Market Review: What?! There's a Real Estate Bubble?

This past Tuesday, Toll Brothers, the largest builder of luxury homes in the United States, cut its fiscal 2006 forecast for home sales, saying there has been "some softening of demand in the markets."

Could it be? Is this the beginning of the end for real estate mania? Perhaps so, as Bruce Zaro, chief technical strategist at Delta Global Advisors admits, "Rising rates are starting to take their toll." And then he said – get this – "maybe there is something to this bubble idea."

In the words of the Mogambo Guru: Hahahahaha! Of course there’s something to this "bubble idea"!

Take the case of the couple The Washington Post interviewed this past week – the Edmonds. In May, they bought a three-floor townhouse under construction in a development in Alexandria, Virginia (right outside of Washington, D.C.) for $796,000. As of late, sales prices for their development are falling, and the Edmonds face the possibility of a $100,000 loss – before they even move in their couch.

Quite the change from the house speculators who were buying property in that same area not too long ago, flipping it, and making around the same in gains as the Edmonds will take in losses without ever setting foot in the house. And the Edmonds’ story is not unique.

"I live in Gaithersburg, Maryland, a nice leafy suburb, not far from the nation’s capital.

"Recently, a slate of condos opened up for rent nearby. I sauntered over, mainly as an observer. I feel sure the people buying these things will lose money. Get this; the condo fee alone is $635 per month. No typo, that’s per month. That’s nearly $8,000 per year.

"You get one parking space. If you want another, that’s $10,000. You want additional storage space? You can get what basically amounts to a closet.

That will set you back another $15,000. The condos themselves go for between $350,000 to $500,000. They are hideously expensive.

"Two years ago, you could get a house for that price. No longer. There are no single-family houses going for less than $575,000 in the immediate area. These prices, I should tell you, are more than 50% higher than what they were only two years ago.

"But, things may be softening at the margins. These condos have been available now for several weeks. I asked how many people have moved in. The answer: one couple."

What’s the problem here? Exactly what we’ve been beating over our dear readers’ heads almost daily: things that are unusual eventually return to normal.

And home prices this high are certainly not normal – and are definitely unsustainable. Just look at all of the would-be buyers that have been forced out of the market in the past few years. Hopefully, they’ll wait it out…there are sure to be a lot of foreclosures right around the corner.

Kate Incontrera
The Daily Reckoning

Novemeber 13, 2005

P.S. "House prices cannot grow faster than income for very long; people have to be able to pay the prices in order to live in them," writes Bill Bonner in the introduction of he and Addison Wiggin’s new book, Empire of Debt. "So, you can expect houses to revert to their mean too. Prices will fall…or else stop rising.

"These simple reversions to the mean are hardly controversial. We don’t know when they will happen or how, but that they will come about is practically guaranteed."

P.P.S We’re near the top of the housing bubble. It’s a rerun of the stock market bubble of the late 1990s. But this time the hangover is going to be much, much worse.

— Daily Reckoning Book Of The Week —

Empire of Debt: The Rise of an Epic Financial Crisis
by Bill Bonner and Addison Wiggin

"Watching the news is a bit like watching a bad opera," say bestselling authors Bill Bonner and Addison Wiggin. "You can tell from all the shrieking that something very important is supposed to be happening, but you don’t quite know what it is. What you’re missing is the plot."

After a generation of being spoon-fed reality by media, it’s understandable that Americans are confused about the state of their nation. In their newly released book, Empire of Debt, Bonner and Wiggin wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions.

Americans are rapidly facing a choice: recognize these dangerous delusions and take steps to avoid their collapse. Or remain ignorant of them and risk losing all of their wealth when the house of cards comes crashing down.

THIS WEEK in THE DAILY RECKONING: Did you miss an issue of The Daily Reckoning this week? Never fear, we have them all catalogued for you, below…

Remembrance Day               11/11/05
by Bill Bonner

"For whom did the bells toll? It was precisely this hour on this day of this month in 1918 that bloodiest war in human history came to an end."

