This Old House is a Money Pit

By Tobin Smith

Reality Hurts

On average, home prices in this country rose 20% per year for six years. That's 25 years of appreciation in just six years.

When you look at home prices in real terms, they're still more than 30% higher today than they were when this bubble started in 2001.

Let's be optimistic and split the difference, and say that we should expect to see at least 15% more home value deflation nationwide. While this may not happen everywhere in the country, it will certainly happen in places like California, Florida, Las Vegas and parts of Phoenix.

This continued home price deflation means another leg of foreclosures and mortgage writedowns at the banks. And more dilution from being forced to raise capital means we'll see even lower stock prices in the homebuilding and financial sectors, plain and simple.

Expect to see more homebuilders and small banks go bust in the coming months.

While I know that is a scary thought, the good news is that capitalism is working -- the excess inventory is slowly moving to stronger hands.

We have reached the price point where big institutional buyers are coming in to buy homes for cash at 50% off.

I have heard multiple reports of 100-home-plus purchases from banks sitting with thousands of new construction repossessions. And I'm part of an investment group in Florida that is buying condos at $1.65 per square foot -- almost 50% below construction costs!

But don't think for a minute that we have reached the bottom.

We need a few years of underdevelopment to get back to a balance between new homes for sale and willing buyers. In other words, you can't have six years of overdevelopment without five to six years of underdevelopment. That is, unless you start demolishing homes for scrap.

Reality Pays

If you're planning to buy a new home, keep your powder dry -- they will get cheaper.

As investors, though, you can make huge profits by using big bear market swings to short the financial and homebuilding stocks at the top of their trading ranges.

However, shorting stocks outright is risky business. Even if you know what you're doing, you're setting yourself up for potentially unlimited losses.

At ChangeWave, when we play the short side, we like to open ourselves up to unlimited profits, while minimizing our risk. And that's exactly what ChangeWave Shorts Editor Michael Shulman does for his subscribers.

His subscribers have made a killing buying put options on homebuilders and the financials, but Michael is confident that there are more profits to be made in these hurting sectors. (Get in on the action now.)

And you don't want to miss out this time around!



Toby

P.S. Play the short-side the safe way by using simple, easy-to-execute put option plays. Let Michael Shulman lead you to gigantic profits in homebuilders, financials and other falling stocks. Try ChangeWave Shorts risk-free for 90 days.

---

Tobin Smith is the founder of ChangeWave Research, the editor of ChangeWave Investing and ChangeWave MicroCap Investor and a contributing market analyst for Fox News Channel. His market commentary can be found in the ChangeWave WaveWire and he provides more specific recommendations and advice through his ChangeWave Investing service. Click here to learn more about ChangeWave Investing.