Interest-rate analyst projects long bear market for housing

Jay Goldinger doesn't foresee a crash in residential real estate this year.

But that's not good news.

Instead, Goldinger sees the speculative excesses of the residential business working themselves out in a long, grinding bear market maybe five to seven years long that ends only when investors throw up their hands in dismay.

Goldinger, an analyst of interest rate movements and a consultant to Los Angeles-based Legend Mortgage, talked with customers of Business Bank of Nevada in Reno last week.

"We're headed for a real estate market no one has ever seen before," he cautioned.

One warning sign, he says, is the continued decline of mortgage applications from prospective homebuyers even as interest rates softened in the past couple of months.

That's a sign that buyers continue to sit on the sidelines.

"You have buyers who want next year's prices and sellers who want last year's prices," Goldinger said.

Another trouble spot: Mortgage brokers, spurred by bonuses from their employers, continue to encourage borrowers to sign up for so-called "option ARM" loans that can lead to negative amortization.

(In those loans, buyers can select a low monthly payment that doesn't cover the repayment of principal and interest. Instead, it's added onto the loan balance each month.)

Third, Goldinger said, the recent residential boom has led to a cycle in which growth in realty-related employment created many of the jobs that kept the housing market strong.

"The real estate market has become the economy," he said, noting that a residential downturn could drag down the economy, further sinking the residential market.

Goldinger didn't dig deep into the causes of the bear market that he projects. But he noted that residential prices didn't gain much strength in the early summer, when they're traditionally highest, and have been even weaker during the traditionally slow late summer and autumn months.

Investors who want a sense of a bear market in real estate can look at Japan, he said. There, real estate prices were stagnant, or fell a bit, every year from 1991 through 2005.

It's possible, Goldinger said, that markets might bounce a little as prices make their first dip and attract buyers off the sidelines. But he predicted that won't be enough to keep the bears at bay in the longer term.

On the commercial side, he said apartment investment properties are due for correction as values were inflated by the influx cash from tax-preferred 1031-exchange deals.

Industrial properties, particularly for owner-users, remain attractive, Goldinger said.