Is Japan Back?                11/10/05
by Chris Mayer

"Normally, I wouldn’t get excited about something so hashed out in the mainstream media. But it’s hard to ignore the world’s second largest economy. "

War and Empire, Part II             11/09/05
by Byron King

"The first rule of winning a war is to avoid defeating yourself…As Sun Tzu said, ‘The skillful warrior can achieve his own invulnerability. But he can never bring about the enemy’s vulnerability.’"

War and Empire, Part I        11/08/05
by Byron King

"In Chapter 13 of his work, Sun Tzu writes of the use of spies in war, and the necessity of understanding what is going on in the enemy camp: ‘Spies are a key element in warfare. On them depends an army’s every move.’"

Necessinflation         11/07/05
by The Mogambo Guru

"Greenspan is the opposite of what a competent central banker is supposed to do! If he really were a good central banker, none of these bad "crisis" things would have happened in the first place!"

FLOTSAM AND JETSAM: When you think of the Twin Cities, you think of the land of common sense, affordable housing and good old-fashioned values – right? Well, maybe not anymore. Nothing exceeds like excess! Read on…

Updating the Neighborhood and Popping the Top
by Kevin Kerr

As many of you know, I grew up in the Midwest — Minnesota, to be exact.

My father, Ivan, was a highly successful mortgage banker and loved real estate. Often, in the early ’80s, he would drive by the old Met Stadium in Bloomington, Minn., when I would visit from New York. He had a vision of the world’s largest shopping center. People thought he was crazy. He imagined a shopping center with an amusement park inside and more retail than anywhere else in the world, all in one location. Crazy? Most thought so. After all, who is going to go to Minneapolis to see a department store that has some rides in it?

Well, today they do just that, and by the millions upon millions. The now- famous Mall of America attracts visitors from all over the world.

Now, rewind a bit. The town in which I was born, Edina, just five minutes north of the mall, claims the birthplace of mall culture, Southdale Mall. Developed by Austrian-born architect Victor Gruen in 1953, Southdale was the first fully enclosed, two-story shopping mall containing more than one major department store. Up until then, suburban shopping centers had gradually evolved from one-level strip malls composed of one or, later, two department stores with parking directly in front of each store.

So while some people can claim that Albert Einstein was born in their town, or the first astronauts shared their hometown, my town had the first mall. No wonder I hate shopping centers.

Anyway, what’s my point?

The point is this: It doesn’t matter if you’re in the Midwest or in Las Vegas, New York or Maine, the excess of development and consumerism has fueled this debt-ridden society we now have, which is supported by two home equity loans and a partridge in a pear tree – except the partridge was paid for with a maxed-out credit card.

All of this excess and the unrealistic prices we’re seeing for real estate may finally be coming to an end. The disappointing announcement from Toll Brothers this week may be the first major crack in the housing debacle to come. As commodities traders, the bursting of the real estate bubble could offer us huge opportunities. In the coming months, I will be bringing more of them to you. Stay tuned.

My father was the perpetual optimist, and if he were alive today, I am sure he would have been right on board for this entire real estate boom. But I think even he would be worried now and probably take my recommendation to sell his real estate and buy gold and other commodities. I will be heading with my wife, Katrin, to Minneapolis for Thanksgiving. During our visit, I will stop off and talk with my friends at the Minneapolis Grain Exchange, the largest cash market in the world for grains, and also the home of frozen black tiger shrimp futures, more excess Midwestern style.

In the coming months, I predict we will begin to see some very tough times for the real estate markets; the trick now is figuring out how to benefit from it.


Kevin Kerr
for The Daily Reckoning

One way to benefit from the coming real estate disaster may be to sell these highs in copper or lumber as new homebuilding may come to a standstill. Kevin’s commodities trading service, Resource Trader Alert, shows you, step-by-step, how to do just that. And he guarantees he can show you how to at least triple your money with commodities – and in just six months, or your money back. But hurry – this special offer only lasts until Thanksgiving!

The Daily Reckoning