Barron’s – April 21, 2008

In the Eye of the Housing Hurricane

Views from beyond the Barron’s staff – Mike Morgan

Here’s a lesson many Floridians have learned the hard way: All hurricanes have three parts—the front half, the eye and the back half. The eye is a deceiving quiet period at the center of the hurricane. The eye lulls you into believing the storm has passed and all is well.

In fact, the back half of a hurricane can be far more devastating than the front half. The front half of a hurricane does a lot of damage and weakens many structures. Then, when the back half hits, houses, buildings and personal property teetering on the brink of failure are utterly destroyed. Moreover, since the wind is coming from the opposite direction, anything strong enough to resist the first half is tested again by the back half.

This is exactly what’s happening in Florida’s housing and financial markets. We are in the eye of the hurricane, and the back half will hit us twice as hard as the front.

The front half of the Florida real-estate hurricane was fed by a bidding frenzy that drove prices to a peak far above real demand: Flippers were not buying homes for function, just for trading. And with the Fed’s free-money policy, flippers were leveraging themselves at the same 30-to-1 and 50-to-1 levels as the financial wizards on Wall Street.

This artificial demand created an inflated supply of homes. By 2006, the inventory of unsold real estate reached a crisis level (“Florida’s Housing Hurricane,â€