Forbes - "Housing Implosion"

Gary Shilling, of Forbes magazine, has some negative thoughts to share about the housing bubble. When the mainstream media picks up on the obvious, it is usually way too late to make a difference to the average person.

If you still don't believe there's a massive housing bubble that is beginning to deflate, look no further than Toll Brothers. This home builder caters to the mushrooming ranks of the well-to-do who have enough income and assets to laugh off rising interest rates and energy costs. But in the year's first fiscal quarter Toll orders fell 32% from a year earlier. The company blames the fall on cancellations by speculators.

With dreams of huge appreciation dancing in their heads, speculators indeed drove the housing frenzy in the high end. Now that prices are flagging, they are fleeing. These investors and vacation-home buyers accounted for 40% of house sales last year, up from 36% in 2004. A lot of these investors rent out the properties. Despite low-payment interest-only mortgages, they cannot cover their cash outlays with rents, which are depressed by the proliferation of spec houses.

This is the first nationwide housing bubble since the 1920s, and it's driven by three nationwide forces: low interest rates, loose lending practices and the desperate search for a stock substitute after the 2000--02 debacle.

The speculative housing craze is crashing from its own excesses, not Federal Reserve action.

None of this will be sufficient to offset the mass exit by speculators and the hesitation of builders to slash production in the face of falling sales.

A house-price collapse will be far worse than the 2000--02 bear market on Wall Street and will bring a serious global recession. Half of households own stocks or mutual funds, but 69% own homes. The resulting unemployment will kill many subprime borrowers' ability to make payments. Both Toll Brothers at the high end and dr Horton in the starter market will suffer.