Real estate market timer and author of Timing the Real Estate Market, Robert Campbell, now in its third edition for 2007, says that successful investing is about predicting.

But with mixed signals in the marketplace, the crystal ball can be cloudy, even if you think you have "can't fail" techniques to predict what the market will do.

"You can look at specific economic and market data that alert you to what lies ahead and put the laws of probability in your favor," says Campbell.

He says looking ahead to the rest of 2007, the "greatest uncertainties we face are whether there is going to be a hard or soft landing for the U.S. housing market(s) and whether the economy goes into recession."

Recession? He's one of the few analysts to mention the dreaded R-word.

Why didn't the Labor Department find that more people had better-paying jobs last year, which weakly explains why the slowing housing market didn't curb consumer spending as anticipated?

According to economist Irwin Kellner, the government agency underestimated the number of jobs added to the economy in 2006 by a eye-popping 22 percent. He warns in his column, "... unless offset by gains in productivity, these higher labor costs will eat away at profits and margins."

Jobs data is core to evaluating the economy, but when the numbers are off by more than 400,000 jobs (22 percent,) it's hard to analyze any market, but it's safe to say that an accelerating jobs market will boost inflation, because employers will try to get more for their goods and services before they turn to layoffs. That means the consumer is once again front and center. If consumers don't step up to the plate, the economy will recede, jobs will be forfeited, and the cleansing cycle of inflation-deflation will begin again.

Robert Campbell says, "The U.S. and California economy is unquestionably in danger of recession. I say this for two reasons: (1) the unraveling of the housing bubble is clearly at hand; and (2) historically reliable recession indicators continue to predict that the economy is going to contract."

He explains that from 2001 to 2006, the U.S. economy was "asset driven," not income driven, with "rapidly rising housing prices" providing "households with the collateral for increased consumer spending, and thereby GDP growth."

Otherwise, the economy would only have expanded at an "anemic 1 percent rate or less."

However, consumers living on borrowed money can't fix the economy forever. In the last couple of years, consumers have actually spent more than they earned, a troubling phenomenon not seen since the days of the Great Depression.

"When does a credit-driven real estate bubble end? It ends when the availability of credit tightens up and/or when borrowers are unable or unwilling to get credit because it makes no economic sense," he says. "It seems that we are now reaching that stage."

Campbell points out that sub-prime lenders are starting to fold and more sub-prime homes are going into foreclosure.

"In 2005, the number of sub-prime loans going into foreclosure was 5 percent. It was 8 percent in 2006," says Campbell. "In a report recently released by the Center for Responsible Lending, a Durham N.C. research group, they predicted that 1 in 5 sub-prime mortgages originated in the past two years would end up in foreclosure."

That's significant because "from 2003 to 2006, approximately $1.75 trillion or roughly 16 percent of all mortgages were sub-prime," says Campbell.

That also means that a large number of homebuyers won't be in the game in 2007 and moving forward. "This all adds up to a sizable contraction in the pool of buyers that are able (or willing) to obtain mortgage financing," says Campbell. "If median income families can only afford the median income home because they had to overstate their income, then house prices will need to drop substantially as easy credit disappears."

A contraction of credit can become a vicious downward cycle that feeds upon itself, says Campbell. "Even those who can comfortably afford to pay their mortgage may decide not to. When prices are falling, instead of throwing good money after bad, borrowers could simply mail in their keys to their lenders and buy a similar home that is a deeply discounted foreclosure down the street."

Trends always start at the margin, he says. "The problem starts at the outside edge, with the weakest players going down first, before spreading to the center," says Campbell.

"In 2007, I believe that housing prices will continue to fall," he predicts. "The U.S. median price home could fall 5 to 10 percent and prices in some of the most overvalued markets like California and Florida could fall 10 to 20 percent. Based on the length of past housing market down cycles -- roughly three to five years -- we are still early in the game and we haven’t even begun to see the bloodshed. If we have a credit crunch and/or a recession, it will accelerate the slaughter and the destruction of wealth."

Published: February 13, 2007

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Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. For more articles by Blanche, click here.