Forbes: The Last Speculators. The perfect article illuminating the Housing Ponzi scheme

Important article, so here's the whole thing. Take the time to read it. Everything we've talked and joked about:

Strip club managers becoming flippers, Miami being ground zero, and this massive game of musical chairs ending, yet some didn't hear the music stop

Condo flippers in south Florida will tell you that they are sure, real sure, that they will sell out at a profit.

Robert Jenkins, 30, found religion, quit his job as a disc jockey at a strip club and, in 2003, began speculating on real estate in hot-hot south Florida. He borrowed heavily and flipped 19 houses in Fort Lauderdale, reaping profits of $750 to $71,000 on each property and plowing two-thirds of his $300,000 in profits into still more homes. He now owns seven, worth $2.5 million and doubts a crash will happen. He vows to keep flipping, even if it does.

Donna Franklin, a 52-year-old former direct-mail publisher, owns five homes. Last year she and a partner borrowed against a Miami apartment they own and rent out to make down payments on three $400,000-plus “preconstruction” condos in Fort Lauderdale. They are confident they can flip the three condos at a nice markup soon--well before construction ends, at which point they must take mortgages for the $1 million they owe developers.

That could be wishful thinking. The number of unsold condos for sale in and near Miami has more than doubled from a year ago to 2,232, says Miami Realtor David Dweck. Foreclosures nationally are up 45% in a year and in Miami now occur at twice the national rate of one per 1,117 homes, according to RealtyTrac. Some 25,000 condos are under construction in the Miami-Dade area--more than the total number of purchases in the last nine years combined.

Three-fourths of those are in the hands of speculators, says Jack F. McCabe, a Deerfield Beach, Fla. consultant to developers. “The demand is artificial. Most south Florida speculators have been selling to other speculators,” he says. “It works fine--until you’re the greater fool and nobody else comes along to pay that higher price.”

Neither Jenkins nor Franklin paid much attention when the Commerce Department, on Feb. 27, said the supply of unsold, newly constructed homes across the country had ballooned to 528,000 in January, up 60% from the average from 1995 to 2004.

Brisk sales of new homes have helped prices stay aloft, for now; sales are running at 1.2 million houses a year, 40% more than normal. But if rising mortgage rates cause sales to tumble to a normal pace, the effect on prices would be shattering. And in some parts of the country the last speculators--people like Jenkins and Franklin--would be in deep quicksand.

A correction may already be under way. The number of half-million-dollar-plus condos up for sale in Miami is twice the number in Los Angeles, whose population is four times as large. In New York prices reportedly slipped 13% last summer. In Las Vegas several developers have canceled projects amid soaring construction costs, spurring suits.

Condo prices in Florida have gone up 63% since 2002, and most speculators credit the state’s population growth--a thousand newcomers per day. Others credit the speculators themselves: Encino, Calif. real estate firm Marcus & Millichap says more than half the mortgages in Florida are high-spec in nature. The firm compared price appreciation to income growth in markets across the U.S. and fingered West Palm Beach, Fort Lauderdale and Miami as three of the five most vulnerable to a price correction.

Terrance and Jennifer Trott, both 26, describe themselves as “regular folks” who happen to own two homes. They grew up in New York’s Hudson River Valley and moved to Florida after Terrance finished active service in the U.S. Marine Corps in 2004. Last July they borrowed on their four-bedroom house near Tampa to pay $200,000 for a two-story condo in a development near downtown Tampa. They listed it at $235,000 in December. Two months later they dropped the price to $217,000 and are getting some bites.

The Trotts together earn about $85,000 a year, and the extra $22,000 a year it costs to carry their condo is a severe drain. “I drive a Kia that I’ve had since 1999 and it’s paid off, and we only go out to eat on the weekends, and it’s not every weekend,” Terrance Trott says. If the condo doesn’t sell, they may try to rent it out--just like everyone else; but even at $1,000 a month they would be pouring cash into the property.

In the aftermath of every crash come a few fearless souls, intent on making money on the misery of others. Jack McCabe, the Miami consultant, is raising a $250 million vulture fund to buy condos. He aims to pick up $1 billion of south Florida apartments on the cheap. Lenders are already offering him blocks of condos repossessed from distressed homeowners. “We’ll focus on buying million-dollar properties at 2003 prices-- at 70 cents on the dollar,” he says.