By ANDREW JEFFERY

This post first appeared on Minyanville.

Deflation, the economic beast many feared would devour the next decade, appears to have been vanquished.

Or has it?

Superficial signs of renewed inflation are everywhere: Oil prices appear to be stabilizing, and concern is growing about future supply shortages (which, by extension, could lead to higher prices at the pump). The stock market has staged an impressive rally, with expectant bulls and former bears finding for “green shoots” of economic growth everywhere. Home prices, if you look purely at the data and ignore fundamentals, are starting to slow their fantastic decline.

Even the consumer price index, or CPI, is looking tame. Well, except for last month’s drop, the largest in more than 50 years.

And herein lies the problem.

The CPI, the market’s favorite inflation gauge, has been masking the structural deflation in our midst since the housing market fell of its wheels almost 4 years ago. Given the precipitous drop in property values, one would naturally expect the housing component of the CPI to fall in kind. Not so.

The statistical alchemists, err, experts, at the Bureau of Labor Statistics use something called “owners equivalent rent,” OER, to measure consumer housing expenses. OER tries to approximate the cost to rent the country’s typical home, and according to the Wall Street Journal makes up 24% of the CPI and 31% of the core CPI, which backs out food and energy costs.

And since even as property values have slid in record-breaking fashion rents remained buoyant, OER has vastly understated the drop in home prices. This means the CPI — were it to reflect some sort of economic reality — would have fallen more than it actually has.

As the housing slump rolls on, the pain is increasingly being felt by landlords, not just owner occupiers. Rents in big cities like New York and San Francisco are already dropping, as would-be tenants demand concessions from property owners. Vacancies are increasing, as even those driven from the housing market by foreclosures and the tight mortgage market can’t fill up empty apartments, condos and track homes.

Drive around suburbia and “For Rent” signs are nearly as common as “For Sale” signs.

Rents are likely to keep falling and as a result, OER could begin to drag down the CPI. Of course, statisticians can and likely will play games with adjustments for volatile energy prices (renters often don’t pay for utilities, so energy costs are backed out of OER). Further, government bean counters are even considering adapting OER to reflect new, high levels of home ownership (just in time for a reversion to the historic mean, thanks for being ahead of the curve guys).

As long as construing economic data in a way that makes it seem more likely for effectively insolvent financial institutions like Bank of America (BAC) and Citigroup (C) to raise capital and remain in business, that will remain the status quo.

Meanwhile, back in reality, saving is now en vogue, deleveraging is ongoing and the repayment (and destruction) of dollar-denominated debt will keep inflation in check for the foreseeable future. More importantly, the recognition that smaller can be better and less can be more are becoming entrenched in the lives of ordinary Americans.

Don’t believe the hype: Deflation isn’t going away any time soon.

This post first appeared on Minyanville.

Freedom is back in vogue: Americans are finally growing tired of living in the shackles of debt.

According to the Wall Street Journal, government-led efforts to jumpstart lending are being derailed by weak demand for new loans. As the recession rolls on, an increasing percentage of consumers are opting to pay with cash or (gasp) save their hard-earned money.

Initiatives like the Term Asset-Backed Securities Loan Facility (TALF) aim to free up consumer credit by supporting the market for asset-backed securities. The Federal Reserve and Treasury Department hope their efforts will enable American consumers to start spending again.

During the boom, fixed-income investors snatched up bonds backed by all types of debt – credit cards, auto loans, and, of course, mortgages. High demand for these seemingly safe investments pushed down interest rates, which stretched consumers’ budgets to the brink – and beyond.

But now that investors have been badly burned by such investments, they’re shying away from the market almost entirely. Without Wall Street’s securitization machine, there’s simply nowhere to put new consumer loans.

After years of gorging on cheap credit, Americans are reverting to more responsible fiscal lifestyles. Savings are up, spending is down – which is as it should be. This is reducing the urge to borrow and thwarting Washington’s plans to pass the bailout buck down to taxpayers.

Every dollar we don’t spend or don’t borrow is another that could potentially be handed over to effectively insolvent financial firms like Citigroup (C), Bank of America (BAC) and American International Group (AIG), or failed automakers like General Motors (GM) and Chrysler.

