Critics may object that this is one of those typical Tinseltown fads and not representative for the "real world." Not true, as a glance to the other coast shows. In Florida, buy-and-flip real estate investors are outbidding each other for rickety trailers on postage stamp-sized lots, framed by chicken-wire fences and often littered with debris from the last hurricane. Currently sellers rake in up to $500,000, especially if the property happens to be located in the Keys. Of course it's not the trailers but the land that's so valuable to investors--in fact, as the Miami Herald reported, the price of moving the trailers often exceeds their value by so much that most are being demolished on-site by their proud new owners who no doubt already envision a nice townhouse or cottage on the premises.

We can only shake our heads in wonder... and figure that, even though we have covered the housing bubble in previous issues, the latest developments warrant an update. In a nutshell: the news is not good. Take housing affordability, for example.

According to the National Association of Realtors, in 2002, the median price for an existing single-family home was $158,100. In June of this year, that figure stood at $218,600, nearly a 40% increase. That's pretty heady, but it might be okay if incomes were keeping pace. They aren't, not by a long shot. Over the same period, median family incomes rose from $51,680 to $57,115, a gain of only 10.5%.

What's really sobering is the fact that during that same period, the monthly payment (P&I) required to finance a median-value home jumped from $804 to $1,016, up over 26%. And that despite the fact that average mortgage interest rates dropped from 6.55% to 5.71%.

Take the NAR's Housing Affordability Index, which shows the percentage of American households that can afford a median home (based on a 25% qualifying ratio of monthly housing expense/gross monthly income). A year ago, that index stood at 57. Now it's 50 and falling. This means that only one out of two families in the country can now afford an average dwelling. In superheated markets, the situation is far worse: a mere 17% of California families can afford that same house.

The rental market, in contrast, has remained relatively stable. So what's happening? For one thing, folks are spreading themselves exceedingly thin. For another, those buying houses are increasingly uninterested in a place to live. Soured on the stock market, they are trying to make their fortunes by speculating in real estate.

The figures make this abundantly clear. According to an article in the Wall Street Journal, in the first four months of 2005 investors accounted for 9.9% of home mortgages, a better than 60% increase since 2001. In addition, another 7.2% of mortgages went for second homes, vs. a mere 2.2% in 2001. (Totals for all of 2004 show 23% investors, 13% second-home buyers.)

These two groups are largely driving the red-hot market, and they are not stable home owners. They will sell at the first hint of a price peak. No one knows, of course, when that will happen, but it will. History teaches that no asset class continues to appreciate indefinitely. What goes up must come down--at some point, the supply will simply exceed buyers' ability (or desire) to pay. With the affordability index sliding so dramatically, we believe this tipping point cannot be far off. Our trailer story is another indicator, since it is well known that towards the end of a bubble activity is picking up a frantic pace. We can hardly imagine anything more frantic or insane... million-dollar doghouse parcels, maybe?

Compounding the problem has been the ominous rise in the incidence of non-traditional financing, which Fed Chairman Alan Greenspan commented on in June, saying that "the apparent froth in housing markets may have spilled over into mortgage markets."

There's no may have about it. What Greenspan is talking about are such high-risk propositions as interest-only mortgages--which in their early years require only interest payments, often leading borrowers to choose a higher-priced house than they can actually afford; and option ARMs, which are, if possible, even scarier. Option ARMs have teaser rates as low as 1% and give borrowers four different choices of how much to pay every month. The minimum-payment option is so low that it may not even cover all the interest due. Whatever isn't paid gets added to the principal, a phenomenon called "negative amortization."

People who take on obligations like these are gambling with their places of residence. When the grace period on monthly payments expires (somewhere between 2 and 10 years out), their monthly payments will jump by a lot--up to 50 percent, or even more if the index for the adjustable rate rises as well. What they're betting is that housing prices will continue to rise so that, a few years down the road, they can sell their home for a nice profit before they won't be able to afford the (increased) payments anymore.

Even though that's the kind of speculation resembling Russian Roulette, buyers are proceeding to take these big risks, in ever-increasing numbers. Nationally, for example, a staggering 31% of mortgages were interest-only in 2004, and in the hottest markets, the ratio was much higher. In California, for instance, interest-only and negative amortization loans comprised 60% of all new mortgages (vs. the 2002 figure: 2%).

Taken together, all these numbers indicate a teetering house of cards. What would cause it to collapse? A rise in mortgage interest rates, which have not yet tracked the Fed's steady raising of prime, would do it. Each 1% increase translates into an 8.5% decrease in purchasing power for the purchaser. Thus, should rates rise by 3 points, more than a quarter of all buyers will be priced out of a given market. Or it could simply happen because of a supply glut. The graying of America means that the trickle of seniors downsizing out of large family homes will soon become a flood.

A collapse means more than just people losing money on housing transactions, too. It would have a disastrous ripple effect through the whole economy, which has seen much of its tepid growth result from consumers freeing up capital gains they've accrued on their real estate. In addition, since 2001 over 40% of all new private-sector jobs created have been in housing-related fields such as construction, real estate, and mortgage brokering.

Is a crash inevitable? No, but a decline is, and that decline could take a different form than an outright plunge. Prices could drop in fits and starts, with any number of fool's rallies punctuating the trip to the bottom. Or there could be a long, steady fall, as has happened in Japan, which before the present U.S. boom boasted the most overpriced market in history. Since their peak in 1991, Japanese property prices have dropped for 14 consecutive years, with a cumulative loss of more than 40%. As The Economist points out, "it is surely no coincidence that Japan and Germany, the two countries where house prices have fallen for most of the past decade, have had the weakest growth in consumer spending of all developed economies over that period."

Our advice regarding how to protect yourself and your family in this climate is the same as it's been for quite a while now. Get the lowest fixed-rate mortgage you can negotiate, and sit on it; avoid gimmicky interest-only and option ARMs like the plague. Don't speculate in real estate; you may miss the top, but you won't get hurt when the downturn comes. Don't borrow against your property's present value.

What this all boils down to is merely adopting a more traditional mindset about your home. It's the place where you intend to live.

The housing bubble is about to burst, leaving millions in the dust.

The demise of blue chips like General Motors and the dotcom collapse have taught investors to distrust the stock market.

The dollar is well on its way to reaching its intrinsic value: zilch.

And investment icon Warren Buffet himself, the man whose Berkshire Hathaway fund outperformed the S&P 500 in all but five of the last 40 years, says it's time to get out of mutual funds.

Where does that leave you?

As strange as it may sound--maybe in a better place than ever before. Because sometimes we need a wake-up call like this to reconsider our choices.

The difference between an investor and a speculator, says Doug Casey, is the investor puts 100% of his money on the line for a potential 10% return; the speculator puts 10% of his money on the line for a potential 100% return. And with the "rational speculation" Doug stands for even that risk is markedly reduced.

Granted, the natural resource sector is not for the faint of heart and you may wonder if you have the nerves to participate in it. But Doug and his Casey Research team do not just tell you what to do and where to invest. They teach you how to recognize the best opportunities and in time, to become an expert yourself.

That's how double- and triple-digit returns (and sometimes much more than that) are made--not by blindly following an investment guru but by learning the tricks of the trade. And Doug is probably the best teacher you'll find in the rock-kicking business.

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