Meredith Whitney Predicts Double Dip in Housing Market: Is She Right?

Adding to her skepticism of a recovery, said Whitney, is that more and more, people are choosing to not pay their mortgages, which is something she would not have predicted a year ago.

"What has happened in the last year," she said, "has been the government and banks have provided a lot of mortgage modification programs, and a lot of consumers have been smart enough to say, 'I can get a better deal on a modification program if I wait two, three, six months. So I will pay the things I need to pay the most -- my credit card bill, auto bill, even home equity.' And they've been not paying their mortgage."

This has created, she said, "a massive, rotting pool of assets on bank balance sheets that have provided the consumer excess cash."

That cash has allowed people to spend more freely in stores and restaurants, creating the feeling that the economy is, while not completely recovered, moving forward.

Just the opposite, said Whitney, who expects a double dip in housing to be inevitable. Those delinquent payers will soon have to answer for their actions, she said. In the second quarter, banks were becoming more aggressive about foreclosing on delinquent borrowers, she said. More houses on the market means still-low home prices.

"How can house prices grow?" she asked. "There's no other way to look at it, they are going down again."

She wouldn't go so far as to commit to a double-dip recession, but a tough housing market has never been good for the economy. She concedes that news in credit card lending, and hiring in large corporations, has been good this past year. But she doesn't believe it's enough when so many people are still out of work.

Indeed, today a report on housing sales for May showed that sales of new homes sank 33 percent -- the slowest sales pace since records were kept in 1963 -- after tax-credits for homebuyers expired at the end of April.

While no one expected May's housing numbers to be great, the more optimistic watchers of home sales predict that sales will level out as the summer buying season takes hold. But Whitney points out some underlying problems in the U.S. economy that have yet to be reconciled, with a still-uncertain job market and continuing personal debt. Without buyer incentives, it could be another tough year for the housing market.

A double-dip recession? There's a chance, said Whitney. But a double-dip in the housing market? "No doubt," she said. What's most scary is that what she is telling us isn't anything we don't already know. The job losses, the mortgage defaults, the high personal debt are things we have been talking about for two years. It's how you read those signs. And Whitney's track record in reading those signs is pretty darn good.

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