That task is growing increasingly dicey, as it becomes clear that using debt to fix a system already crippled by debt is patently absurd. And even as the US government loads up on borrowing, consumers are doing the right thing: getting out of hock.

By ANDREW JEFFERY

This post first appeared on Minyanville.

In its ongoing attempt to rewrite the rules of what’s quickly becoming our quasi-capitalist nation, the Obama Administration is weighing options that would expand compensation restrictions to all corners of the financial-services industry.

According to the New York Times, well-publicized efforts to rein in executive pay at firms that accepted TARP money could extend to companies that have thus far stayed off the government dole. In other words, the spottily regulated world of hedge funds and private equity could be subject to some of the same restrictions faced by their government-subsidized competitors.

However unpleasant, firms like Citigroup (C) and Bank of America (BAC) (both in hock to the US taxpayer for hundreds of billions of dollars) have lost their right to be the masters of their own executive compensation destiny. On the other hand, pay at hedge funds that haven’t touched a penny of government money should be determined by the firms themselves.

Since he took office, President Obama has been a loud advocate for pay that’s closely tied to performance. The prevailing view in Washington is that Wall Street traders were able to take on massive risk — either their firm’s or their clients’ — without feeling much pain if the bets went sideways. This led to excessive risk-taking, and the kind of near-criminal alchemy that ultimately blew up the financial lab.

And while this is true to an extent, the result of this typical government overreaction will be a system reduction of risk – and by extension, of reward. Financiers, entrepreneurs and businesspeople of all types engage in risky behavior every day – which is what keeps the economy humming.

Systematically reduce the incentive to take risks, and economic output will slow. It’s simple math.

Already, even as Washington bumbles its way towards legislation on executive pay, what’s left of the free market is sorting things out on its own.

Raising capital is well-nigh impossible for upstart hedge funds, as even management teams with strong credentials are struggling to get off the ground. Existing funds, most of which remain below their so-called “high-water mark” (the level at which juicy performance incentive fees kick in), won’t see big bonus payouts until well into 2010.

This is the market at work, punishing bad actors — even ones that were just marginally bad — and creating an environment where only the most astute, talented, and driven can succeed.

By contrast, as policymakers look to make up for years of ignoring their fiduciary responsibility to safeguard the public interest, we’re witnessing the development of an economic system that benefits only the most well-connected.

Needless to say, this is an unwelcome progression.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Every month, it seems, Washington dreams up new and fantastic ways to funnel taxpayer money towards a growing list of undeserving recipients.

Now, in the latest attempt to coerce banks into modifying delinquent mortgages en masse, the Treasury Department plans to offer cash incentives to lenders who lower interest rates or forgive principal on second liens (so-called “piggyback” loans). According to Bloomberg, the new program aims to simplify the modification process and help struggling borrowers avoid foreclosure.

The subprime second lien was a highly profitable, nearly usurious loan product that proliferated during the housing boom. Once reserved for high-quality borrowers and those with sufficient equity in their homes, seconds became an easy way to jam borrowers into homes they couldn’t otherwise afford.

If a homeowner wants to take out a first mortgage for more than 80% of the home’s value, he or she is typically required to take out mortgage insurance, issued by firms like Radian (RDN), MGIC Investment Corp (MTG) and the PMI Group (PMI). For years, the cost of insurance — plus the required down payment — limited home ownership to those who, by and large, could afford to buy responsibly.

But as housing demand ballooned from 2002 to 2005, banks discovered they could just loan borrowers the down-payment money – and charge a hefty fee to do so. Without those pesky requirements — and by bypassing the sometimes strict credit guidelines of mortgage insurers — banks were able to open up their loan products to a whole new group of unqualified borrowers.

Second liens, by virtue of being subordinate to first liens, carry additional risk, and thus a higher interest rate. In other words, if a borrower defaults, the holder of the second lien has to wait until the first mortgage holder is made whole before getting paid.

