The Rude Awakening
Laguna Beach, California
Tuesday, August 22, 2006 ------------------------- - From Miami to New York, Boston to Los Angles, housing
prices collapse as inventories soar,
- Hedging against the coming crisis already available,
- Medical marijuana, mansionization, the end of the
Boom Boom era and assorted other shenanigans...
------------------------- Eric Fry, up the road from the Boom Boom Room, reports... "Truce Strained as Israelis Raid Lebanon Site," A New York
Times headline announced Sunday. "Iran Tests 10 Short-Range Missiles," a second headline
reported. Other nearby news stories related that a
"defiant" Iran will continue to enrich uranium, that New
York pension funds are running out of money and that child-
porn sites are still flourishing. But here in Laguna Beach, the "Coastline Pilot" featured
none of these weighty stories. Instead, the local paper
carried the front-page headline: "Marijuana dispensaries
under scrutiny." On page 2, the "Police File" reported the
unsettling news that, "A surfboard was reported stolen from
a home...in the 300 block of Thalia Street." Then in the "Mailbag" section on page 9, the Pilot featured
headlines like: "City Needs Protection from Mansionization"
and "Possible Loss of Boom Boom 'Shocking'." "City officials want to clamp down on groups that dispense
marijuana for medical purposes in Laguna Beach," the
Pilot's front-page story began, "The City Council - with no
public comment and little council comment - unanimously
approved an ordinance Aug.1 that would prohibit the city
from issuing business licenses to businesses that are
'illegal or unlawful under city, state or federal law.' "No mention was made of the fact that medical marijuana was
the origin of the ordinance," the Pilot continued
indignantly. "Nor were the proposed ordinances brought to
the city's HIV Advisory Committee for advance comment." Hmmm...if 'illegal and unlawful' businesses can no longer
obtain a business license, what will become of the crystal-
meth industry...or the cock-fighting and otter-hunting
industries? The Pilot did not say. But it did spill some
ink to fret about what might become of the Boom Boom Room? "I was shocked to hear," one Pilot reader writes, "that the
Coast Hotel and Boom Boom Room were sold...I feel great
sorrow to see the Boom go by the wayside like so many other
gay icons, and that is what the Boom is - 'an icon.' I have
very fond memories of the Boom Boom Room and Laguna." The issues that captivate the readers of the Coastline
Pilot may be more "left-leaning" than those of most local
newspapers, but they are no less provincial. (Sure, this
brew-ha-ha over in Lebanon is a problem, but it hardly
compares to the threat of reduced access to medical
marijuana, or the closing of the Boom Boom Room). For
example, the Sunday edition of the Star Press of Muncie,
Indiana carried a front-page headline about child
pornography, just like the New York Times. But unlike the
Times, the Star Press story focused on the local consumers
of child porn, rather than the global growth of this
scourge. "The names of men accused of possessing child pornography
in Delaware and Henry counties the past year reads more
like a service club roster than a jail log," the Star Press
story began. "Since July 2005, authorities have reported
finding illegal images or videos of children on computers
belonging to the Henry County coroner, a Burris Laboratory
School music teacher, a former Muncie economic development
official and, most recently, a Middletown Police
officer..." Clearly, the headlines that shock the residents of Muncie
differ somewhat from the headlines that "shock" the
residents of Laguna Beach. But one particular headline has
been shocking residents throughout the nation. And this
particular headline has been appearing in almost every
newspaper in the nation – the Star Press as well as the
Coastline Pilot...as well as the New York Times and the
Miami Herald...especially the Miami Herald. The shocking headline goes something like this:
"Home Sales Slow, Inventories Rise" Most likely, this headline anticipates a new generation of
headlines that will go something like this: "Home Prices Drop, Economy Slumps" --- Special Investment Alert ---
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investment circle today! http://www.isecureonline.com/Reports/RCH/ERCHG851 ---------------------------- The Housing Bust Begins
By Eric J. Fry "We've had the biggest housing boom in the history of this
country," explains Yale professor, Robert Shiller. "That
can't go on forever...I'm thinking that this boom is so
much bigger, that we will see a substantial fall that will
affect the country overall...We're not [automatically]
bound for an enormous decline, but I think it's likely." Shiller aired his skeptical remarks during an interview
with Bloomberg News over the weekend. The housing boom has
been so large and all-encompassing, Shiller argued, that
the coming bust also promises to be large and all-
encompassing. Helpfully, Shiller does not warn of impending disaster
without also providing a partial refuge. The Yale professor
helped to create indexes that track home values in ten
major metropolitan centers. These new indexes, dubbed the
Case-Shiller Indexes, underlie a new batch of futures
contracts that debuted three months ago on the Chicago
Mercantile Exchange (CME). The new contracts reflect home prices in most of the
nation's hottest property markets, namely: Boston, Chicago,
Denver, Las Vegas, Los Angeles, Miami, New York Commuter
Index, San Diego, San Francisco and Washington D.C. "Why did you create these futures contracts?" the Bloomberg
interviewer asked Shiller. "They're designed to allow people to adjust their exposure
to a risky market," he replied. "The total value of real
estate owned by households in the United States is $20
trillion. Bigger than the stock market. Not everyone needs
to hedge. But a lot of people should be adjusting that risk
exposure." Remarkably, very few homeowners are availing themselves of
these new hedging instruments. Only $71 million worth of
housing futures are currently changing hands. "That's
peanuts by Wall Street standards," Shiller admits. Furthermore, $71 million would not amount to even a single
peanut in relation to the $20 trillion of household real
estate equity. In other words, our nation of leveraged
homeowners remains completely unhedged against the prospect
of falling home prices – a prospect that seems increasingly
likely if we are to trust the newly minted Case-Shiller
futures contracts. 
