Monday, August 29, 2005

It's RIP for the housing boom

Supplies of new and existing homes are growing. Add in wild condo speculation and gullible people buying land sight unseen. My conclusion: The housing bubble is about to burst.

By Bill Fleckenstein

Last Tuesday saw the release of July existing-home sales that were slightly below expectations. For the housing market, one piece of data in the National Association of Realtors report portends the end of ever-higher prices: The supply of homes on the market now stands at 2.75 million -- the highest since May 1988.

A Commerce Department report Wednesday adds weight to the evidence: New-home inventories have grown about 15% since July 2004, to 460,000, the highest level since the Commerce Department started tracking new homes in 1963.

Housing ATM: RIP
Given all the multiple-property buying that's occurred, the accounts in the media (I'll share two of them below) and what readers of this column have observed with their own eyes, this news is somewhat surprising. However, it was inevitable that inventory would start piling up at some point. The time, as it turns out, is now.

That excess inventory, together with the further supply now in various stages of coming on stream, makes me feel more strongly than ever that this summer will be seen, with benefit of hindsight, to have been the top. In essence, Time Magazine's cover early last June -- "Home $weet Home: Why We're Going Gaga Over Real Estate" -- will more or less have marked the peak.

There's no point dwelling on the ramifications of an out-of-order housing ATM, as regular readers know: the end of consumer spending, weakening economic activity and the resumption of the bear market for stocks. What's left will be decelerating economic activity and plenty of bad debt, though none of that is today's business.

Condo-mania made kosher
For a look at how gullibility, not apprehension, is the order of the day, let's turn now to the Aug. 18 Wall Street Journal. In a Page 1 story headlined "Behind Zooming Condo Prices: New Demographics, or a Bubble?" this onetime leading-edge, high-quality and now watered-down consensus business publication actually entertained the notion of a bubble-boosting phenomenon called "new demographics."

Since its inclusion in the paper's headline dictates capitalization, it's not possible to tell if the Journal plans to dignify "new demographics" by capitalizing it everywhere (just as it did in "New Economy," which it fell for hook, line and sinker). I suppose that will depend on how long the condo market holds together.

To judge by the writers' sentiments, which ranged from slightly sanguine to downright bullish, that appears to be a long time. They noted one Greg Deman, owner of a warehouse-distribution company in Sioux City, Iowa, who recently bought three condos in the same building in Omaha (for prices ranging from $250,000 to $350,000). Now, Deman wants to buy more. "I might be guessing right, or I might be guessing wrong," Deman told the Journal. "But I think this area's going to grow." Oh, by the way, that same fellow is interested in "investing" in Phoenix and Las Vegas.

I believe the writers (and perhaps the Journal) tip their hand in this summation: "The market is drawing baby boomers and investors, some of whom are using letters of credit instead of cash downpayments to reserve preconstruction units… Local real-estate agents say these buyers are requesting larger-than-average units, such as condos that take up the whole floor of a building."

Apparently not realizing that this is, in fact, the bear case, the writers conclude with this quote from a Florida real-estate agent: "The market down here is extraordinary. … Since (Hurricane) Ivan, people were worried that properties were going to drop, but they've gone up every month."

CPA moms to the rescue
Perhaps some of them have been counting on a little help from "Mom." If it wasn't enough that "liar loans" are ubiquitous (though the need to lie hardly exists, because seemingly anyone can borrow any amount necessary), it turns out that with a mere mouse-click onto CPA Moms Unlimited, one can apply for a CPA letter to "verify" one's net worth. (Their motto: "CPA Moms specialize in cleaning up messes at a price you can afford!")

Maybe I'm overreaching when I say the Journal is bullish on real estate. The paper has also run a few critical stories. Maybe the Journal is just bullish on the vehicle of the easiest speculation -- condos.

Part and parcel of a bubble
There was another sign of the times in "Bidders win unseen lands, discover they bought trouble," a story in the Aug. 17 edition of my Seattle Times. The story details how buyers are clamoring after what can only be described as dubious properties, held by an outfit called Auction Acres. That doesn't sound like someone you'd want to do business with, especially when you read the fine print, which the writer (with the assistance of a real-estate attorney) describes as follows:

"Unlike a traditional real-estate sale, where the buyer gets the title while paying off the loan, the Auction Acres contracts give buyers use of the land, but the seller keeps the title until the full sales price is paid off. ... So the contract allows the company to keep the land -- and all the previous payments -- if a buyer defaults, no matter how much they've paid. The auction company can also borrow against the land."

A match made in (mania) heaven
Not surprisingly, the article chronicled how people who thought they were getting bargains wound up instead with "basketball-court-sized" lots in floodplains. Of course, it appears that none of the buyers who got bagged bothered to do any research whatsoever.

This was a case of unquestioning, gullible buyers dealing with a company that banked on their ignorance, as it cashed in on the phenomenon. (A picture that accompanied the article showed a crowd of 2,000 people attending a recent auction for 220 parcels of vacant land.) As the rising tide of higher real-estate prices goes out and exposes what we don't know, given what we do know, it will be truly mind-boggling. Joe Public is buying land sight-unseen without doing any due diligence. If that isn't a top, I don't know what one would look like.


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At 3:11 PM, Blogger Housing Boom Gone Bust said...

The housing boom...ahhh the days of yore.

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