Let's try to explain where we are:

For most of the last decade, this country could expect about 4.5-5.5 million existing homes sales, and 500k to 1 million new home sales by builders.

Call it 5.5 million homes sold in any given year.

Over the past 3 years that number went to almost 7.5 million, fueled in a large part by speculation, folks trading up faster, buying multiple properties.

Note: For real estate folks the end of 2008 is going to be a real bear, but we'll get back to 5M homes sold in 2009 - historical norms. With each year 1,000,000 new households are being formed, so the real estate market will have its sales. Homes p-r-i-c-e-s will be down 30% on average, but people have to move in the US and they will.

So let's keep tracking what happended to get us in financial turmoil.

In addition to housing speculation, put into the mix people using their new home equity - as homes prices rose - as piggy banks. Lines of credit to live beyound our means. Throw in all the credit card debt too and the american consumer has little in reserve to weather any slowdown in the economy-caused by that everyone has to slow down their own spending. Yes, that's how it works ;).

Now here's where it gets to become a crises:

Throw in lax mortgage underwriting, packaged as subprime, that fueled a large part of those extra 2 million housing sales.

Right there you have the making of an inflated housing market.

Add that Wall Street goosed returns by leveraging these subprime mortgages and sold them to investors as high yeld bonds, now selling for 30 cents on the dollar as the underlying fundamentals deteriorated. That was part of the Lehman blow-up.

Add more...that the government got involved in giving Fannie Mae and Freddie Mac a "social purpose" instead of a pure ecomomic one, and you have a failed securitization engine. That means if they got people into homes that couldn't really afford them, these securitization firms got more $ without penalty. They blew up next.

Here's one of the more damaging moves...then the government said that banks, who could in the past only could invest in US Treasuries, could now invest in preferred Fannie Mae and Freddie Mac stock. This also goosed bank returns. This is where additional banking pain is being felt. My own mid-sized regional bank has over $600 million in now worthless Fannie Mae stock. Now you have the duel real estate/banking crises - a nice chunk of GDP now whimpering.

ADD to all this... that corporate borrowing was propping up many of our "leading" firms, like the auto industry, and guess what, this 3 year party, built on over a decade of excess -- is now unravelling. And the insurance industry, tied to many of these ills through the wrongful investment of your premium payments (see the next section about credit derivatives to learn what brought down AIG) is being pulled in as well.

Is this a great country. Yes. We will get back in gear. Yes. Will it take 3 years. Maybe.

The interesting part is while everything is unwinding, there is still a leg wobbiling that could make things worse, yes worse in the next 1-6 months. Something I really just learned about - the credit derivative market.

Here is a summary from an AP story this week:

".....in a letter to shareholders, billionaire investor Warren Buffett followed with his own warning, calling derivatives “weapons of financial mass destruction” controlled by “madmen.” While financial experts were concerned with the housing bubble and mortgage-backed securities, Buffett was focused on what many now believe may be the next big shoe to drop - the credit derivatives market, better known as credit default swaps. What worries financial insiders most is the $54.6 trillion of risky credit derivatives concentrated among the few banks left standing. Credit default swaps (CDS) are the cornerstone of the credit derivatives market accounting for more than 98 percent of all credit derivatives. They are difficult to understand, ignored by regulators and poorly reported on balance sheets. In simplest terms, CDS are insurance policies on things like bonds, loans and corporate debt. But there are two big differences: the seller of a CDS doesn’t need to have the money to cover losses if the security defaults, and the buyer doesn’t need to own the asset it wants to protect. It’s as if hundreds of people could buy insurance policies on houses they didn’t own yet still collect the full value if it burns down. The danger comes when the company defaults and the seller - because he’s not required to - doesn’t have the money to pay out on the default. Investment firms that traded various derivatives, such as CDS, collected an average of $2 billion in fees each quarter over the past two years. And traders who spoke to CBS News said these transactions were the largest cash cows on Wall Street, even more profitable than mortgages. The newfangled transactions were seen as easy money and many traders had the attitude that when it blows up, it’s someone else’s problem. Today, the same commercial banking heavyweights thought to be the most safe, JPMorgan, Citigroup Inc. and Bank of America, hold 92 percent of all the disclosed credit derivative contracts, according to the Office of the Comptroller of the Currency. "

That does not seem like a happy ending in the short term. More bailouts, will equal more pain, slower recovery. But it all resolves over time, that you can bet on.

In the meantime, try Smarter Agent to look for your next home or apartment. A whole new real estate search and marketing channel will emerge in 2009 putting agents and consumers in touch via a new medium (mobile) in much the same way the Internet did starting in 1999. It's built by us, at www.smarteragent.com. We invented the mobile real estate location-aware (GPS) search and have 4 granted patents.

Labels: real estate market analysis. mobile GPS real estate