrank, subprime loans, pay option arms, and stated income loans soared as a percentage of all loans. Anything and everything was done to keep the bubble expanding.
• The masses embraced the trend just as it was ending.
• Panic buying reached a peak in the Summer of 2005 with people camping out overnight in Florida to buy condos for ridiculous prices hoping to flip them. No one bothered to figure out there was no one to flip them to.
• David Lereah, chief propagandist for the National Association of Realtors, published the same book twice. His book “Are You Missing the Real Estate Boom?”was published in February 2005 about 6 months before the peak. One year later in February 2006 (about 6 months after the peak) Lereah retitled his book “Why the Real Estate Boom Will Not Bust—And How You Can Profit from It.”
• Pent up demand collapsed and home sales plunged. The pool of greater fools, reached its pinnacle, depending on location, somewhere between Summer of 2005 and Winter of 2005.
• The unwinding process has really just started.
• Given that the housing boom lasted for close to 20 years and sustained panic buying happened over a 3-5 year period, selling capitulation and inventory work off can easily take 7 years or more. We are nowhere close to selling exhaustion.
• Global wage arbitrage, outsourcing, rising bankruptcies, and rising unemployment will ensure this process will take a long time to fully unwind.
• Prices will continue to fall until bankruptcies and selling exhaustion are in.

I don’t think this bodes well for my Architect clients, both current and former as they are part of the food chain of housing.  Let’s hope for the best.