Former Goldman Sachs  executive Joshua Pollard on Wednesday sent a sobering 18-page report  to the White House  warning of a potential nosedive in home prices that could put the country back into a recession before the ripples of the previous one settle.
According to Pollard, the former head of the Goldman's housing research team, home price appreciation is outpacing income, and the United States is on the brink of a 15 percent decline in home prices over the next three years. Rising interest rates and values will cause already overvalued homes (Pollard says values are 12 percent higher than they should be) to be even further out of sync with reality and generate an unnatural surplus that will itself lead to a slowdown in investor purchases.
Flipped homes have declined 50 percent in the last year, and home flippers are losing money outright in New York City, San Francisco, and Las Vegas according to the report.
If Pollard is correct, the impact on the U.S. economy would be seismic. Overvalued homes, according to his report to President Obama, make up $23 trillion of consumer asset value and "serve as the psychological linchpin" for $17 trillion of invested capital.
Put together, that 15 percent decline translates to a $3.4 trillion cut to consumers' net worth.
"As an economist, statistician and housing expert, I am lamentably confident that home prices will fall," he wrote. "Home price devaluation will expose a major financial imbalance that could lower an entire generation's esteem for the American dream."
Student debt and a 45 percent underemployment rate for recent college grads has handicapped millennial buyers already, Pollard wrote.
Pollard outlined three distinct stages of the decline—the first of which, the "hot-to-cool" stage, is already underway. This is where home price growth slows and turns negative in large markets across the country. Investors slow their purchases, homebuilders lose pricing power as absorption rates decline, and press outlets shift their market pieces from positive to mixed.
In Stage II, the "demand-to-supply" phase, new negative shocks cause investors to shift from raising prices in an effort to outbid competition to reducing prices to beat future declines. In Stage III, the "deflation and response" phase, consumers come to the decision that now is a bad time to buy a home. Fewer people seek mortgages and banks become less willing to lend. Consequently, deflation hits, taking jobs with it and triggering calls for new policy.
In other words, Pollard fears the recent past will be prologue. His report squarely targets public finance and housing officials and calls upon the White House to devise "forward-looking monetary policy that balances the risk of raising interest rates," create a skilled trade externship program for laborers whose jobs are most at risk whenever housing investments drop, and "forcefully rebalance number of homes to the number of households" by reducing the number of new builds as well as the number homes that can force prices down—particularly those that are already vacant, unsafe, and expensive to rehabilitate, the report states.
"The shift from a good market to a bad market occurs quickly, exaggerated by the circular currents of confidence from consumers, investors and lenders in Unison," Pollard wrote. "When unnatural levels of demand or supply impact the market, prices are pushed in lockstep."