Why My Wife Is Scared Silly

Mike Larson is sending out so many gloomy e-mails about the coming housing bust, hes scaring the living daylights out of my wife.

We own a middle-class home here in Palm Beach County. Its a big chunk of our nest egg. So if Mike is right, were going to take a big and painful hit.

Plus, Cynthia is such a real-estate nut always following home sales in our neighborhood … always shopping for undervalued properties … often concerned about how the ups and down of the local market could affect our net worth.

She even tried to get me involved in real estate speculation about six months ago. Fortunately, thanks to Mikes never-ending stream of e-mail warnings, we decided not to.

I must admit, though, the lure was powerful. Everyone around us was buying properties … flipping them … and making not-so-small fortunes.

Most recently, one friend bought a prime property in Port St. Lucie, about 60 miles up the coast from here. He said it was a short-term, investment. Easy to flip.

Thats When I Knew Mike Had
To Be Right. Too Many People
Were Going Gaga Over Housing.

Thats also when I started passing along Mikes e-mails to Cynthia. I figured it was the best way to cool her real estate mojo.

You see, Mike didnt start the e-mail barrage yesterday. Hes been at it since last spring. Thats when he started building his case for a bursting housing bubble. And thats also when he says the whole shebang was peaking.

He sent us e-mails about the wacky financing schemes that made the stock market boom of the 1920s look conservative by comparison. In those days, thousands of investors bought high-flying stocks with only 10% down. Now, millions of households were buying high-flying real estate with zero down or even less.

He wrote about the wild speculation by banks, mortgage lenders, builders, and contractors … and how it could all blow up in a puff.

Those were just forecasts. But then he started writing about how his forecasts were coming true falling homes sales … mushrooming home inventories … and finally, this year, actual declines in home values.

At First, Cynthia Pooh-Poohed It All.
But with Time, the Evidence Was Just
Too Overwhelming for Her to Ignore.

You can keep sending me these things, she said. But you should know that usually I just stop reading them and start panicking.

Indeed, Mikes stats were getting more and more persuasive. But nothing was more convincing to us than seeing our own friends slide down a slippery slope …

In a matter of a few short months, that short-term, quick-flip investment our friend had made in Port St. Lucie has turned into a long-term, buy-and-hold investment. Maybe even a retirement property.
Tracey, a lawyer friend, was already heavily burdened by student-loan debt when she bought a condo as an investment. She used an adjustable-rate, interest-only mortgage. Low payments. But no pay-down of equity.
Now, suddenly, there are plenty of condos for sale in her development, but no one is buying. Her mortgage payment is rising with higher interest rates. And sure enough, shes stuck with an investment thats a millstone around her neck.
Claudia, another friend, is in a similar situation. Buried in debt. Condo on the market for six months. Not so much as a nibble.
Leo and Anna, our former neighbors, sold their house for a good profit. But then they rolled every penny into a giant, new McMansion at the top of the market. They expected home prices to continue soaring so they could take out a home equity loan. Instead, new homes in the same development are now selling for less than what they paid for theirs.

Our friends arent dumb. Nor are they any less prudent than most people nowadays. But theyre being smacked in the face by a cold reality they never thought could come to pass.

Heck, just a short while ago, speculators around here were going door to door, asking people if they wanted to sell their homes.

Today, middle-class Florida homeowners are dropping their asking prices by $30,000 … even $60,000. And in some of the priciest neighborhoods, like in Sarasota, desperate sellers are slashing $200,000 … $300,000 … even $500,000 off their price tags.

Talk about reverse sticker shock!

The Horror Story a Lot of Smart
People are Worried About Now

Some of our friends are so overleveraged they could wind up digging into every penny of their savings just to get out.

But whats the alternative? If they dont make their payments, theyll go into default … be evicted … maybe even wind up on the street.

Yes, they could file for personal bankruptcy. But the bankruptcy laws have changed, making it much harder than it used to be. Anyway, most of our friends are too proud to file.

You know what that means? If theyve got …

a $600,000 mortgage …

a home that sells for $500,000 and …

a $100,000 nest-egg in the bank …

it means theyre going to wind up losing every last dime of that nest-egg. Theyll be flat broke.

