I agree, it’s going to take a looong time. A lot of FBs refinanced and cashed out, or took out HELOCs for emergencies. We have just entered the “emergency” period of negative cash flows on “investment” properties and people are still hoping that the market will shoot right back up to save them.

I don’t expect a real estate panic until 3 years from now, when the FBs have no more emergency funds to carry them over. At that time, debts would have skyrocketed leaving borrowers no way to service those debts.

Here’s a scenario I envisage. BF his bought house in 2004 for $600k. Refinanced at $800k and cashed out $200k in 2006. He can’t really afford the $800k note (much less the original $600k loan) so he’s using part of his $200k cash horde out to service the debt. He still thinks that in a few years his out will be worth $1.2M, so of course he went out and bought a big SUV.

A few years go by and his cash is running low… but houses in his neighborhood are now only worth $400k. His debt is still $800k and he can’t make the monthly payments. His wife and kids are used to having everything. He’s now worried about paying for the college education of his oldest son who is also clamoring for a new car, preferably a BMW. What is he to do? He’s an FB out options.

Some people might be able to pull themselves out of this quandary. But throw in a few real family emergencies such as medical expenses, unemployment, divorce (ie, the vagaries of life) and you have a nasty mess.