And since seconds carried super-high interest rates, securities backed by this type of loan offered juicy returns for investors. It should come as no surprise that the second-lien market was dominated by Bear Stearns (now JPMorgan (JPM)), Countrywide (now Bank of America (BAC)), and Citigroup (C) (now in hock to Uncle Sam for a cool $300 million).

Now, the Obama Administration wants to give billions to not only the banks who wrote these loans, but the borrowers who accepted them. The program is destined for failure.

In fact, it’s already failed.

A little over a year ago, Fannie Mae (FNM) and Freddie Mac (FRE) introduced an initiative called the “HomeSaver Advance.” Under the program, borrowers behind on their mortgage payments could take out an unsecured line of credit to get current. Under this program, Fannie and Freddie lent out $462 million over the course of the next 12 months.

Now, based on current market prices, the loans are worth a whopping $8 million, or $0.017 cents on the dollar. Talk about throwing good money after bad.

The President’s initiative to modify seconds is no different: It takes a situation destined for foreclosure and simply prolongs the agony. This prevents the borrower from getting out from under his mountain of debt and starting anew. Meanwhile, homes become ever more dilapidated, and banks further delay their own days of reckoning.

The rationale for this program is obscure – though it does provide yet another way to hand taxpayer money over to the very banks who got us into this mess in the first place.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Residential real estate is about to get very weird.

In the coming months, housing-market data is likely to show price stabilization in many of the country’s hardest hit areas. Pundits, government officials and real-estate professionals will loudly proclaim the worst of our real estate woes are behind us. Back in reality, however, this data will simply reinforce the axiom that there are lies, damn lies, and statistics.

The lion share of home price declines have, thus far, been focused in low-end markets -areas where property values became the most detached from housing-market fundamentals. Even though the high end is now declining, sales activity is still heavily concentrated in the country’s most distressed markets.

Taking a look at the data below compiled by my firm, Cirios Real Estate — which depict sales transactions for the part of the San Francisco Bay Area between San Francisco and San Jose known as the Peninsula — one can see how rising home prices from 2003 to 2007 shifted sales transactions towards more expensive properties. This makes intuitive sense, and should naturally push up both average and median home prices.

Click to enlarge

Since the market peaked, however, notice how the percentage of sales of homes under $400,000 shot up to more than 50% of sales in the first quarter of this year, from as low as 9% in 2007.

Conversely, sales over $1,000,000 that accounted for almost a quarter of transactions in 2007 now make up less than 9% of total sales so far in 2009.

This heavy concentration of sales in low-end markets is skewing home price data to the downside, exaggerating the impact of depressed markets on broad measures of prices.

As the foreclosure epidemic spreads outwards to more well-to-do areas, and job losses force previously stable homeowners to sell into a weak high-end market, more expensive homes will begin to make up a greater percentage of total transactions. This dynamic — not an overall rise in property values — is likely to push up average and median home price measures.

In other words, high-end markets will be falling as price discovery rears its ugly head, while low-end markets are flat at best, as price declines reach exhaustion levels and investors step in to buy. High levels of supply and looming shadow inventory of foreclosures will prevent meaningful appreciation in these distressed areas for the foreseeable future.

Meanwhile, data will show a housing market on the rebound.

No doubt, banks like Wells Fargo (WFC), Citigroup (C) and Bank of America (BAC) will cheer the end of the real-estate slump. Real estate professionals will pound the table that now’s the time to buy (just like they said back in 2007). Government officials will proudly assert their mortgage-relief efforts were a success.

Nothing, however, could be further from the truth.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Of the myriad highbrow economic debates currently raging throughout the world of punditry, academia and government policy, few are as contentious as the one over the future of prices: Inflation vs. Deflation.

Indeed, the endgame for this issue is not insignificant, as many believe our economic future hinges on the Federal Reserve’s ability to deftly engineer a return to steady, manageable inflation. To say the least, this is no easy task.

With the unemployment marching upwards, credit markets still largely frozen and global trade grinding to a halt, the American economy is in desperate need of a monetary jolt. The trouble for Fed Chairman Ben Bernanke is that with interest rates already at zero, he’s being forced to rely on so-called “quantitative easing” to pump money into our badly bruised financial system.

These efforts are being managed through the alphabet soup of new lending programs like TALF, TAF, CPFF and others.

