By Seth Jayson (TMF Bent)
May 5, 2006

Allow me to offer a new twist on an old gag.

Question: "How can you tell when a home-selling industry insider is lying?"

Answer: "His lips are moving."

Now, now. I'm not talking about specific agents here (although if you want to hear the one about the agent who tried to sell us a townhouse with a collapsing foundation for a mere half million bucks, let me know).

No, I'm talking about the housing industry as a whole, in the general sense. You know all those Sunny Jims who refused to see a single cloud in the sky. Remember the good old days? All those National Association of Realtors (NAR) releases that claimed there was no bubble? How about all those mortgage-industry mouthpieces who helped drive up home prices over the past few years to the constant drumbeat of "Get your foot in the door before it's too late! No need to run the math on that loan to see what happens if interest rates go up! By then your equity increase will take care of it!"

And we really owe a debt of ingratitude to those pundits who continually exclaimed that home prices were flying through the roof not because of speculators, or overly-easy credit, but because of healthy demand from an American workforce undergoing strong wage growth. (The latter was a complete whopper, by the way.)

Yeah, we had to tiptoe through this widespread load of manure, even as, all around us, the real story was evident: We endured college grads regaling us with stories of their real-estate "investments," and TV producers glorifying the home fix 'n' flip industry. Interest-only and option ARMs became the instant-gratification financing vehicle of choice. We continued to hear it even as big loan providers like Redwood Trust (NYSE: RWT) announced that they were going to start offloading their loans to reduce credit risk.

As I've reported from time to time, not too long ago a few of these folks changed their tune to something along the lines of "OK, maybe there are some bubbles, itsy bitsy ones ... but the air will leak out slowly. They certainly won't pop! Would we kid you? What would we have to gain? Cough. Oh that? That's just our standard 6% commission. Let's go look at the great room again."

I've made no secret of my distaste for the worth of self-serving spin and the greed on which these remarks were based. That's why I'd like to give a round of applause to Toll Brothers (NYSE: TOL) chairman and CEO Robert Toll, for his unvarnished and very interesting remarks on the current state of the housing market. Today, in discussing this month's preliminary Q2 revenue release, he issued the following statement.

"We are entering our ninth month of slower sales in most of our markets. Looking at the market in general, I offer the following comments: Speculative buyers are no longer fueling demand; instead they're putting the homes they've recently acquired back on the market or are canceling contracts in mid-construction. Additional supply is also coming from speculative homes started by other builders, as well as from their "non-spec-buyer" cancellations. Much of the oversupply described above is now being aggressively discounted by others."

Hmmm. The speculators are moving out, and prices are falling as supply increases. Doesn't that sound like exactly the thing all those people said wasn't happening? Wouldn't happen?

Well, if that's not a pop, it's certainly more than a hiss. Toll operates at the high end of the market, but given the past years' heated bidding for anything with four walls and a roof, I'll be quite surprised if we don't continue to see this situation reverberating through peers like Pulte Homes (NYSE: PHM), Centex (NYSE: CTX), Beazer (NYSE: BZH), and Hovnanian Enterprises (NYSE: HOV), which was the latest to join the hard-luck club of homebuilders, with a chopped earnings outlook on Tuesday.

And if skyrocketing gas prices plus "core" inflation continue the upward march, as consumer confidence hits the skids, it might not be long before we see the not-popping bubble blow over more than just the housing stocks. Shareholders at companies as diverse as Apple, True Religion, Coach, Best Buy, and GM might do well to ask themselves if consumers will have much left to spend on luxuries if the gas pump empties everyone's wallet and that housing ATM runs dry.

For related Foolishness:

• The housing experts change their tune.
• While home prices help the California Dream go bad.
• Look behind the housing bubble babble.
• Bubble? You bet. But only Fools seemed concerned.
  
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