When the Walls Come Tumbling Down

Over the last nine months, the cyclical peak in housing activity has come and gone. Almost weekly, prior upward guidance by homebuilders has been replaced by the slashing of estimates, lower order rates and eroding backlogs. And the industry's inventory has mushroomed to multiyear highs.

The worst is yet to come for housing; it is moving toward a very hard landing. And with a further decline, will be (important) attendant and adverse ramifications for consumer confidence and aggregate economic growth.

Housing led the economic recovery and will now lead the economy's contraction -- a causal relationship far older than most hedge fund managers' (who have never seen a bear market) half-life of investing.

House in the Hamptons

This morning I wanted to write about my home and my neighborhood as an illustration of how quickly real estate markets turn and how worrisome the downward trend in the housing market might become.

For five months of the year, I live in the tony town of East Hampton, N.Y. (I purchased the home three years ago.) I live in a nice 50-year-old home on a little more than an acre, which sits about five blocks from Georgica Beach.

When I left East Hampton for southern Florida (my winter residence) last October (which, coincidentally, was the statistical peak in housing), there were no homes for sale on my block (which consists of about 12 homes). However, upon returning to Long Island in late May 2006, four of the existing 12 houses had been demolished and replaced with new homes for sale (I would estimate, on average, each home was about 7,000 square feet).

All four homes have been for sale since May (by speculators/developers) with no bids. Moreover, three other existing homes on my block have been put on the market this summer. No bids there either.

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