It’s Going to Get Worse

That's quite a turnabout from the view he articulated in his book, first published in 2005. There he argued that the solid economy, strong demographics (including immigration and aging boomers), and a lean supply of homes should lead prices to continue rising for years to come. "Today's real estate market is the result of rational decision making based on supply and demand conditions," he wrote. "With today's economy, home owners are in no danger of experiencing a widespread fallout of home prices."

Oops. "You knew there were a couple of [regional] balloons out there, and [I] said you could have a couple of these balloons pop," Lereah says now. "But I didn't think this would turn into an all-out bursting of a balloon for the whole nation." He, like other prognosticators (including Greenspan), points to his lack of understanding of the profound effects that subprime lending was having on housing markets. "[I] just didn't realize the scope, the extent, the magnitude of the loose underwriting—not looking at incomes and wages, just providing so many mortgage loans based on [expected] future price appreciation rather than the creditworthiness of the borrower," Lereah says. "That got so out of hand, and none of us realized the magnitude of it until it was too late."

Now, as the market continues to worsen, Lereah is skeptical of many of the rescue plans being touted in the media. He was particularly unimpressed by Hillary Clinton's proposal for a 90-day moratorium on foreclosures. "That was, to me, just wacky. Don't try to control the market—that's not going to do anybody any good."

Lereah does think that the House bill co-sponsored by Barney Frank—which was recently passed by the House Financial Services Committee and now awaits a full House vote, is the right idea. Frank's bill would serve to modernize the Federal Housing Administration (FHA) by increasing loan limits in high-cost areas like California and New York, authorizing zero-down and low-down payment loans for more homebuyers, and generally improving access to mortgages for lower-income folks who have faced bigger hurdles to a home loan since the credit crunch began last fall.

"Every time you have something like this you overreact the other way," Lereah says. He sees Frank's efforts to boost the FHA's role as a solid countermeasure that may help the market. While he was an economist at NAR, Lereah was also a real estate investor himself, at one point owning 10 condominiums from Virginia to Florida, which he rented out. Today he still owns seven of them, and aside from one that's languishing unrented, the other six are still making money, he says. So even if his forecasting record is mixed, his in-the-trenches investment record appears more solid.

At his new firm he's also looking to cash in on the weak market. He's currently talking with several Wall Street folks about setting up an investment fund that would buy pools of distressed real estate, which it would convert into rentals. "We think there are some very good acquisitions that can be made," he says.