This is the The BuilderBubble Bear   Get your Bear here

The BuilderBubble Story

Who’s opinion do you trust, family members, friends, your boss, your Government?  There are vast and differing accounts of information coming at us from myriad sources.  Far too many whom we should trust are continuing to tell us not to worry.  People who draw their living from the real estate industry have a vested interest in precipitating misdirection on us for just as long as they can get away with it.  Don’t listen!  There is no good news in property value forecasts of residential real estate, except that home building creates jobs!  Publicly owned builders… about 20 in all, have enjoyed rapidly climbing, wild success in the past five years. 

These builders have grown into vast land banks, owning property they paid a much lower price for than today’s values command.  Because of their accumulated great wealth in cash and land, these builders may continue building right on through any price decline [admittedly at much lower unit development levels than are prevalent today] and attendant flat period.  Because people will need to move for various reasons, they will need to sell their homes.  The glut that will slowly build over 2006 and 2007 and, possibly, over 2008, from surplus housing will force prices down.  Those home owners that do not need to sell during the expected three to seven year decline may be hurt only temporarily because prices will probably bounce back during the teens.

I created this website especially for you, because I believe a lot of people (investors) got burned in the stock market by the Internet Bubble. I believe the burning occurred basically because armatures fueled the bubble. These burned investors fled from the financial markets to real estate as a safe haven and immediately learned they had made the right decision.  Residential homes were a very safe harbor for your investment money for all the right reasons for a time… a half-decade; however, it got overheated and grew far too fast.  Now the entire residential realty market is extremely over inflated.  Your home is an important component of your financial independence and wealth growing posture; however, it is no longer the safe haven it was the last three years.  Appreciation has stopped.  Now sellers are reducing prices to move their homes.  Developers are canceling construction projects.  I read in the Las Vegas Review-Journal recently that Hard Rock Casino cancelled its planned expansion.  Carl Icon cancelled his Las Vegas Strip condo project in January and Ivana Trump cancelled her one thousand foot high condo project in December 2005.  Las Vegas was the hottest city in the U.S.!  No longer.  Wynn lost money last quarter.

Q: Why is this negative energy creeping into residential real estate? 
A: Because speculators got involved.

These speculators, affectionately known as flippers, got involved and drove the car too fast… showing up at each new home sight, especially the big condo projects, buying up the early release properties, driving the price higher on each continuing wave.  This fast and furious activity moved the curve from a nice, gentle 30-degree slope upward toward an angle of 70 degrees, a totally unsustainable attitude.  Commercial aircraft are forced by dense population centers to take off from certain airports at a steeper angle than what pilots consider a safe; however, their rate of ascent is nowhere near 70 degrees.  Their normal ascent is about 30 degrees.  When pressed, they climb at 45 degrees.  Forty-five degrees feels very steep to passengers who go white knuckle clutching the arm rests.

Wild buying and turning is what happens every market day at the very liquid Chicago Board of Trade and New York Stock Exchange, among other established financial exchanges; however, there is no liquidity in the residential real estate market… not really!  Therefore, the flippers were doomed to get stuck with properties valued at less than they paid as the music stopped in the game of chairs before they started their quest of greed driving up profits In the aforementioned exchanges, traders know how to react to instant trend changing phenomena.  Sure, there are losers, but the losers don’t lose big because there is usually a buyer or seller standing nearby to take the other side.  When the music stops in the non-liquid residential real estate markets, there is no such liquidity… causing much more, protracted pain!

History delivers a continuing saga.  Those who ignore history are doomed to repeat it.  It doesn't feel good to repeat certain history.  It does feel kind of good to ignore the signs too long so a lot of “intelligent” souls will ignore the signs… and me.  Yes, you may ignore me!  Thinking I may be right is about all you will do… at best.  Why?  Because acting is hard!  You will not act!  You are too busy!

Some believe that Alan Greenspan deliberately set out to crush the BuilderBubble by initiating the gradual increase of interest rates.  This time, [unlike in the spring of 1994, when he increased rates rapidly, a full point and a half in six weeks,] he practiced a measured pace.  Now, analysts tell us that Ben Bernanke, our new Federal Reserve Board Chairman, plans to continue raising rates to at least 5%. Greenspan started at 1% and now the bank overnight rates [those rates the Fed controls] are at 4.5%. These increases are only one reason why real estate speculators are rapidly becoming landlords... unprofitable landlords, I might add.  