If the Air WHOOSHES out of the
Housing Bubble, Millions of Americans
Could Wind Up in the Same Boat

If you think Im a bad guy for forwarding Mikes scary e-mails to my wife, you should see the ones I dont send her!

I could have sent her Mikes story about the 1980s housing bust in Houston that forced $70,000 condos to sell for $10,000.

I could have sent her the one about the Florida land bust of the 1920s, when prices fell to 10 cents on the dollar (even though the speculative boom that preceded it wasnt nearly as bad as this one).

Or I could have shared the bombshell that Mike dropped in my inbox just the other day. His words:

An estimated $2 trillion in Adjustable Rate Mortgages (ARMs) will see rate and payment increases in 2006 and 2007. Thats 1/4 of all mortgage debt outstanding. This is a key risk the market is just not paying enough attention to.

Subprime lending (lending to borrowers with bad credit, little or no money down, and other problems) has exploded in recent years. More than $600 billion in subprime loans were originated in 2005, compared with just $150 billion or so in 2000.

When you layer rising rates, ARM adjustments, and a slumping housing market on top of a massive surge in lending to poor credit risks, youve got a recipe for a default and foreclosure explosion!

Think about those numbers too much and you might find yourself burying gold bullion in the back yard. Or consider these e-mails weve received from Mike:

Hey, Sean. Did you know that 55% of the past years growth in the entire economy was a consequence of the housing boom? A housing bust could destroy between 5 million and 6.3 million jobs.

Or …

Good morning, folks. Pending existing home sales index for January fell for the fifth month in a row. Its now at its lowest level since February 2004 …

Or …

Look at this just out! For-sale inventory on the existing home side is at an 18-year high. Supply of new homes for sale hit 516,000 in December highest in history. And the supply is getting worse not better. Nationwide, condo supplies have jumped fifteen times faster than demand!

Now Mikes Really Done It!

Last week, Mike asked me to review the final draft of his new report, The Great Real Estate Bust of 2006-2008.

I immediately read it cover to cover. Its that good. But theres no way in hell Im showing it to my wife! Shed freak out.

In his report, Mike paints a scenario that makes other kinds of busts look tame by comparison.

But he also gives us solid recommendations on exactly what to do, and that will make Cynthia happy. Maybe, Ill just cut and paste the tips and send them along to Cynthia (without the dark scenario) …

Tip 1. Consider selling investment real estate IMMEDIATELY. Dont wait for prices to turn around. Just move quickly to protect capital. (There are more details on why, how, and where in the report.)

Tip 2. Maybe renting is the way to go right now. If the home means more than just an investment, stick with it. If not, run the numbers on owning vs. renting. Youll probably find that renting is cheaper even after they factor in the tax advantages of owning. By selling, you not only protect your nest-egg … you also cut monthly expenses.

Tip 3. If youre holding mortgage bonds from Fannie Mae, Freddie Mac, or based on the high-risk subprime mortgages sell now. The market value of these bonds is likely to fall as home prices decline and mortgage delinquencies rise.

Tip 4. Sometimes youve got to buy, even in the worst market. If thats your case, first read the section in Mikes report 10 Ways to Be a Smarter Home Buyer.

Tip 5. Dump vulnerable stocks from your portfolio: construction companies, subprime lenders and mortgage REITS. In Mikes report, he discusses seven vulnerable sectors, and names up to six stocks in each.

Tip 6. You probably have insurance to protect your home against storm damage. So why dont you buy some protection against a housing bust? Mike explains how in the report.

Tip 7. Be proactive go for profits. There are investments you can buy right now that are designed to double and triple in value as the real estate market crumbles.

(If you download Mikes report now, youll be entitled to four updates. The entire package The Great Real Estate Bust of 2006-2008 and the four follow-ups is normally priced at $495. But right now, the complete package is $129.)

Bottom line: If youre like Cynthia, and the prospect of a housing bust scares you too much, dont read Mikes report.

But if you want to be proactive, Mikes report is not just doom and gloom. It tells you how to protect yourself, your familys home, and your portfolio, and even profit on the coming nosedive.

All the best,

Sean Brodrick

For more information and archived issues, visit http://legacy.weissinc.com.

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Jennifer Moran, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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