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Home Front Economy
Forbes on homes: Implosion by A. Gary Shilling
2006-06-06
If you still don't believe there's a massive housing bubble that is beginning to deflate, look no further than Toll Brothers. This home builder caters to the mushrooming ranks of the well-to-do who have enough income and assets to laugh off rising interest rates and energy costs. But in the year's first fiscal quarter Toll orders fell 32% from a year earlier. The company blames the fall on cancelations by speculators.

With dreams of huge appreciation dancing in their heads, speculators indeed drove the housing frenzy in the high end. Now that prices are flagging, they are fleeing. These investors and vacation-home buyers accounted for 40% of house sales last year, up from 36% in 2004. A lot of these investors rent out the properties. Despite low-payment interest-only mortgages, they cannot cover their cash outlays with rents, which are depressed by the proliferation of spec houses.

This is the first nationwide housing bubble since the 1920s, and it's driven by three nationwide forces: low interest rates, loose lending practices and the desperate search for a stock substitute after the 2000--02 debacle. Previous real estate bubbles were regional, spurred by economic cycles like the rise and fall of the oil patch in the 1970s and 1980s, and southern California's aerospace leap in the late 1980s during the Reagan defense buildup, ending with the Cold War's demise.
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