May 28, 2006

Barrons Cover Story "The Big Glut" - announcing the end of the housing bubble and the housing crash underway

The most important and thorough article on the bursting of the housing bubble since "In Come the Waves" first predicted it. I'm tempted to end the blog here, but then again, there's still so much more to come, so we'll stick around.

The rush for the exits is speeding up in the hot spots. All those second home wonderlands - Naples, Vegas, Phoenix, Tampa, Miami, Colorado, ...? They're so screwed it's tough to even put into words. Panicked speculators and greedy boomers are trying to get out at any price now and its going to get so, so bloody.

The easiest home to sell is the second one they say. We're seeing it in real time now. Dot-condo is here.

Here's some highlights from the Barrons article on the bubble - I recommend the full read and picking up the magazine to show your kids one day

"If you want to sell, you've got to go back to '04 prices," says Chip Harris of Coldwell Banker Previews International, which is handling the property.

The market for second homes could use a second wind. After a long string of double-digit annual price increases, a number of second-home meccas across the country are suddenly suffering from plunging sales volume and burgeoning inventories of unsold homes.

Though the official figures on sales prices have yet to reflect the current round of cuts, interviews with real- estate pros and others strongly suggest that the averages are deteriorating in a number of key markets. Just look at green and hilly Litchfield, Conn., about a two-hour drive from New York City. It was a magnet for Wall Streeters during the past five years, and prices climbed accordingly. But in the past 10 months, prices in the lower end of Litchfield's market -- homes of $300,000 to $600,000 -- are down 12%-14%, and volume is falling at the next level up, says Stephen Drezen of the local Portfolio Properties Group.

IT'S ALL A BIG CHANGE from the seemingly endless rises in prices. For more than a decade, baby boomers have been flocking to the second-homes market and lifting prices, just as they'd earlier lifted the market for primary residences

While pundits debate when the bubble might burst in the primary-housing market, the air already is whooshing out of parts of the second-homes market.

With mortgage rates rising and home-price appreciation slowing or vanishing, buyers in Naples have pulled back in a big way.

The Naples experience is being repeated, to one degree or another, in a variety of other vacation hot spots -- from Palm Desert, Calif., to Phoenix, Ariz., to Ocean City, N.J. Phoenix in recent years has been overrun by property flippers from California, says Mike Messenger, president of Russ Lyon Realty in Scottsdale. But unit sales now are down by 40%-42%, and the city's inventory of unsold homes has shot up more than five-fold, to 39,000.

For starters, many second homes have been sold not to serious vacationers but to speculative investors hoping to cash on the national real-estate craze. How else to explain why six out of 10 second-home owners surveyed by the Realtors group own two or more homes in addition to their main residences?

The danger is that if enough of those investors decide the market has peaked, they could trigger a selling frenzy throughout the second-homes market. That, in turn, could add to the pressures in the main housing market. After all, second homes now account for a full 40% of all homes sold in America.

Says Ingo Winzer, president of The Local Market Monitor: "This makes me very worried because it implies that the price increases have been driven more by speculators than by people who are going to hold onto these properties, and indicates to me that there's a speculative boom."

BUT THOSE HIGH ROLLERS COULD LOSE THEIR nerve quickly if prices continue to weaken.
"People don't believe in the laws of supply and demand anymore," says Alan Skrainka, chief market strategist at Edward Jones. "We're not saying it's a bubble, but we're saying prices are overstated and will likely correct 20% to 25% over four or five years."

Mike Messenger, the Scottsdale, Ariz., broker, sounds considerably more glum. He says this is the first time in 16 years that the lower end of the market -- always the driver for the area -- has weakened. The culprits? Mainly the flippers; Messenger figures investors account for 35% to 40% of the market


Anonymous said...

My friend I work with said his condo flipping buddy just walked away from a $40,000.00 deposit he put down on a paper condo in Florida(a condo that exists on paper only and hasn't been built yet).Plus the builder is sueing him for another $40,000.00 for the granite counter tops and other upgrades even though the thing hasn't been built yet. He decided to bail out because he has two other condo's on the market he is haveing trouble selling. What a greedy bastard to have 3 at once!! Now he is sweating it out! Next phase of the bubble...lawyers getting rich from the mountian of comming law suits!!!

zinger said...

Folks this thing is O V E R!

The U.S. Gov't just stopped the music. Did you get a chair?

Great thread expains all, just scroll down and read the first 7 blogs posted after May 27, 2006 8:25:03 PM. Click here

S said...

Original Barron's article (free) here:


Mark said...

