In 2003 I said we had a housing bubble. As usual with bubbles (the same thing happened in the 90's stock market bubble) there was much denial. Now that we're finally past the denial, let's look at what the collapse of the bubble will mean.

Unemployment Over the course of the last recovery real estate related jobs made up the largest proportion of new jobs. Most months, there would have been a net loss of jobs if it were not for the real estate sector (and remember this is larger than just construction, but includes the financial sector, forestry and so on.) When the housing market craters, so will jobs.

Oversupply There will be an oversupply of houses on the market. The crash doesn't end until the oversupply is worked off. The first sign is always (and this has happened) increased time to sale. The second part is when prices start actually dropping. One reasons the naysayers moaned about how housing doesn't burst, it just sort of stagnates, is that traditinally a lot of people live in their houses, and they won't lower prices. But too many people this time either bought houses for spec, or have variable rate mortgages where the cost of the loan will simply become so great they either must sell or hand the key back to the bank. Both options will be taken.

Increased Bankruptcy One of the oddities of this "recovery" is that bankruptcies kept going up. Expect that trend to accelerate significantly. A lot of people bought with no money down variable loans, or were heavily leveraged and flipping houses and are getting caught out. Bankruptcies will increase the real estate overhang, and lengthen the bust period for the housing market.

Municipal distress. High housing prices meant high real estate valuations. Expect a lot of municipalities, used to fattened tax receipts based on bubblicious real estate values, to take it on the chin. Expect them to raise tax rates and to cut services.

Reduced Consumer Spending Consumer spending in this cycle has been based on increased housing prices, not on increased wages (which are slightly down for the vast majority of Americans.) People have borrowed, either explicitly or implicitly, against the increased values of their houses. They felt richer, but the old trader's maxim is true - it isn't worth anything till the second someone pays you for it. As house valuations drop, so will consumer spending - wages won't have improved and the artificial high feeling of a high valued home will be gone. I expect an absolute drop in consumer spending.

Investor Distress A lot of investors have bought a lot of mortgage backed bonds on the assumption that they are as good as treasuries, since the Fannie Mae and Freddie Mac are government related. Greenspan tried to tell them otherwise a few years back - we'll find out whether or not Congress is willing to let them take a bath. Because if the house behind the bond takes a significant absolute loss of value, the bond's collateral may suddenly be worth a less than the value of the bond.

Commerical Real Estate won't make up the difference. Sorry, businesses aren't going to be expanding in the middle of a recession.

Concluding remarks My favourite comment during the last few years was in an article that mentioned that no principle down variable rate mortgages hadn't been seen in such numbers since the 20's and then later went on to talk about how it wasn't a bubble. While I don't expect this to trigger the next great Depression, 2007 is going to an ugly year, whether or not the GDP numbers push it into a formal recession. High bankruptcies, piles of layoffs, people being forced to take wage cuts of a third to a half, loss of pensions and continued increases both in health insurance costs and the number of uninsured will make this a really ugly one.

Add to that the newly punitive bankruptcy act, and the pain will truly be epic. Smart politicians will start running, now, on anti-usury laws and in turning back the clock on bankruptcy laws to "what Jefferson and Washington intended." I also expect a huge wave of protectionism and a renewed push for public health care while real wages continue to slide.

There's going to be a lot of populist anger. The politician who can tap into it - whether in terms of "we can have the 90's back", or as anti-immigrant hysteria, or as some form of protectionism, or, hopefully, as a progressive populist platform of health care and an energy plan, will likely be the next President.