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Baghdad Bob Comes to Baltimore

Written by Steve Christ
Posted August 28, 2006 at 8:00AM

My home town newspaper the Baltimore Sun just can't seem to make up its mind. Just last month the paper went to press with a three part story entitled "The Coming Housing Crunch."

It was the epitome of folly.

In it they argued that there was no bubble in housing to be found at all. Amazingly they argued that it was quite the opposite. Where others saw bubbles they saw coming crunches.

Needless to say the facts have proven them wrong.

In fact, just this past weekend the same paper ran a special report entitled "Going from Boom to Glut." It was a stunning reversal, to be sure, but at least we can all rest a little easier here now knowing that that hometown sleuths are on the right path.

But to say that The Sun was alone in its blindness would be folly too. Like the rest of the media it is a little late to the party.

But what a difference a mere six months can make. Suddenly the debate has shifted. With summer coming to an end, it is not about whether or not the bubble exists, but about how bad the popping of it will be.

It is a stunning reversal of fortune and opinion.

Even David Lereah, the head cheerleader for the real estate industrial complex, has changed his tune.

In fact he has run up the white flag.

Just check out these two power point presentations prepared by Mr. Lereah himself.

One was presented a couple of weeks ago and is entitled "Real Estate Reality Check":

Real Estate Reality Check

The other was presented in August of 2005 and is entitled, "The Real Story About Today's Real Estate Boom":

The Real Story about Today's Real Estate Boom

It may take a while to get through these slides but it's worth it. In fact, it's educational and entertaining at the same time.

Let's just say that they are not just "night and day" different, but more like the difference between apples and kangaroos. It really is that bad.

Mr. Lereah it seems has changed his mind.

Unfortunately for him the so called chicken littles and the eeyores of the boom have been right all along. It is only now that the media at large has caught on.

But it's better late than never.

So now that all of the debate about the bubble itself has been answered, the question of the moment centers around how bad exactly it will get.

For his part, Mr. Lereah fully expects a "soft landing."

In fact, this Baghdad Bob, recently said this, "Confidence has plunged in the real estate industry and thus, I do not expect sales to come back anytime soon. We reached a sales floor in July and will flatten for the remainder of the year. ‘07 will be a flat year. The positive demographic influences will influence the real estate market in a positive way during the second half of ‘07 and all of ‘08 and beyond."

In other words, in Mr. Lereah's world prices will level off for the next year or so and then start moving on up again until the end of time.

This is what's known as the soft landing argument. But unfortunately it is just another one of Mr. Lereah's fantasies.

Here's why.

You see, bubbles- be they in tulips or dot com stocks- always end badly. They have to- because the valuations that they're awarded are completely illogical.

And no..... it's not different this time.

In fact, it's a lot like the Florida real estate bust of the 1920's

The similarities are mind boggling.

Not unlike today, those 20's sure did roar. And America, on the base of its expansion, had suddenly become wealthy.

The stock market of the time flourished and many Americans became enamored by the materialistic and prosperous lifestyle of the time. Like today these sure were some good times.

And it was at about that time that Florida land became the investment of choice among the newly wealthy. Then- like now- it's where the easy money was to be found.

Others, of course, soon followed because at that time almost anyone could invest in Florida, even without much money. Sound familiar?

Credit was plentiful to say the least. And before long everybody in Florida was either a real estate investor or a real estate agent. The demand was that strong.

In fact, in 1922 the Miami Herald became the heaviest paper in the world because of all of the real estate related advertising.

As a result, whole new communities sprung up everywhere practically overnight. Investors got filthy rich too and almost as fast.

Real estate it seemed then- as now- was a sure thing.

But it didn't last. How could it? By 1925 real estate prices had become so exorbitant that buying land simply wasn't affordable any longer. As a result, no greater fools could be found and old investors started to sell. The demand slowed to a trickle as the supply continued to balloon. The sellers were on the run.

Of course it wasn't long before the panic arrived.

The market crash followed and prices kept falling as heavily indebted investors tried to sell to avert bankruptcy.

In a few short years it was all over but the tears and the net worth of tens of thousands of people vanished as a result.

It is a scary story to say the least but a familiar one. The easy money, the speculation, the mania, and the fraud are the same today as they were 80 years ago. Our great-grandfathers it seems were as foolish as we are.

But for them it didn't end there. The stock market crashed some two years later only to be followed by the great depression.

And while we may be lucky enough to skip the depression part of the story, it promises to be a bumpy ride. In fact, it won't be long before all hopes of a soft landing are abandoned completely.

You see, any drop in home prices will devastate the economy. And unfortunately home prices could easily pull back to the tune of some 30%.

In fact, I believe that it is likely.

It's scary math to be sure and not for the squeamish.

Properties that were purchased at the top of the cycle for $300,000 will suddenly fall in value to the $210,000 range or worse. And in an instant the net worth of virtually the entire middle class will evaporate.

It will wipe out the poor.

It will kill the consumer.

It will send us into recession.

It will crush the stock market.

And it will push us to the brink.

It's stunning to contemplate and may be hard to predict, but it's going to happen just like it did down in Florida a long time ago.

And when it does, it will be a reversal of fortune for us all.


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