Meanwhile, a glut of savings from the developing world coupled with reckless financial alchemy caused debt loads to skyrocket to unsustainable levels. The ongoing destruction of that debt, discussed often by Minyanville’s Kevin Depew and Mr. Practical, is now raging at full speed, as assets of all types have come screaming back to earth.

Bloomberg highlights the debate by focusing on 2 highly regarded economists with divergent views on inflation and its causes.

John Maynard Keynes, a 20th century British economist gained notoriety for his thesis that inflation was controlled by supply-demand fundamentals within an economy. He advanced the view that well-directed government spending could help a country balance economic growth with a moderate, healthy rise in prices.

Western politicians jumped on the Keynesian bandwagon during much of the last century to support a vast expansion in government spending and intrusion into the private sector.

Opposing Keynes was Milton Friedman, who instead believed that “inflation is always and everywhere a monetary phenomenon.” Friedman’s focus on monetary policy, that is, interest rates and controlling the flow of money through a country’s economy, clashed with the Keynesian view that inflation could be controlled with fiscal measures and legislation.

Bernanke is doubling down on Keynes, evidenced by recent lending initiatives, bailouts of financial institutions like American International Group (AIG) and his support of President Barack Obama’s massive fiscal spending program. The Fed’s involvement in cleaning up the balance sheets of Citigroup (C) and Bank of America (BAC), along with efforts to jumpstart the mortgage market have also diminished its ability to remain apolitical and tend solely to the needs of the economy.

The Fed’s gamble is a bold one, as inflating our way out of a deflationary debt unwind could lead to a rapid, uncontrollable rise in prices should the economy rebound sooner than expected.

For example, big oil companies like Exxon Mobil (XOM) and Chevron (CVX) will be reticent to invest in new technologies or drill new wells should crude prices remain low. Limited production capacity could squeeze supply when demand picks back up, leading to a rise in prices.

This trend of firms retrenching in response to rapidly waning demand for goods is being mirrored throughout the economy. And although the Fed promises to take back the monetary stimulus when the economic growth returns, the timing and political implications of such a move are anything but a slam dunk.

And unlike other more esoteric debates over economic ideology, the result of the inflation vs. deflation slugfest has real implications for all Americans.

Inflation, while generally viewed as a necessary evil for economic growth, lines the pockets of those invested in financial and other economic assets at the expense of those on the lower rungs of the economic ladder. If real incomes rose at the same rate prices did since the Fed was created in 1913, they would currently stand at $300,000 per year, six times the current median household income of around $50,000.

In other words, Americans earn about 80% less, in real terms, than they did 100 years ago.

Deflation, while causing a drag on the economy at large, benefits those making less money as each additional dollar they earn stretches further. Meanwhile, at the top of the economic spectrum, the wealthy dislike deflation since their stocks, bonds, commodities, homes and Rolexes all fall in value.

As calls for a stock market bottom and impending economic recovery gain momentum, so too will predictions of rampant inflation. Ironically, Bernanke and fellow central bankers around the world are counting on the hangover from the financial crisis to be bad enough to forestall a resurgence in demand and enable them to slowly, carefully withdraw their monetary steroids.

Whether that will be possible, or even politically acceptable is anybody’s guess.

By ANDREW JEFFERY

This post first appeared on Minyanville.

With mortgage rates at historic lows, housing prices plummeting, and Washington throwing billions at housing-market recovery efforts, why is it still so damn hard to get a loan?

And while the easy answer is that banks are flat-out broke, the real answer may lie in an esoteric corner of mortgage finance which has all but disappeared: warehouse lending.

In the heyday of the housing boom, small mortgage companies were able to compete with huge financial institutions by tapping so-called warehouse lines of credit. Using cash from their warehouse lender to fund loans at the closing table, as big banks do, these smaller mortgage shops could often provide better service than their bigger competitors, though at the same low rates.

Warehouse lenders, often big banks themselves — remember Washington Mutual and Countrywide (Bank of America (BAC))? — held onto loans until they were sold in the secondary market. Turnaround time could be anywhere from a few days to a few months for larger, more complex transactions.