I might remind HP's that Barrons January 2000 front page exposed the internet bubble, and it was downhill from there on out for 3 YEARS!. . .I expect that we will have a slow grinding down of home prices over the next 3-5 years. Decisions are made one at a time, and some people will still list their homes at 500K when everyplace else is 400K!

keith said...

this is the end. it really feels like this article bookends the late great housing bubble ponzi scheme.

There'll be some infamous articles and blog posts. The Economist In Come the Waves. The Time magazine cover. My best post I think was 12/28/05 The Housing Bubble Has Burst

Bottom line, it's over. Done. Now we just count the bodies. No matter what lies David Learah and the realtors want to tell, we're done.

The only questions I have are, how ignorant are some folks, will some keep buying into the downturn, and how bad will the effects be on the worldwide financial system?

I think we're heading to a devastating, never before seen meltdown and short circuiting of the world economy. You can't have this amount of leverage, combined with this amount of overvalue, without some serious unwinding and pain.

No matter what the NAR and their "soft landing" says.

auto effects said...

Keith - you have a wonderful opportunity to make a ton of money. If you really believe that we're heading to a devastating, never before seen meltdown and short circuiting of the world economy, then you:

1. Borrow us much as you can
2. Apply for and take as much cash from credit cards
3. Use the cash from 1 and 2 above as collatteral for an ever bigger loan
4. Apply that loan to selling short US and Wolrd stock indexes. Better yet, sell options on ETFs tied to US and world indexes.

If you do not do the above, then either you do not believe 100% that the US and world economy is going down, or you are just all talk and no action.

Which is it?

Thankgodisawitcomming said...

Apply that loan to selling short US and Wolrd stock indexes. Better yet, sell options on ETFs tied to US and world indexes.

NO that would be very dumb.


Keith is right. You need to understand that the markets are made up of funny money. The PPT will create enough FIAT to manage the global markets.

This housing bubble was created and now POPed by the Big Banks and Govts. It was designed to trap as many as possible in the web of unservicable and non-dischargable personal debt and tax debt with the goal of preventing most of the baby boomers from retiring and crashing the social welfare systems.

Two years from now, many boomers will be renters again but owe the IRS non-dischargeable debt on taxes from loan forgiveness. Add to that all the creditors who won't let them walk away from all the rest of their consumers debts and continue to add interest charges forever...

and you get a new class of DEBT SLAVES A work til you drop class and poor to boot. Professional boomers who are making $50K to $100K per year are going to see paychecks that after deductions for payroll taxes, IRS guarnishments, BK guarnishments or Creditor guarnishments; will barley be able to buy groceries after paying the Rent on the type of junk houses that used to be considered Section-8 only.

This is not some doom and gloom predection. This is what a careful analysis of the state of the economy filtered through the new bankruptcy laws and changes in the IRS code over the past 10 years comes out with.

Mark said...


You know I am in total agreement with you on the housing meltdown (although a new member here). I have been following it since I decided to move to San Diego two years ago. I insulted one realtor there when I told him, "I am going to wait a few years to buy and wait for the housing downturn." It didn't take rocket science to see the overbuilding, and compare that with average salaries in SD county.

BUT. . .I have learned from my old age of 55 that everytime I thought the US and world economy would melt down, something (most likely the Fed) would step in and change the equasion. I believe it was Paul Volker who said, "Never underestimate the ability of the American consumer.". . .I guess I am in the "muddle through" camp - yes, housing prices in some areas could drop 40%, but some sort of "Resolution Trust" may be developed for all the foreclosed houses. Remember - members of Congress likely have vacation homes. . .certaily there "auto dealer" supporters do.

auto effects said... the US and World economy going down.....or up?

Or maybe.......we all are not as smart as we think we are and should admit that we just don't know.

Because if we know for sure (FOR SURE), then we could take steps to mitigate damage (and become a very rich person in the process)

Osman said...

Interesting and well written Barron's article.

Couple of points...

What's the per market breakdown of investor versus vacation use home? Call it the flipper versus vacation home buyer factor. I think this will have a big impact on second home markets in the future.

My experience from a high end second home market (Nantucket) was the vast majority of my firm's clients were NOT looking to buy and flip. Most were buying the property (median price ~$1.5MM) as a "summer home".

Also, we've just started to hit the leading edge of retirement for the babyboom generation. The sheer number of very wealthy and soon to retire babyboomers is unprecedented. These are the typical buyers of second homes in high end vacation locales.

There are a number of second home vacation markets (like Nantucket) that didn't experience massive building/flipping/speculation because of growth or other limitations. I don't think these markets, where most owners have purchased for personal/family use not speculation will suddenly plunge off the cliff.