There's no bubble, they say...

Our Government's misdirection is trying to protect us from ourselves... by misdirecting our focus. They are diluting the facts about inflation while they employ more misdirection in the way they calculate CPI.   They say, with a straight face, that CPI is calculated by omitting food, housing and energy. You buy it?  You must, because Ben Bernanke, our new Chief of the Federal Reserve Board, who replaced Allen Greenspan after 18 years, testified to Congress the week of February 14^th. Mr. Bernanke restated that there is no bubble.  Believe what you want!

Just answer this:  Why would anyone in their right mind believe it is prudent to omit high cost of energy and food and wildly increased housing values in calculating CPI, unless they deliberately want to misdirect our attention? Some automobile companies are on the brink of bankruptcy, avoiding layoffs while trying to keep assembly lines open so their employees can continue to buy new cars. The Government wants to avoid congressionally mandated increases in Government checks.  If they told the truth about the real CPI, they would need to drastically increase social security checks.  If you are not able to identify the bubble, yourself without the Government... or anyone else, telling you so, then you are not reading this. The Government] doesn’t want a panic.  Panic selling is not good for the masses.  I agree! 

However, my voice has very minimal reach.  Not many will act on my suggestions.  But those that do... may be the ultimate winners.  When everyone feels rich, nobody is rich.  When the masses believe there is a bubble it may be too late for you to get a head start. When the masses believe there is a bubble much of our equity will have evaporated.

The song by artist Sheryl Crow, “All I wanna do is have some fun…” [Click hyperlink to listen] as the sun comes up over Santa Monica Boulevard says it.  I want to have fun too… growing wealth is fun! Making sound wealth growing decisions is really fun for people who have managed to accumulate a little wealth.

• Goal 1 Get wealth

• Goal 2 Keep wealth

• Goal 3 Grow wealth

We bought our home in 2002 during the height of the residential real estate bubble... selling into plentiful buyers in 2004.  We missed the top; however, I’m pleased I sold in 2004 rather than 2006 because now there are not enough buyers to make sale easy or quick.  I believe history will record the top as 3^rd quarter 2005.  Savvy traders always sell into buyers. Savvy homeowners must follow suit.  They leave money on the table to minimize risk. Because, when all the buyers have bought, there is no one remaining to sell too. Sentiment changes! Crowd behavior dictates change. During 2004, how was I to know there would be plenty of buyers well into 2005. 

As I write this during 1st quarter 2006, I looked at some fine property in one of the best Las Vegas neighborhoods, Redrock Country Club.  I viewed three beautiful homes, all vacant, all located on the golf course, all on the market for over a hundred days. What’s happened?  Last year, these properties would have enjoyed multiple offers, each a little better than the last offer.  This year the broker commented that sellers would “take offers, meaning reduce their price.”  This “news” was the first time I heard that term, “take offer”, in six years.

This personal analysis is my little way of collecting evidence... noting… Woops!  Where did all the buyers go?  So, the BuilderBubble market took an extra year to do what I suspected… and forecasted.  My predictions are well documented. Now your gonna say, “You’re an alarmist and a naysayer, Richard. You don't look at real estate to sell in February... you look for it to sell in March, April and May.  That's when the buyers really come out.” Yes, in recent years that would be true. But this year sentiment is different. To prove or disprove this, I will revisit those properties in March, April and May.  This time I predict they won’t sell in a timely manner and to get them sold, sellers will suffer price reductions. By summer's end we may be a nation [world] in a clear and present “buyer's market.”

Savvy traders use leverage in wealth building! Sure, using mortgages is a form of leverage. However, since there is no residential home futures contract [yet], how do you short a home? In other words, how do you sell a home before you buy it?  [Click link for definition of “short”] You can’t!  One approach is to pile up holdings in BuilderBubble land by shorting homebuilder stocks. Since there is no futures contract, you must short actual stocks.  In addition to the builders, you can short home improvement companies as well as mortgage companies but it takes big money to make big money.  And, the onerous up-tick-rule slows down shorting in the New York Stock Exchange and NASDAQ.

