Tilson: Housing Decline in Seventh Inning

Ryan Leggio: Hi, I'm Ryan Leggio. I'm a mutual fund analyst at Morningstar.

With me today is Whitney Tilson. Whitney is the manager of the Tilson Focus Fund as well as a manager at his hedge fund. Whitney also is chair of the Value Investing Congress and has a popular newsletter, "Value Investor Insight."

Whitney, thanks for joining us today.

Whitney Tilson: My pleasure.

Leggio: Whitney, you wrote in your very successful book "Mortgage Meltdown" about the housing crisis. Where are we as far as housing prices correcting?

Tilson: Sure. Well, the good news is we're most of the way through it. The bad news is, those who are saying we're at the bottom I think are about a year premature.

We're about three years into home price declines, and our best guess--very hard to predict of course; it depends on unemployment, interest rates, things like that--is that what we're seeing now is the May/June data showing that housing prices actually went up a little bit. We think that's more seasonality. April/May/June of every year is historically a strong period for housing prices, and we think as the wave of foreclosures keeps coming through the pipeline, the seasonality passes, home prices are likely to decline my best guess would be another 10% over the next year. Then, if we're lucky, we'll see a bottom then.

Leggio: That doesn't sound too bad, comparing to where we've been. On the commercial real estate front, how does that look? I know there are troubles looming there.

Tilson: Sure. We're probably in the seventh inning on the residential side. We're maybe in the second or third inning on the commercial side. A lot of the same craziness went on in that market, but those loans have longer reset dates than a lot of the residential loans.

The banks are mostly holding them on their books at par, but when it comes time to refinance those loans, they're not worth the debt. So the equity gets wiped out; the debt has to take a haircut.

There's good news and bad news there. The good news is that the losses are going to be spread out, so it's not going to be any sudden shock to the system that might cause dozens of banks to collapse all at once.

The bad news is it's going to be with us for a long period of time and creating a headwind for our financial system. So that's why we think the unwinding of this great bubble is going to take many years, even from now.