The mortgage resets are a time bomb. Russ Winter did an analysis of Cagan’s Sept 2005 paper on mortgage resets.

“Conclusion: if we use a 10% drop in housing price combined with a trillion in new mortgage debt since the Sept. 2005 First American survey, we can easily visualize well over a trillion in mortgages showing serious negative equity, and nearly two trillion having no equity. All this, while rate resets keep going on like firecrackers.” link

Today I met a real estate investor who currently buys high end vacation homes near Palm Springs, FL. He’s cash flow positive, because he only needs to rent each house 4 months of the year for $10K/month to break even; I think he’s using I/O loans. He buys at least one home every year, and says this year is no exception. He believes prices may go down for 1-2 years, no more than a 5% drop, and then start going up again. This guy has been through both San Diego housing busts in the 80s and 90s, and says that the best investment from a tax standpoint is real estate.