The benefits to being able to finance one’s own loans rather than just acting as a broker were numerous. Having a warehouse line gave mortgage bankers better control over the closing process, enabling them to beat out big banks in terms of response time and customer service.

By aggregating loans on a warehouse line, bankers could bundle them together and sell packages at a premium, rather than selling them off one by one. And since they could sell loans to any bank on the street, most such originators offered loan programs just as varied as those of even the biggest institutional lenders.

At the height of the boom, it was estimated that almost half of the over $3 trillion in annual loan production was first funded on a warehouse line.

As the mortgage market began to collapse, big purchasers stopped buying, and warehouse lines filled up with unwanted loans. Warehouse lenders began margin-calling clients, cutting off funding capacities, and capturing every penny they could from the few sales that actually went through.

The result, which can be plainly seen on websites like The Mortgage Lender Implode-o-Meter, was that hundreds of small bankers closed up shop.

Now, as banks scramble to handle the flood of requests for refinances at super-low interest rates, the mortgage industry is once again facing a credit crunch. By one estimate there’s only $25 billion in available warehouse lines to support the $2.8 trillion in mortgages expected to be written next year.

Mortgage bankers I speak with say the only thing holding them back from giving out more loans is a lack of warehouse capacity.

According to the Wall Street Journal, one solution being floated by the Mortgage Bankers Association (or MBA) is for Fannie Mae (FNM) and Freddie Mac (FRE) to provide government-backed warehouse lines to the few intrepid mortgage bankers still eking out a living in this nightmarish market.

The MBA argues that, since big banks like JPMorgan (JPM), Citigroup (C) and Wells Fargo (WFC) don’t need access to warehouse lines, they’re pushing out the smaller guys and stymieing competition. There’s little incentive for a Chase or a Citi to reopen its warehouse lending group, since the move would just allow competitors to grab market share from the very profitable business of originating loans.

While it makes logical sense for regulators to allow Fannie and Freddie to prop up this segment of the market, it may run contrary to other bank-friendly initiatives. Fees generated by writing new mortgages may be the only thing keeping the likes of Bank of America and Citigroup from tapping even more government support to stay afloat.

By ANDREW JEFFERY

This post first appeared on Minyanville.

This week, 2 data points led optimistic market-watchers to declare the bottom in the housing is nigh: Indeed, one widely read trader-writer proclaimed, “The oversupply of housing that so plagues the market at present will be a figment of our memory a few months hence.”

The first: On Monday, the National Association of Realtors said existing home sales jumped 5.1% in February compared to the previous month, largely due to the high number of foreclosures being dumped onto the market by big banks like JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC).

While indicative of buyers gingerly dipping their toes back into the market, existing home sales are still down 13.4% from a year ago.

The second: On Wednesday, the Commerce Department released data on February new home sales which showed a similar trend: Transactions bounced 4.7% from January, but remain a whopping 41% below sales this time last year. Nevertheless, shares of beleaguered homebuilders like Centex (CTX) and Lennar (LEN) had stellar performances this week, capping a nearly 100% gain since the beginning of the month.

Prices, however, continue to slide for both existing and new homes. And while median (and average, for that matter) price data is skewed to the downside due to the mix of homes sold in a given period — in this case, more cheap houses than expensive ones — property values remain in a decidedly downward trend.

But since transactions typically find a bottom prior to prices, the number of people who believe prices should stabilize in the near future is growing.

Examining the data, unfortunately, tells a different story. Below is a chart produced by my firm, Cirios Real Estate, showing home prices and sales transactions in for the eastern part of the San Francisco Bay Area. The East Bay is a fairly representative sample of California housing markets: A little high-end, a little middle-class and a little low-rent all mixed in.

Click to enlarge

The red line shows average home prices, while the blue line shows sales transactions, as measured by their change from a year ago. Notice how, even as sales have spiked from the previous year, prices continue to plunge.

Two things jump out at me on this graph (aside from the massive increase in transactions and precipitous decline in prices):

First, transactions began to ramp up as prices moved down toward levels where borrowers could get government-backed loans to buy homes. That means Fannie Mae (FNM), Freddie Mac (FRE) and the FHA have financed a whole swath of homes in the past 18 months that are now severely underwater.

