Excerpts from
http://money.cnn.com/magazines/fortu...6866/index.htm

The sudden shift in the nation's housing markets is exploding some
long-held beliefs. The first is that a scarcity of buildable land on
the coasts keeps a cap on supply and prevents prices from falling.

But high prices inevitably work their magic, encouraging more people
to sell existing homes and sparking new construction. Sure enough,
prices are already tumbling in Boston, where a swarm of downtown
condos is swelling the number of properties for sale and punishing the
price of all housing.

A second myth is that today's big homebuilders learned their lesson in
past downturns and now launch projects only when they have firm buyers
lined up. But housing starts are still running at near-record levels
of some two million units a year. Big builders are starting 20-30% of
their units on spec, without signing up buyers in advance.

A third tenet holds that home values never drop in areas where
employment is rising. But today some of the hardest-hit regions rank
among the strongest job machines, notably northern Virginia and San
Diego. Young buyers filling those jobs can't afford the houses for
sale.

The current boom has spawned one new myth of its own - hot markets
will glide to a soft landing. The National Association of Realtors and
the National Association of Home Builders argue that housing is simply
returning to "balance" and that prices across the country will resume
"normal" increases of 4-6% this year and next.

But the housing bulls are relying on wishful thinking. The total
inventory of homes for sale, new and existing, stands at a staggering
3.8 million units, 70% higher than in 1999. The modest price increases
they are predicting would make today's houses more unaffordable,
adding to the already huge supply of unsold units and forcing an even
more severe adjustment in the future.

Even as speculators flee, developers keep throwing up condos at a
breakneck pace, in part because if they have already bought the land
and poured the foundation, they have no choice but to finish the
project. Unsold condos are piling up. In the Miami area 25,000 new
units are under construction, and another 25,000 are approved. Yet the
Miami market absorbed only 10,500 new condos in the past decade.
Builders don't have the luxury of waiting out a slump - they need to
sell for what they can get. At first they hold the line on base prices
by offering incentives. Then, as unsold units collect, they move
merchandise with huge discounts.

Most homeowners don't have to sell. The new, lower prices will be set
by those who have to bail out. They include not just investors but
also owners who stretched their finances to buy a house. This year no
less than 22% of the $8.7 trillion in mortgages will reset rates - and
the extra burden will be big. A typical three-year ARM will go from
3.6% to 5.6%.



--


Before I got married I had six theories about bringing up children.
Now I have six children and no theories.

....John Wilmot