Yet despite the still-strong economy, the very factor that is helping to fuel it, perversely, will soon be the principal cause of its demise, if my evaluation is correct. What exactly does this mean? Allow me to explain. I'm starting to notice a growing trend which I believe will make a big impact on the economy later this year and which I felt it was namely to mention it here. Not surprising it has to do with the real estate market, but not in the way that most analysts are talking about.

The real estate bubble (and yes, I call it a "bubble" for reasons I'll explain below) is growing to such gigantic proportions that inning to have ramifications on the state of the economy. In truth, consumer spending hasn't really suffered a serious setback in nearly a decade, although there is reason for concern that a major economic slowdown is right around the corner. I believe this will be fostered by the real estate bubble of all things. Why? Because more and more of the public are getting loaded up to the gills with mortgage debt and, whether the effects are actual or psychological, they have already begun cutting back on discretionary purchases. How many of your friends and acquaintances have recently bought new homes or are in the process of doing so? How many of them are talking seriously about becoming first-time home buyers? Probably a lot more than usual.

Now before going any further, let's address a topic of debate among the financial crowd of late, namely the argument of whether or not there is truly a real estate "bubble" in the U.S. I say yes there is. The naysayers ask "how can it be a bubble when there are so many real estate markets all across the country?" This is a good question but one that obfuscates the main point of the argument. The respected and widely-read "Doug Noland Credit Bubble Bulletin" recently quoted a speech made by Fed Chairman Alan Greenspan on the potential for a housing bubble. Here is what Greenspan has this to say of the question:

"I personally don't think that there's a housing bubble similar to that which exists in stocks. First, because the transaction costs of selling a home are far larger than they are in stocks. Besides, you have to move. You don't have to do that (with stocks). And it's fairly evident that, unlike the stock market, the housing market in the United States is really a whole series of metropolitan area markets. Portland, Oregon's housing market does not compare with the housing market of Portland, Maine. Yet, stock prices do. So you have regional, localized markets. And it is perfectly possible, and indeed it happens on occasion, that you get a housing bubble in a localized region -- I think we have had some in this particular state (California). But it is very hard to make the case that you get a bubble created for the country as a whole, and therefore a significant contraction in overall housing prices and, therefore, if it were to happen, a significant damper on economic activity."

Greenspan makes a point of stating that the U.S. real estate market is a composition of localized and metropolitan markets, yet the same could be said of the broad equities market, which is composed of various industries and sectors. Like with stocks, certain sectors can be undergoing a recession even while the broad trend of the market is up, and this is true of real estate also. I think it's safe to say that the broad trend of housing and real estate prices (including commercial properties) across the U.S. is up. This point is made especially clear according to the latest statistics published by the National Association of Realtors (NAR). The numbers show that most housing markets rose in value in 2002, and in some hot markets jumped more than 20%. In fact, 39 out of 120 markets tracked by NAR saw double-digit gains in home prices between the fourth quarter of 2001 and the fourth quarter of 2002. That was an all-time record, according to the NAR.

Another indication that there is indeed a housing "bubble" is that real estate is THE topic of the hour in the financial press; indeed, even in the mainstream non-financial press. Simply put, everyone is talking real estate and it seems that just about everyone is "in the market" in some way or another. You cannot drive down the roads of any town or city in America without seeing "For Sale" signs everywhere, even on undeveloped roadside property. This is especially true in the prime real estate markets. The mainstream press constantly directs everyone's attention to the real estate market, another "bubble indicator," and probably the number one advertisement theme in America right now across all mediums -- E-mail, T.V. and radio commercials, and print -- has something to do with real estate (home loans, etc.) There are even commercials on cable television advising people on how they can become real estate wizards by ordering whatever correspondence course is being offered. Now I realize that the transaction times and costs of real estate deals is much different than that of stocks, but let's face it, with this much media publicity you know it's a bubble. By definition, a bubble exists when everyone is focused with single-minded devotion on one particular object with the effect of driving up prices beyond rational and sustainable levels. And right now, that object of the public's obsession is real estate, hence the bubble.

But the party can't last forever, and as with the erstwhile stock market bubble, the real estate bubble will soon meet its demise. The proverbial bursting point could come from any number of factors. The latest release from the NAR provides some clues. According to NAR, interest rates were the most important factor behind last year's thriving real estate market. In fact, low interest rates have become a major selling point in advertising for housing and real estate. But what happens when the home-buying public wakes up to the fact that it's not the interest that matters most but the "principal of the thing." Thirty years is a long time to pay off a loan, even if the interest is very small, when you consider all the bad things that can happen over the next 5-10 years alone. The coming K-Wave crash hasn't even descended yet and the severe battering that stock investors have taken over the past three years is merely a precursor to what is to come. In fact, the economy in toto hasn't even been touched in comparison to what is coming from the converging long-term economic waves and cycles that are in the "hard down" phase between now and 2010-2014, including the 10-year, 60-year, and 120-year cycles among others.

The red-hot housing market can also be attributed to a surge in home buying among immigrants. Celia Chen, senior economist for Economy.com, wrote, "There is a strong push among immigrants to purchase homes. About a decade ago this country had a surge in immigrants who have only recently begun the home-buying process."

I hope this doesn't come across the wrong way, but I would place immigrant home-buying in the same category as old maids and "shoeshine boys" in the late phases of a stock mania. History shows that whenever these categories of investors get into the market, the market is usually at a major top. The only reason there has been a "strong push" among immigrants to go into long-term debt to buy homes is because of Madison Avenue. There is been so much propaganda, saturation advertisement, and hypnotic suggestion aimed at immigrants in recent months to buy homes that this probably accounts for most of the "surge." And when you consider that most of the home-buying immigrants today have only been here for a decade or less, you have to consider them "weak handed" buyers since there is no way most of them could have established themselves financially enough in 10 years to become solid home buyers. Based on this factor alone I smell a top in the market developing.

And here's another trend I'm starting to notice that may be related to the bubble in real estate -- people who have a long and unbroken habit of consumer spending on non-essential items, for the first time in years, are reeling in spending because they've just purchased a home and feel they can't afford to spend another dime on something unnecessary. They are starting to ask the question, "Do I really need to buy this?" Multiply this by tens of thousands all across the nation and you have the makings of a bona fide economic slowdown, which in spite of what the economists have been telling us we haven't really seen yet. I believe this trend will accelerate and become very conspicuous by late third quarter/early fourth quarter 2003. Home buying is a very expensive ordeal and the psychological effects alone on the consumer purse can be staggering. This in turn will lead to the next severe downside smash in equities expected next year when the 10-year cycle bottoms. I predict that a massive consumer spending slowdown will be the dominant theme in the financial press by the fourth quarter and will supplant the current rage over real estate.

April 21, 2003

Clif Droke is the editor of the Gold Strategies Review newsletter, a monthly forecast and analysis of gold and silver futures and precious metals stocks. He is also the author of numerous books on finance and investing, including most recently "Junior Mining Stock Yearbook 2003-2004." Visit his web site for free samples of his analysis at www.clifdroke.com