Second, transactions bottomed in September 2007, not long after the market peaked. 18 months have passed and prices have dropped more than 50% since that time.

With that in mind, the current “euphoria” over housing data — after a single month-over-month increase in sales, when year-over-year measures remain well behind even last year’s weak totals — seems a bit premature.

This is not to say prices will never stabilize, or that increased sales are a bad thing. In fact, the more sales we have, the quicker price discovery happens and the faster a true bottom can be found. Nor is this some proclamation that this part of California is a perfect proxy for home prices nationwide.

But given the backlog of foreclosed homes sitting on the books of the major American banks, continued price declines across the country and tight mortgage market conditions, calls for the devouring of supply by voracious home buyers causing an imminent housing bottom is downright premature.

To be sure, we may be one step closer to a housing bottom, but that’s one step on a very, very long path.

By ANDREW JEFFERY

This post first appeared on Minyanville.

Despite herculean efforts to stop the foreclosure juggernaut, Americans are still losing their homes at near-record pace.

According to RealtyTrac, a firm that sells default data, foreclosure filings rose in February to nearly 300,000, up 6% from the month before. This figure is the third highest for any month since the housing market turned south in 2005.

As property values fall, more borrowers are finding themselves underwater – owing more on their homes than they’re worth. This, coupled with job losses, means homeowners are missing payments at an alarming pace.

Sky-high foreclosures are even more astounding when myriad loan-modification efforts and short-term foreclosure moratoriums enacted by big lenders like Fannie Mae (FNM), Freddie Mac (FRE), JPMorgan (JPM) and Bank of America (BAC) have been taken into account.

And while President Obama’s hotly debated $275 billion housing-relief package is barely a month old, its becoming clear that no cleverly worded press release or inspiring oratory can reverse the trend that’s firmly in place: Housing supply remains elevated, with buyers sitting on the sidelines awaiting better deals. Prices, as a result, will keep falling for the foreseeable future.

In fact, Rick Sharga, executive vice president at RealtyTrac, told Bloomberg he believes the country’s biggest lenders have yet to list over 700,000 bank-owned homes.

This “phantom supply,” as its known in the real-estate world, paints a bleak picture for the housing market in the near term. Even though strong sales activity in distressed markets is pushing aggregate inventory data back towards historical norms, phantom supply is patiently waiting to punish those bold enough to prematurely call a bottom.

Further, well-to-do areas, formerly immune from home price declines, are starting to follow their more bubbly counterparts over the proverbial cliff. In the San Francisco Bay Area, for example, 15 homes had sold for over $5 million by this time last year. This year: Just one.

Many of the most distressed markets are in their last gap of depreciation. And while material appreciation is simply fantasy, high-end markets will pick up where they left off and keep broad measures of property values under pressure.

But as this dynamic plays out — and the depreciation torch is passed from the “subprime” people to those who are “prime” — opportunities will emerge in markets that stabilize first. Just as housing prices overshot to the upside, they will likewise overshoot to the downside.

The opportunities are currently few and far between. But with each day that passes, the world of possibilities grows, if only ever so slightly.

By ANDREW JEFFERY

This post first appeared on Minyanville.

There isn’t an economic forecaster or media pundit alive who isn’t angling to be the first to (correctly) call the bottom in housing. Many have tried; they all have failed.

But what happens when one’s right?

At some point in the future, broad home price indicators will cease to slide, then stabilize and even begin to move back up. When, and in what shape that trajectory will be, of course remains a mystery. As I’ve written in the past, the eventual recovery in housing will be a prolonged, localized event. The rising tide will not lift all boats, as the fundamentals of the old cliché “location, location, location” will be truer than ever.

And although predicting the date of this event is a fool’s errand, savvy home buyers will be ready to jump in ahead of those who remain in their shells long after the best bargains are behind them.

