So the statistics are finally starting to emerge, and nobody but the spokespersons for our real estate brokerage industry, our debonair denizens of denial and flagrant fanners of fantasy can gainsay the obvious: the housing market is softening, and it is doing so quickly and rather dramatically. Prices are softening, unsold inventory is rising quickly, and new construction is clearly on the decline. The New York Times pointed all this out in its May 9 Business Section and, as we all know, once the Old Grey Lady spots a trend, its well underway or, perhaps, very nearly over.

Real estate investors, over the last couple of years, are the equivalent of the late 1990s high-tech moguls, persuaded beyond any reason that profits were limitless and that the market would, indeed, go up forever. Yes, folks, its the tulips again! For those who may not recall 17th Century Holland (all evidence to the contrary notwithstanding, even I cant remember back that far), irrational and maniacal speculation in tulip bulbs in that era drove the prices up exponentially, until, predictably, the market crashed. I say, predictably, even though every time speculative frenzy overtakes society, whether it be a dotcom investment environment unburdened by earnings or a frothy real estate market which must go up forever because they aint making any more, we seem to have to learn the same lesson over and over again.

Is it a lack of intergenerational memory? We certainly dont have much sense of history, yet most of us know at least something about the Great Depression and Stock Market crashes of the past. Is it mere self-deception, i.e., the determination to think ourselves so clever that weve all become real estate moguls? In the late 1990s, I remember clearly being surrounded at my tennis club by 20-somethings, knee-deep in internet-land, sipping well-aged single-malt scotch, and puffing on expensive cigars, secure and, indeed, smug, in their status as captains of industry.

I wonder what happened to those guys?

In truth, it is hard to say why we seem to have to keep learning the same lessons over and over again. This is, perhaps, a question better put to sociologists, and not to lawyers and financial people. But the consequences are, as ever, predictable, to those who see the writing on the wall.

In a previous article, I pointed out that the decline in housing values, coupled with other developments in banking, consumer lending and revisions to the Bankruptcy Code all portended very poorly for the American Middle Class. Depending on what happens in this area in the near future, a similar prognosis may, I am afraid, await the Upper Middle Class who also have a great deal of their wealth tied up in their homes.

Until only a few months ago, clients and colleagues were begging me to find them deals in distressed properties. There was, at the time, virtually no such thing, because no sooner had someone gotten wind of a property owner with a financial problem, that the bidding war began, raising distressed properties fully to market value (there may well have been no such thing as market value either). Now I have the very clear sense that those properties may soon be plentiful. Those who have had the sense to keep their powder dry and who have the foresight over the next year or two to begin nibbling at opportunities and the patience to hold the properties they acquire, will, in this writers opinion, be well-rewarded. Much as the good leavings of the dotcom meal were feasted upon by so-called vulture funds, the sharks may soon be smelling the blood in real estate, and might be slowly, oh, so slowly, beginning to circle.

Warren R. Graham Copyright 2006