A New Kind of Money Pit Brewing

Remember the late 1990s and the investor rush to tech stocks? The Internet boom of that decade is something many tech investors will never forget… not because of the technological advancement of the Internet, but because of the money they lost on tech stocks. Their tech stocks became their money pit.

Ah, the real estate boom of this decade. Its funeral started in 2005, when housing sales and housing prices peaked. Remember the rush for home renovations? The Home Depot, Loews and other smart U.S. home improvement retailers made billions off the renovation boom. And Wall Street made billions financing the growth of huge real estate developments. But, at the end of it all, homes have become the new money pit for many millions of Americans.

At this point in the real estate bust, we still have the average investor/homeowner feeling that soon the worst will be over and that stability will return to the real estate market. I call this the “denial phase,” as nothing could be further from reality. In my many decades in the real estate business, I’ve never seen a boom that wasn’t followed by a nasty bust. As I mentioned Monday, most housing booms are followed by eight- to 10-year busts and lulls.

I have the proud achievement of warning my readers in 2005 that the housing market advance was unsustainable and that investors should get out of housing. (All those years of studying stock charts sure did help.)

Back in 1999 the NASDAQ traded at 5,000. Today, and almost 10 years later, that market trades below 2,400. Booms are great for investors to make money in. Busts take a long time before opportunities for investors present themselves again. That’s the stark reality of what we are facing in the U.S. real estate market today.

NEWSFLASH — Just when the big homebuilders couldn’t have it any worse… Lennar Corporation (NYSE/LEN) reports a quarterly loss of $1.25 billion. The 50-year-old big homebuilder says that it expects 2008 could be an even more difficult year for it. Lennar’s new home orders fell 51% in the fourth quarter. I continue with what may sound like an outlandish prediction: Before the housing and credit bust is over, at least one major American new homebuilder will declare bankruptcy.