"In all 10 [futures contracts]," Shiller reports, "we have
what's called backwardation. That means that the futures
price is below the price that it is today. All of the
markets are predicting price declines. And these price
declines range from 4% to 5 1/2% by May of 2007...That's
not me talking; that's the market." To help frame his bearish expectations for the housing
market, Shiller refutes the myth that residential real
estate has been a great long-term investment. "It has not
been a great investment," he says flatly. Between 1890 and 2004, Shiller's book, "Irrational
Exuberance" explains, U.S. residential real estate
increased by only 66%, in real terms – that's only 0.4% per
year. By comparison, U.S. home prices soared by 52% between
1997 and 2005 – or by 6.2% a year. Since home prices have
soared so far above their long-term trendline, he reasons,
a reversion toward the mean would not be surprising. "Many contend that a sustained pullback in house prices is
unthinkable," remarks James Grant, editor of Grant's
Interest Rate Observer. "But the unthinkable – or, at
least, the highly atypical – has already happened. In 2001-
2005, prices levitated." Shiller agrees. "So why did it happen?" The Bloomberg News interviewer
wanted to know. Shiller, an economist by trade, cited no economic rationale
for the boom. Rather, he provided an explanation rooted in
the curiosities of human behavior. "One of the mysteries of human society is how we interact
with each other," he said. "We are an empathic species.
When you have emotions, I see it in your face and I feel
the same emotions. That means we kind of move as herds. And
so when other people are getting excited and they are
talking about the real estate market, it gets me excited
too. You can't stay above it. If you are human, you get
drawn in. But then when the emotions start changing, you
get drawn into that too. And the emotion does seem to be
changing. It looks like we're at the beginning of a change
in psychology." The recent housing data bear out his assessment. 
Clearly, emotions are changing. The feel-good era of the
housing market is visibly yielding to the feel-less-good
era. Prepare yourself. [Joel's Note: Whether you choose to believe in the plethora
of hard data available or the altering psychological
landscape, there is little doubting that we are in for a
fairly shocking correction in the housing market. The
question now seems more, "when?" than, "if?" Cracks, very
large, structural cracks, are already appearing across the
nation. Just take a look at what one vigilant Rude reader
had to say yesterday about the abysmal state of the Denver
housing market: Dear Rude,
I've talked with realtors and a VP of a title company,
they've confirmed the fact that the real estate boom in
Denver is definitely done. The VP said it's been flat since
the first of the year. A realtor I talked with said he knew
a guy who had 265 listings, and hadn't got a single phone
call on them.
Foreclosures have steadily increased as well... even with
all this, the prevailing mood seems to be that "when real
estate comes back" everything will be all right. People
seem to think it'll bounce back like tech stocks did in the
late 90s, say in 6 months to a year - if the Fed doesn't
raise rates too much farther. However, I think there are
major structural problems that'll prevent this:
1) Rising interest rates from the Fed,
2) Heavily indebted consumers,
3) Outsourcing of blue and white-collar jobs to Asia and
Latin America
Maybe the bubble is still alive on both coasts, but here in
the Denver-metro area, it's definitely popped.
B. Ochsner So what can you do about it, if anything? Learn how to
protect yourself against the coming crisis in this special
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going on in your neck of the woods, please pen your ideas
to your renting editor at: aussiejoel@the-rude-awakening.com Cheers, jOEL ---------------------------- 
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