Collapsing Bubble

“I’ve cut the price twice,” said a dear reader of his house in Florida. “I get plenty of people stopping by, but no one makes an offer. It’s eerie. It’s as if they all suddenly knew that if they wait they’ll be able to do a lot better later on.”

This morning, we read that major new condo projects are being closed down in Washington, DC, as well as Las Vegas and Miami. Nationwide, there are said to be almost four million new and used houses on the market. Reports from all over the country tell of rising inventories, slower sales, and price-cutting.

And from other dear readers come more worrying anecdotes:

“When you mentioned Las Vegas real estate woes, I’d like to comment further,” begins a letter from a dear reader. “I am a Phoenix real estate agent and March 2005 there were 5,000 houses on the market, March 2006 there were 35,000 houses on the market. Today there are currently 40,000 houses on the market. Staggering!”

How will it all end, we wonder. With a bang or with a whimper?

Meanwhile, the curious fact remains: consumers are still consuming their fool heads off. Spending and debt are still rising, despite the lag in house sales. And in surveys of consumer attitudes, the lumpen report vague presentiments of trouble coming, but no real fear. It is as if they thought they were expected to appear wary. As if it would be unseemly or lacking in gravitas to expect such fat times to roll on forever. But, queried more closely, that is exactly what they do think.

Susan Walker reports from her own Elliott Wave Forecast:

“A recent national survey of homeowners by the L.A. Times shows ‘widespread faith in the real estate market.’ The worst possible scenario, that prices would ‘stay the same’ over the next three years, was selected by just 5 percent of homeowners. That total was less than the 6 percent who said they expect to see a rise of 31 percent or more. No matter how much talk of a bubble there may be, homeowners continue to demonstrate that they have no clue about the ramifications of one. And this is in an environment in which prices actually are falling! The denial runs so deep, it’s not even denial anymore. It’s some kind of epic disconnect between the reality of a newly falling housing market and an unwritten social contract that says home prices do not fall.”

“We recall that during the late ’90s a study of investor beliefs yielded the unexpected finding that a substantial number of mutual-fund buyers thought their money was insured by the federal government. Those were the unsophisticated lumps, of course. The more sophisticated lumps believed the entire market was protected by the “Greenspan put,” which meant that the Fed chairman would always come to the rescue of a falling market with more liquidity. There was some truth to this, but it didn’t save the billions that had been dumped into tech stocks. Greenspan came through with the liquidity, but it flowed into housing, not dot.coms.

“It is our view that the ‘irrational exuberance’ has transferred from stocks to housing, setting up conditions for a ‘housing deflation,’ writes John Rubino at 321 Gold. “We expect a serious fall-off of home construction, sales and values, starting in 2006, and becoming very pronounced by 2007. A glut of new houses will accumulate in the next 12—24 months, causing a drop in price and construction of new units, and setting up a serious risk of price decline (similar to the ‘tech wreck’ in the stock market).”

But now, the lumps are betting that the new men at the Federal Reserve and U.S. Treasury, along with the president, Congress, all the ships at sea and God himself, will make sure that they never get what they’ve got coming. That is, they’re betting that they’ll never have to put back in the equity they’ve taken out of their houses…that there is no slip to this slope…no downside to go along with the upside…no bear market in housing to follow the bull market.

But there always is. It doesn’t mean that house prices will suddenly fall. There are more ways than one to balance out a housing boom and ruin speculators; some of them homeowners would hardly notice. House prices could stay at present levels for the next 10 years, allowing inflation to cut them in half and slowly grind away at speculators, whose carrying costs would rise while their assets depreciated. Or, prices could collapse in some areas and hold steady in others. Or, they could even continue to rise, but less fast than consumer prices. Anything could happen.

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.

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