Real Estate Values Falling; hold onto your shirts!

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http://moneycentral.msn.com/content/P149596.asp

The Housing Bubble Has Popped


Reports of falling sales and investors stuck with properties they can't sell are just the beginning. Property owners should worry; so should their lenders.

By Bill Fleckenstein

A recent story in the Wall Street Journal, "Hot Homes Get Cold" (subscription required) offered lots of its useful vignettes that serve as a microcosm of manic markets -- starting with the bravado-cum-denial displayed by a medical-equipment salesman in Stuart, Fla.

Concerned about his real-estate investment apparently going sour, he can't afford to reduce the price to what homes now sell for in his neighborhood -- which is about $100,000 less than he's asking. Says the salesman: "If I got in a jam, I would have to drop the price, but I am not at that point." His game plan: Rent the house, so as not to "lose my shirt."

That's the mentality often seen in manic markets -- the belief that you can't possibly lose, and, when the price goes against you, you don't have to deal with it, because it will come back. This fellow (and millions more like him) is going to find out that his belief is a mistaken one, in the same way that folks did when the stock bubble burst.

Dwelling takes a little shelling
The story went on to note that many formerly hot markets in California, Arizona, Washington, D.C., and Florida are now "languishing without buyers or even prospects. Many once-booming markets are seeing double-digit declines in sales." The magnitude of the drop in Florida home prices (once the frothiest market in the country) is striking. Single-family home sales declined 20% in February, year-over-year. Similarly, California sales dropped 15%. Some of the hottest towns in those states were off twice as much.

I loved the point that what seems to be really alarming is how "real-estate agents in some of these formerly red-hot markets have been surprised at how suddenly (my emphasis) market conditions have deteriorated in the past few months." Of course, that's what happens when manic markets and bubbles turn. Prices change radically and, seemingly, for no reason.

Many people will say that the real-estate market has turned due to higher interest rates, and rising rates have hurt. But the real-estate market ignored rates going up for quite some time. Its topping was caused by exhaustion. Same with the stock bubble -- many folks think it was rising rates that caused the implosion. That isn't true. The stock bubble ran until it popped in March 2000, having ignored everything up to that point.

Symptoms of the doldrums
To me, it's not debatable that the real-estate bust is starting to gather steam. The top was approximately when Time Magazine published its June 12, 2005, cover story: "Home $weet Home: Why We're Going Gaga Over Real Estate". (For more, check out my June 13, 2005, column, "Straight talk on what the Fed has wrought," and my Aug. 29, 2005, column, "It's RIP for the housing boom.")

After having leveled off for a while, the real-estate market is now starting to slide. We're seeing signs of sales slowing and inventory accumulating, which are all quite classic, even though the timing of when this would begin was not possible to predict in advance.

Continuing on, the article noted that Florida is "ground zero for the housing market" and as good a laboratory as any to watch. The real power behind the housing bubble, i.e., irresponsible lending, was "exacerbated in Florida." Quoting from Mark Zandi, chief economist at Moody's Economy.com: "There were more lenders, more realtors, more foreign investors" than the rest of the country -- which is how a hot market gets really wild.

The story cited the plight of investors who'd purchased homes in formerly hot housing developments that now resemble "ghost towns." One such individual is Paul Zani (no pun intended, I'm sure), who'd bought a couple of condos, listed them for more than he paid and now can't sell them. However, he doesn't want to reduce the price (even though he'll probably have to). This mentality is an example that many real-estate "investors" seem to share -- heads we win, tails the bank loses. (Some people are sanguine these days because, as the article notes, "while sales are slackening, they aren't collapsing." To that, I would add: "Yet." They will.)

By and by, heartburn for the bankers
It is indeed the financial institutions that are most at risk in the real-estate market (which is not to say that consumers and speculators won't get hurt). The lenders will bear the brunt of the pain, because in many cases, they loaned the entire purchase prices of many homes. As I have said often, the housing bubble has been more a lending bubble. It will be the impairment of the financial institutions that will stop the flow of credit to the real-estate market. In turn, that will accelerate the collapse in house prices somewhere along the way.

The story closed with a description of how slow the market has recently become in Florida -- via the following comments in an e-mail by real-estate broker Mike Morgan: "We went three days this week with not a single showing. That's incredible. I have 35 listings. We usually get 2-6 showings a day. ... I received more desperate calls from sellers than ever. One lady broke down into tears. Her husband bought two investment properties, and they are now going to lose their 'life savings' if they sell the homes in today's market."

Ladies and gentlemen, unfortunately, a lot of people around the country are going to be badly hurt as this bubble unwinds. And, after they have taken their losses, the financial institutions that were the engine behind this folly will take their own hits. 'Easy Al' Greenspan at the Fed tried to bail out one bubble with another bubble. While it bought some time, it will end in far-worse pain.

A vision of mean reversion
Finally, a recent edition of The Liscio Report, the economic newsletter, put into perspective how wacko the current climate is. It said that the ratios of (a) stock value to GDP and (b) real-estate value to GDP are both nearly twice their averages from 1952 to 1970. As the report noted: "If mean reversion still has any role in market valuations, then both markets have plenty of room to fall."

Since the name of my investment partnership is the RTM Fund (which stands for "reversion to the mean"), I obviously believe that plenty of mean reversion lies ahead.


Morningstar, Inc. © 2006. All rights reserved.[/url]

According to some posts on Real Estate Planet ( http://realestate.largeplanets.com ), mortgage rates are skyrocketing.

They sure are skyrocketing. Hard to predict whats going to happen.

Here is a good advertisement parody about over priced homes from that site. Its on the bottom half of this page:http://realestate.largeplanets.com/feeds?id=1