Nothing lifts I.Q.s more than a property boom.
America's real estate bubble has created a whole nation of geniuses...people who think they are smart because their houses have gone up in price. And the smartest of them weren't content to merely watch prices rise; they took advantage of them by leveraging themselves into more and more expensive properties.
But now stocks are beginning to wobble. The Dow dropped 214 points yesterday and leading it down were the building stocks. What they are telling us is that the great bubble is over.
"I have a neighbor who asked me for financial advice," said a speaker at yesterday's investment conference. "But I don't want to give him advice...so when he asks me if property is still going up, I just smile and say 'maybe.'
"I've watched him over the last few years. He bought one condo before it was built. He flipped it and bought another one. And then, he bought a whole bunch of them. To him, the secret of getting rich seemed so obvious. All you do is buy beachfront condo at pre-construction prices...and then flip them to someone else. And when he asked me about it, I'd just say, 'Well, I don't know how much longer this boom is going to continue.' He must have wondered what was wrong with me. He was making a fortune. I just didn't get it.
"But the last time I saw him, he told me that the condos he bought aren't selling like he expected. I wish I could tell him 'I told you so,' but I never told him anything."
There must be millions of real estate speculators, concentrated in the hot markets on both coasts, in similar situations. They've stretched to buy. Now they're stretched to keep up with maintenance, taxes, condo fees, and interest payments. Their neighbors bite their tongues. "I told you so," they itch to say.
Don't worry, say the experts. The boom may have peaked out, but there should be a soft landing.
"I'm not so sure," continued our speaker. "People say the property market can't collapse, because houses are tangible and people have to live in them. They compare housing to dot.com stocks, for example. The stocks can fall 90%...or even disappear. That doesn't happen with housing.
"No, it doesn't happen the same way, but a much smaller decline in housing prices can have a much bigger impact on people like my neighbor. Let's say prices go down just 10%. That's not much. We could expect at least a decline of that much. But a lot of people don't have 10% equity in their houses. They've bought with zero-down mortgages - or maybe 5% - never expecting to have to pay off those mortgages.
"Instead, they were counting on price increases, either to refinance or to sell. If they are forced to pay a mortgage greater than the value of the house, they are going to be in big trouble. And a lot of them aren't going to make it."
What can you do to protect yourself? If you have a house you don't intend to hold for a long time, this may be your last chance to sell at near-peak prices. Otherwise, all you can do is to put your money where a U.S. housing collapse won't hurt it.
Yesterday's speakers had a number of ideas: Japanese real estate, Icelandic bonds, oil and gas companies, rare coins and other collectibles...and gold!
"Gold is not really going up because it is becoming more valuable," said John Doody, editor of Gold Stock Analyst. "It's going up because the dollar is becoming less valuable. And that's a trend that is not likely to stop anytime soon."
John showed us a chart.
"Look at this. Gold has gotten ahead of itself. It's way out of its channel. It looks as though you can expect a correct back to $650 or so. That would be a good thing...it would allow the gains to consolidate and set the stage for another big run-up. How high will it go? I don't know. It could go to $1,000 without any trouble. But if it goes to $3,000, a lot of other things are going to be going wrong."
*** "Inflation's rising toll on consumers," reads a headline from the Christian Science Monitor.
High energy prices and rising interest rates are, of course, taking a toll on consumers. And now, "everyday items" have risen "more than expected." The article reports:
- The pace of home-mortgage applications is down 15 percent, compared with this week a year ago, as "for sale" signs stay up longer in a slowing home market.
- Half of Americans have changed their vacation plans to stay closer to home, according to an Associated Press/Ipsos poll out this month.
- Prices beyond the gas pump are also edging up. The "core" consumer price index (CPI), which excludes volatile food and energy costs, surprised analysts by jumping 0.3 percent last month, according to a government report Wednesday.
The economic climate has become increasingly challenging to consumers: " 'an economic a gray zone' where the pace of economic growth may be slowing even as the threat of inflation remains in the foreground."
Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.