How long have you been involved in following the housing market?

In terms of following real estate closely, I've been following the market for eight years. I've always had an interest in housing and in real estate, however. My interest started when I read Nothing Down by Robert Allen. The ideas seemed so simple and they made sense. When I read the book for the first time, nothing down was used only by experts. Of course, once I started investing and working in this industry, I realized there was more to housing than just finding a place and going zero down. Now after I've read countless books and been active, real estate isn't such a simple industry. It is hard to believe nothing down went mainstream in the last few years. Many people only read bullish housing books and jumped into the bullish time for housing, and now they're having a hard time figuring out what to do in the bearish market.

On your blog, you talk about the disconnect between incomes and median home prices. When did you begin to notice the fact that incomes weren't supporting the market growth, and why do you think so many people continue to ignore what seems to be an obvious disconnect?

I actually noticed the disconnect in 2003, at least in Southern California. Many folks in the real estate industry kept making money, so the disconnect kept growing. Hard to tell someone that prices are disconnected when the price of a home goes up each year by $100,000 having no basis in population growth or local income. The game kept going and going, like a car alarm that goes off in the middle of the night. Rental rates were also going up but not in relation to housing prices. In fact, there were 3 years in Southern California where year-over-year appreciation was 20+ percent! With the benefit of hindsight, many people now realize that they lived through a bubble.

It is easy to be disconnected when you're intimately tied to a certain industry. If you owned a particular stock, you'd want it to go up; the same is true if you own housing. It's hard to step back and say, 'yeah, you are right that my house isn't worth that much.' Over 70 percent of the U.S. population are considered homeowners, so a majority of people directly benefited from the housing market's continuously going up. And then we have lenders, agents, banks, the government, and consumer goods, all of which enjoyed the benefits of the increased wealth effect. This wealth effect, however, was based on a credit bubble. That is why we're seeing fierce lobbying from housing groups to raise the lending caps and support a bailout of home owners facing trouble.

Do you think keeping home prices propped up artificially is one of the central (if unspoken) goals of these proposed mortgage bailouts?

Absolutely. We just need to look at mortgage equity withdrawals to see that consumers spent much of their perceived wealth in the economy. Since two-thirds of our economy is consumer spending-based, it benefits all of those who participated in this bubble to keep it expanding. A drop in housing prices hurts consumer spending. In fact, it hurts many in the housing industry, such as builders and the others who projected housing growth every single year. After all, if credit gets tight and there's a perception that prices are going to drop, this will create a feedback loop. This thinking spurred a lot of the bubble psychology. 'I need to buy this year - next year it's going to cost $50,000, $75,000 or $100,000 more to buy this house' seemed to be the thought of many. Here is the issue. If we acknowledge many metro areas to be in a bubble, any kind of support will be like a crutch to support the continued growth of that bubble. After all, if the prices made sense with the local income levels, why would people be getting into trouble? People have faced foreclosures in 1985, 1995 and 2005. The reason that it's such a pressing issue at the moment is that much of our economy is now based on the housing bubble's continuing, but the bubble is bursting.

Markets work themselves out. If someone paid $500,000 for a house, expecting to flip it at $600,000, and he now finds out that his place is only worth $450,000, he still has a few options. Let the place foreclose, hurting your credit. You may get hit with a 1099 for debt forgiveness, but there has been talk about forgiving this debt with a bailout. You can rent out the place, but in high priced areas, you will most likely be in negative cash flow as renters can only pay you with their actual monthly earnings - there will be no negative amortization for the rent. From the recent polls I've seen, the public is against any sort of bailout. There are ways to help current owners in trouble, but keeping home prices artificially high isn't one of them.

Most of the country seems opposed to any kind of mortgage bailout. Do you think this opposition will eventually register with the politicians, or will taxpayer opinions fail to be a driving force when decisions are made?

Hard to say. The housing industry has a strong lobbying arm and the politicians seem to be taking their cue from them, not from the public. The large majority of the public doesn't want a bailout. Still, I think many politicians, knowing that 2008 will be a hotly-contested election year, are trying to figure out how best to win votes. 70 percent of voters own their homes, so it's interesting that the majority of people don't want a bail out. What the politicians are missing is that many people bought on conventional terms and they don't want to subsidize all of the egregious flippers, exotic Wall Street financers, and other buyers in hyper-expensive metro areas.

It seemed like government intervention only prolonged the housing recession in Japan. If our government follows Japan's lead by intervening and bailing out the banks, will this prolong the inevitable market correction that has to take place here?

Markets self-correct. We're already seeing this happen with over 140 mortgage lenders closing shop. We're also seeing markets adjust with dropping prices and sales. Wall Street lost its appetite for exotic loans, and now that market is adjusting. What's being proposed is corporate welfare to support the credit and housing bubble on the backs of the prudent savers and people who managed their finances wisely, including those home owners in states that stayed away from the housing bubble (if you have a hard time believing a 1,000 square foot starter home would cost $500,000, just look at SoCal). Many people buying homes in the last few years in the high-priced metro areas became speculators, whether they would acknowledge it or not. The housing industry wanted the government to keepout when things were good, but now they're asking for a handout as the market corrects.

Japan has different characteristics from the U.S., as their culture fosters saving. As a society, we have a negative rate of savings. Any government intervention would stifle the decline for a while, but a bubble, by its very definition, needs to pop.

You salute a number of overpriced homes with what you call the 'Real Homes of Genius Award'. Do you have a favorite among these homes? If so, could you tell us about it?

We had a Tweedledee and Tweedledum post. These vastly overpriced homes were selling for $430,000 and $539,000+ in an area where both places would rent for $800 and $975 respectively. And the pictures that they used! One home had more flags than the United Nations. Anyone living in an overpriced metro area could relate to these homes. As the old adage goes, you'd need to see it to believe it.

Do you have any guess as to when the bubble might pop? What about advice for buyers eagerly awaiting the bottom?

It is already popping. In certain California auctions, homes are selling for 30 percent lower. Many homes, especially short-sales, are down between 10 to 15 percent. The best recommendation I have for prospective buyers is survey the neighborhood and try to find out what local lease rates are going for. Any potential buyers should play house. If you're planning on buying a $500,000 home, you need to budget out the real cost to live in the place before you buy. Run the numbers on a hypothetical 30-year fixed mortgage. Adjust the numbers for the down payment you plan to put down. Any difference between what you currently pay in rent and your hypothetical mortgage should go towards your down payment fund. If, after one year, you feel comfortable this way and you find a suitable house, you can go ahead and purchase it. This, of course, is a conservative approach, but you don't need to rush and jump into the current market. The long lines to bid are a thing of the past. We have shifted into a buyers market.