NEW YORK (Fortune) -- Equity-addicted homeowners have long hung on David Lereah's every word. As chief economist for the National Association of Realtors, he's responsible for tracking the closely watched sales of existing U.S. homes.
He's also seen as a booster for the housing boom. But after five years of record volume and price growth, sales dropped by 8.4 percent last year while prices rose by a measly 1.1 percent nationwide.
With his latest book, "All Real Estate is Local," due out in April, Fortune's Ellen Florian Kratz talked with Lereah about where the market is headed and how an angry blogger almost made his mother cry.
Even though the market contracted, 2006 still didn't bring the first yearly price drop since the National Association of Realtors started tracking the statistic in 1968. Nope. It's amazing isn't it? People thought we'd get it because they thought the bubble was going to burst, but it never happened.
Do you think it will happen in 2007? I don't because we're already seeing some parts of the real estate market picking up again. It looks like we've bottomed out. The worst was the fourth quarter of 2006.
For the past two months now the inventory numbers actually improved for the country. Mortgage rates are still low. The Fed is going to behave. So there are a lot of good signs that the worst is over for housing.
So when it's all said and done, this contraction in housing is probably going to be the least severe contraction we've ever had, which is going to surprise a lot of people.
But many think we still have a long way to go. If you look at local areas, that statement is true. California has a long way to go. I expect them to continue to experience pain all throughout this year. Southern Florida, same thing. Las Vegas is probably going to take a little longer to correct as well.
A quarter of the country is still feeling pain, and I can't guarantee that it's going to be over by the end of 2007 for some of those areas.
So they could decline into 2008 or longer? They could. It's hard to tell right now. The real key for some of these areas that are having problems is prices. Prices need to come down to bring buyers back to the market. And until they do, they're going to experience drops in sales. California is experiencing some serious drops in sales - 30 percent drops in some places.
So when we talk about real estate are you talking about local or national? If you¹re talking about national, I think we've bottomed out, and it looks like we're going to come back very modestly throughout this year. And then in 2008, it will be back off to the races again in my opinion. But for a quarter of the country, that's not the case.
What do you predict for price appreciation for 2007? My forecast is 1.4%
So you don't think California and Florida could bring the whole country down? They'll bring themselves down. But will it bring the whole country down? No. The real key here is the economy. The difference between the contraction today and any other contraction we've ever had is that the economy is healthy.
But Robert Shiller, author of "Irrational Exuberance," says we might have gotten so far out of whack that it has to come down no matter what. I know. That's Bob. That's what he says. We disagree. He thinks psychology will play a major role here, and my view is no. We haven't strayed from the fundamentals. The only part where we strayed from the fundamentals was the speculative investors coming in during 2005. And that exaggerated everything in real estate.
What about the problems in the subprime market? I was giving a speech in Atlanta about two years ago. During the question and answer period, someone asked me something about interest-only loans. I said, they're kind of dangerous and you have to be careful. Someone rose their hand and said, Did you know that in Atlanta, the percentage of interest-only loans in 2005 was 40 percent of the market? Atlanta didn't even have a boom.
That's when I knew we were in trouble. Regulators and the big lenders need to get together and work out some arrangements to accelerate refinancings. They need to take people out of these crazy loans and get them into longer term loans that work for them over the next 10 or 15 years.
Will problems with subprime have any effect on your sales numbers? I think in some areas yes. Foreclosures are going to happen in California.
You may see a rise in Las Vegas or Phoenix or Washington DC and parts of Florida, but it's not all over the country. The big problem right now is borrowers with a loan balance that may be greater than the value of their home. They have no incentive to make the mortgage payment. They'll say, I don't need it, take it. That's going to occur in some of the real unaffordable areas, like San Diego and San Jose.
What surprised you about the boom? The share of second home buying. It was 40 percent of the market in 2005. I was in shock. When you have a lot of second home buying, that's volatile, whereas when people buy a primary residence, they're buying it to live in.
I never anticipated that type of market share in second home buying. That proved to be the end of the boom.
You've been accused by the blog David Lereah Watch of being too bullish. What's it like to have an online antagonist? At first I was kind of laughing. And now, it's enough already. This is a 26-year old that could not afford a townhouse and blamed it on the boom. And then he said, Who's talking about the boom and my name kept coming up. So I became Satan to him.
The worst was that my mother read one of those things, and she almost started crying. And I had to say, Mom, you have to have thick skin. I'm going to be in the public and make statements about real estate, and if someone doesn't like what I'm saying, they have every right to say something opposing me.
Now should they go so far as to call me Satan? I don't understand where that's coming from. That's just weird.
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The risk in subprime defaults
Home 'flipper' gets stung
Home slump continues 
