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Is The Bubble in Housing About to Burst?   (June 2005)

Some of the most respected publications in the financial media have been trumpeting the dangers of a collapse or decline in housing prices. The Economist (6/15/05) bluntly states: "The worldwide rise in house prices is the biggest bubble in history. Prepare for the economic pain when it pops."

The Wall Street Journal has covered both the cause of the bubble-- In Treating U.S. After Bubble, Fed Helped Create New Threats (6/09/05), and the result-- What Happens If Real Estate Goes Bust (6/12/05)

For an excellent summary of just how extreme this housing bubble is, and why it appears to be close to popping, check out Barrons' story on economist and author Robert Schiller, whose book Irratioinal Exuberance predicted the collapse of the NASDAQ dot-com bubble just weeks before its ultimate top.

Judging by various events and timelines--the fact that the current "bull market" is running out of steam, the current account deficit continues to hit new highs, short-term rates are approaching long-term rates (hint: that signals a recession), crude oil continues to set new highs ($58/barrel today, with a target of $67 in my estimation), and perhaps most tellingly, Federal Reserve Chairman Greenspan retires in December--the housing bubble will stop expanding this year and then burst in a showy conflagration in 2006.

I feel badly for the multitudes buying overpriced houses with no money down or with "interest only" mortgages-- which is some 60% of recent buyers in California. It can safely be predicted they will either lose their homes or their down payments in the coming years. Such is the power of "irrational exuberance."

There's one more irrefutable piece of evidence that the bubble is about to pop: anyone doubting the staying power of real estate is subjected to the rage of fearful believers. To quote from the WSJ's Jonathan Clements:
How hot is the real-estate market? Try reading my mail. A few years ago, I could offer warnings on the actual costs of homeownership and I would hear hardly a peep. But lately, when I offer similar comments, I am inundated with blistering emails that belittle my intelligence with language unfit for publication.

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copyright © 2005 Charles Hugh Smith. All rights reserved in all media.

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