Definition: Shorting is a technique used by active traders in all financial markets in which a trader sells the instrument before it’s owned.  Shorting is a difficult concept for non-traders to grasp; however, you can analyze the definition on the Internet and get a tutorial.  Just enter “Shorting” and click SEARCH.  The major futures exchanges in the U.S are:  CME, CBOT, NYMEX, NYBOT.  These exchanges endure NO “up-tick-rule.” 

In April the Chicago Merc will offer a “residential homes future.” The Chicago Mercantile Exchange [CME] has announced that they will launch the future in April.  Even with the new future, we will need to improvise.  Also, I read that HedgeStreet is merging with the CBOE and may offer a contract similar to futures where the public may participate in estimating the direction of residential property.

Look at: UPDATE: CBOE, HedgeStreet Team Up On 'hedgelets'

And, even though some builder stocks have already lost half their value, it may not be the time to short the weaker issues.  But the time will come, so you need to start watching the residential construction index.  There has been so much selling already in the weakest builder stocks that some may be at support and need to trade up a while before entering short.

But, here is the issue:  selling a residential home is like turning an ocean liner.  You need time and space.  The point I’m making is that there is precious little time for you to act… in the big picture of world events.  Fear and greed rule the world!  Once the masses learn the problem, too much fear will stop the homeowner wannabes in their tracks.   The evaporation of the buyer pool will drastically impact home equity values.  When the masses learn that they can rent for less than it takes to buy, they will lose interest in home ownership… for a time, for a half cycle… for 5 to 8 years.  Whenever there is too much of a good thing, it becomes a bad thing.  Rents won’t stay low forever but rents are low today… compared to home ownership with the changing mortgage rules back to reasonable… with a 20% down payment.  Who has a hundred thousand dollars to put down on a $500,000 home?  Because would-be homebuyers can get the entire home they want, they won’t want it.  Buyers will fear action.  This fear will result in delay.  Delay will motivate sellers to reduce price, and since price has run up so high, expect more extreme home price reductions to get their property off their backs.  Pain, heat, fire, action from sellers will take a lot of  t   i   m   e  before buyers react. 

There will be no greed anywhere to be found.

Buyers don’t want [for a time] what they can have on the cheap!  It will take gutsy people to turn the market.  The gutsys won’t be around at first.  They will wait like vultures to make their move.  The gutsys will want to make sure the carcass is DEAD before they decide to dine. Yes, it will be the world speculators who will bail the BuilderBubble effect.  Yes, if they are among the few to still have any money, the same speculators who initiated the problem in the first place. But, to be fair, I suspect it will be a different pack of speculators who bail us out.  But you can’t think to that time period.  We are talking about years, a lot of years.  Three to seven years in a human life is a long time.  Nobody should “wish away that much time.”

 The speculators who will buy up distressed properties will have money, staying power and time.  They won’t be the same people, mom & pop types, who attended a hype driven real estate seminar and went out and paid too much for a condo on the Gulf Coast [where, unlike South Florida, the weather is good only a few months of the year.] 

The new speculators will be well organized and cool about how they buy up the carcasses of the dead… properties from suffering owners, or, eventually, ailing lenders.  I can imagine the plea now. Those poor, poor lenders: the ones who offered ridiculous mortgage terms of 100% [or more] in the first place.  They deserve to get fleeced.  I feel so sorry for those lenders!  “Woe is me,” they will whine to our Government.  I can already imagine their plea:  “[Please help me; I’ve fallen and can’t get up.  Please send the bill to the taxpayers, Mr. Congressman. Please!]”

The new speculation will start slowly, raising prices a little.  Then price will steadily increase, bringing in some real, honest, homebuyers with new families, and the cycle will start all over again.  This time, by about 2020, my friend’s home will be worth > $1.5 million while beach property will selling last year for $5 million will be offered at $10.  Just keep in mind that the cycle is 14 to 17 years.

Extra, Extra… Read all about it!

On Tuesday, star homebuilder KB Home (KBH:NYSE - commentary - research - Cramer's Take) warned of an increase in the number of canceled home orders and of a drop in new-home sales in the first two months of the year. Likewise, Toll Brothers (TOL:NYSE - commentary - research - Cramer's Take) last week warned that new orders for homes had dropped by 21% in the first quarter so far.