The U.S. Housing Bubble-- Yea, the Pinprick Cometh

Saturday, Apr 15, 2006

I am now convinced that the housing bubble in The United States is about ready to pop. Once home sellers see that "the Spring buying season" does not reappear along with hay fever this year, they will get panicky. Up to 30% of the homes that have been sold in the past two years have been sold to over-extended speculators who were hoping to "flip" them--taking advantage of the rising house market. The old saying goes "A rising tide raises all ships." But the inverse is also true. When the flippers realize that they are on a down escalator, they will start discounting their prices to make sure that their "spec" house sells before the music stops. Once this psychology sets in, it is just a matter of time before the mindset of "Get my investment back out of it" is replaced by "Dump it, and save part of my principal, while I still can."

There are already reports coming out of Florida and Southern California of a "buyer's market", with prices being substantially discounted. Some of the big house builders are offering unusual incentives ranging from gym memberships to cruise ship tickets. One of them is even advertising a "selling at our cost" sale, in an attempt to break even. Methinks this smacks of desperation.

As quoted in yesterday's Daily Reckoning (one of my daily "must reads"--BTW, I highly recommend that you sign up for a free subscription) economic analyst Richard Benson offered his insights on why housing is about to go to H*ll:
"Consumer debt is up to $2 trillion (not including $440 billion of revolving home equity loans and $600 billion of second mortgages). Not only do consumers owe a whopping $9 trillion in mortgage debt, but home equity extraction has reached $600 billion annually. Homeowners have basically received, and spent, in excess of $2 trillion that they never
earned (Just take a look at the increase in total mortgage debt in the Federal Reserve's Flow of Funds Data since 2000).
"Home prices are under horrible pressure. There are probably a few million property owners, including speculators, flippers, and second-home buyers, who are in way over their heads. We've all heard stories about second-home buyers who really couldn't afford the luxury and high expense of a second-home priced at $200,000, yet they purchased one for $250,000
and rationalized its affordability because 'the value would only go up to $300,000 or more.' Besides, they naively believed 'It could always be sold quickly in a bidding war for a profit.' In resort areas - given the number of days people actually use their second home - staying at the Ritz for $500 a night could be a much better deal. Do the math; it's not pretty."

My advice: If you have a second home, sell it muy pronto. And if you anticipate moving within the next two or three years, sell your house and rent. The hassle of moving to a rental is nothing compared to the mental anguish of being "upside down" in a house mortgage in a plummeting market. The next five years will be a great time to be a renter. One unusual approach that might be prudent: Sell your house to a property management company, and then rent it back from them. Let them watch the value of the house go down. meanwhile, you'll sleep well.


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