Here are 5 simple things you, the future home buyer can do now, without putting your nest egg at risk, to be ready for the coming opportunities in real estate:

1. Have patience.

There will be false bottoms, dead-cat bounces and treacherous pitfalls on the path to a recovery in real estate. Be patient. Don’t believe the hype – a couple months of strong sales numbers don’t foretell and imminent rebound in prices. Let the beginnings of a trend develop before you begin your home search in earnest. Future appreciation will come slowly, as tightened mortgage guidelines and fear of the collapse we’re now experiencing will not be soon forgotten.

2. Find a market, do your homework.

Had your eye on that classic Victorian around the corner from your kids’ future grade school, and hoping the elderly couple living there knock off just in time for you to swoop in at the estate sale? Expand your search.

Pick a couple of areas you could be happy in – look in multiple cities even. By focusing too narrowly on a single street, or even a single neighborhood, you could be missing out on what could be a fantastic opportunity on the other side of town. Don’t compromise, but play with your list of priorities to give yourself the most “exposure” to localized markets that may become increasingly attractive.

Tour the schools, scope the neighbors – hang around on Halloween to see who gets egged. RealtyTrac.com is a great resource for watching foreclosure activity all over the country and in your backyard. Their free site provides a great overview of cities and neighborhoods, but you have to pay for the house-by-house detail. Unfamiliar with an area? Use RealtyTrac to eyeball major neighborhood dividers (railroad tracks, highways, main roads, etc.) and examine foreclosure activity on either side.

3. Find a broker and start a housing “tracker”.

Real estate brokers can be a valuable tool in your home search – use them.

An aside: The commonly used term “realtor” denotes an association with the National Association of Realtors, or NAR, the lobbyists who have been predicting a bottom since the downturn began over 3 years ago. Tread carefully with anyone proudly bearing an NAR pin. Contrary to what many tell you, you don’t need to be a realtor to have access to MLS. But I digress.

Today, with transactions down in all but the most distressed areas, any broker worth his (or her) salt should be out prospecting for future clients, not proclaiming the time to buy is now. Collect referrals, test drive a broker or 2 and find one you’re comfortable with. Your broker should not just understand the local market but be up to speed on the macro-level events affecting the real estate and mortgage markets. Ask him what a CDO (collateralized debt obligation) is – watch for a flinch. For better or for worse, understanding the state of Wall Street is as important these days as understanding the state of your street.

Ask your broker to help you develop a “housing tracker,” a simple tool that allows you to watch homes as they come on the market to see when and for how much they sell. Watching the life cycle of homes in a given market will give you a sense of how desperate sellers are, when asking prices drop and what concessions buyers are able to receive from sellers. As concessions begin to swing in favor of the sellers, the bottom may be nigh.

4. Start saving money.

If there’s one sure bet in the housing market, it’s that mortgage requirements will remain tight for the foreseeable future. Banks — Citigroup (C), Bank of America (BAC), JP Morgan (JPM) and Wells Fargo (WFC) being the obvious examples — are hoarding cash and reticent to lend even to the most qualified buyers. Unless a loan falls within guidelines set by Fannie Mae (FNM) and Freddie Mac (FRE), rates remain elevated and approvals elusive. This isn’t likely to change any time soon.

Save for a down payment and be able to point to liquid reserves (i.e. money in the bank) during the application process. Think about this as the lender’s cushion should you fall on hard times – and banks will need all the cushion they can get.

5. Think of your home as an investment, not just a place to raise your kids.

This may seem counter-intuitive, since speculation on housing prices played a huge role in creating the recent housing bubble. But speculating and investing are not the same thing.

A home, in addition to being a place to raise kids, is a massive financial obligation. Becoming emotionally attached to a house, rationalizing the financial realities away and hoping paychecks keep coming simply isn’t a viable home-buying strategy. As un-romantic as it may be, treat a home as you would a stock: Examine it, turn it upside down, run the numbers. Love it every day you’re there, but financial responsibility and emotional attachment don’t need to be mutually exclusive.

The time to buy may not be today — and it may not be tomorrow — but we’ll be closer to that day tomorrow than we are today. However, just as prices overshot to the upside, they’ll likely overshoot to the downside – be ready when that day comes.

Preparation, not hoping, will be the key to taking advantage of the opportunities that will present themselves on the other side of this mess.