The following exchange occurred in February between two under-employed and surly finance professionals.  I have committed to resend the email chain in 2012 to remind my former school-mate of his erroneous expectations for a short economic depression.


February 7, 2009

Optimist 
I don't think (the housing depression) will be 5 years.  I bet by this summer you'll start seeing firesales.  In fact, I think we'll have deflation for next 18 months.  I ain't livin' large.  I'm just trying to deleverage like everyone else.

AMD
In 1931 someone said this thing will be over in 18 months.  In Japan in 1992 someone said this thing will be over in 18 months.  We know as fact that Option Arms and Alt As are just beginning to reset and will set new foreclosure records for years to come.  Foreclosures invariably force house prices lower, even if they are already discounted.

2012 is the first chance we have for a recovery as the structural impediments to the economy will have been removed.  Sadly the government seems intent on lengthening and deepening the crisis while also saddling us with insane amounts of debt and threatening our credit rating.  The whole system is deleveraging except the Federal Government which is borrowing at never seen before rates.  You THINK you are deleveraging while the govmt. is borrowing and spending in your name.  You are on the hook for their wasteful, useless spending in the form of higher taxes or less bright future.

Optimist
Don't get me wrong - I think we'll be in this quagmire for a while.  I just think prices will bottom rather quickly.  You're spot on about this year and next being the big years for option arm resets.  You're also right about the government spending in my name.  The only thing is I'm trying to move to Brazil... so I'll be affected by it less.

AMD
Good luck on Brazil.  Happy to join you if you could use a valueless, English-only speaking, male secretary.  There have to be commodity and international trade opportunities.  Neat place either way.

As for prices bottoming:

1. People underestimate how slow moving the real estate market is
2. Foreclosures have always exploded AFTER job losses. The job losses are just starting
3. We know that ARM resets will cause record foreclosures through 2011.  When you have material numbers of foreclosures, prices drop... unless you are at replacement value or the value of housing as shelter. Still years away.
4. Finally, 70 years of cultural and social perspective on house ownership is changing.
5. The govmt is making this longer and deeper.
6. I am guessing that 5 years of dropping prices will trigger a massive unloading of properties by the Baby Boomers.

I will forward this email to you on the first of 2012 and we will see how I have done.