Areas of very high speculation (and flipping) like much of coastal Florida? Perhaps another story.

Chris G said...


I think you should get the term "dot-condo" trademarked...that's a catchy term.


"Generationally" i'm qualified, but it escapes me who are these other 'boomers' that seem to have money to piss away like there's no tomorrow.

How about the dude in the article who adjusted his price a million bucks or so? Like it was nothing? Sorry to tell ya, there's only so many millions going around. He's an idiot, plain and simple.

Just wondering if the criminal community is aware that there are so many unoccupied mansions all over the place.

Another thing, you'll really see some freaky liquidations of these places when the equity market collapses.

I'm 57, fyi, wondering how 'old' or 'perpetually' young my vacation home owning cohorts happen to be.
Japanese buy homes late in life as a place they will die. What is the intent of these boomers? Partying on perhaps???

BTW, flippers are beating all other sellers in lowering prices and taking hits. Large home builders /contractors are reluctant to sell at the new market prices being set by ardent flippers. The Contractors now know that they are looking to incur tremendous bottom line losses if they sell in here.

Look for a major sell off in Wall Street very soon as unnamed financial institutions become short-term insolvent. They might need to stop trading the entire market until the news is released.

I have no pure info on this, just a feeling that the housing market disaster will manifest itself in the financial markets in a big and tremendous way. The money that is being lost is beyond a normal person's belife.

uknowwhoiyam said...

Thank you. The Barrons article was one of the better ones posted lately.

uknowwhoiyam said...

"If you want to sell, you've got to go back to '04 prices," says Chip Harris of Coldwell Banker Previews International, which is handling the property.

RE: "back to '04 prices"

Very interesting! '04 prices is where I drew my own line in the sand when I decided it was time to start bidding.

In this area, that means about 30% off.

I still haven't had any low-ball bids accepted or even had a seller suggest further negotiation but Mr. Harris' number reassures me that I'm probably in the right ballpark.

keith said...

uknow - go 40% off and let 'em know it's serious

30% off and you're gonna be in trouble yourself if an offer gets accepted

oh, man, I wish I was back in Arizona so I could run around and make 50% off offers! god, that would be a blast!

Anonymous said...

oh, man, I wish I was back in Arizona so I could run around and make 50% off offers! god, that would be a blast!

I would not want to get stuck with anything in Arizona at only 50% off; what makes you think you could flip it for a profit.

To be safe it had better be 75% off and no more than $25 per sq ft.

The soon to be job changing mexicans are going to be moving in and they can't afford more than that. Few others will want to live there.

This is not meant to be raceist just the way I see it demographically.

Awaiting Bubble Rubble said...

2004 prices?! Then they only have another 40% to fall...

Nov 2004 was when I cashed out of California real estate completely, eliminated all debt, became a renter and invested most of the proceeds in emerging markets and commodities stocks. I told everyone I knew that RE prices were completely unsustainable and due for a large correction. Everybody said I was crazy and being irresponsible. Spring of 2005 was when I quit my (mortgage industry analyst) job and began to live off capital gains from the stock portfolios. My coworkers thought I had lost my marbles and extended their sympathies. They were working 60 hour weeks and spending their weekends buying condos in Phoenix and Las Vegas with IOs and said I had missed out on $100K worth of appreciation on my house. Now, many of them have been laid off or their jobs moved to Texas, nothing is selling around here, I suspect some have moved into their condos condos in the desert in time for summer. I'm mostly in Euros, and bear market funds, CDs, moving some into tax liens but still with a pretty large stake in blue chips and dividend plays but will be reducing over the next few months. Looks like reality will start hitting the markets this fall/winter along with the first wave of foreclosures and I'll probably buy swiss francs. I haven't been called "crazy" since March or April. I'm almost starting to miss that and I do miss having a big yard, but I don't miss the cubicle job. Now, I'm starting to think I can get the yard without the cubicle, probably when prices go back to 2002 levels and panic selling begins. That would just be crazy. Crazy.

Is the gov't really that evil? said...

It was written here that: "Two years from now, many boomers will be renters again but owe the IRS non-dischargeable debt on taxes from loan forgiveness. Add to that all the creditors who won't let them walk away from all the rest of their consumers debts and continue to add interest charges forever..."

Those consumer debts might be sold off on secondary markets pennies on the dollar, as the primary debt-holder goes belly up or in search of cash. Sure, the debt total increases, but the cost of buying that debt paper gets less and less. Maybe that is how the crooks will profit from all this.

It will not be very politically correct to collect IRS garnishmants on people that have lost ity all and are trying to rebuild. Probably hear campaign promises to repeal that in 08.

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