Growing expectations of price slowdowns, or even significant drops in values, in hot real-estate markets are stimulating a new subindustry...

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WASHINGTON — Growing expectations of price slowdowns, or even significant drops in values, in hot real-estate markets are stimulating a new subindustry: Entrepreneurs preparing investment funds and businesses to snap up bargains after the bubbles burst.

Yale economist Robert Shiller, who forecast the stock-market decline and the dot-com implosion in his book “Irrational Exuberance,” says significant corrections in housing prices in some of the fastest-appreciating markets are inevitable.

Double-digit, multiyear run-ups in prices in markets in California, Florida, Nevada and along the Atlantic Coast are “much the same phenomena” as the tech-stock bubble of the late 1990s.

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Shiller has no specific predictions about when or how severe the corrections will be, but he is convinced the speculative excesses in at least some of these areas will trigger downturns in property valuations.

In Deerfield Beach, Fla., Jack McCabe of McCabe Research & Consulting, an adviser to large residential developers and apartment owners, shares Shiller’s bearish views. But he’s getting ready to pick up the pieces after the storm.

He is putting together what he calls “opportunity funds” — pools of investor capital — to acquire new and converted condominium units purchased by speculators.

Some projects in the Miami-Dade County area have sold “70 to 80 percent” of their units to speculators “who think they’re getting into a gold rush and expect to flip” the units within the year, he said. In reality, McCabe thinks, many of these investors will lose their shirts trying to resell at ever-inflating prices.

It’s the 2005 real-estate version of the “greater fool” theory, he argues.

“At some point, there just aren’t enough people who will buy” your overpriced condo unit, “and you can’t afford to carry it anymore.”

Investors expect slowdown

McCabe says a lot of sophisticated investors apparently agree with the scenario. He says he has commitments for more than $10 million in capital from investors, large and small, who expect to acquire individual units and entire projects at deflated prices during 2006 and 2007.

McCabe is creating limited liability companies for small groups of up to 25 investors to buy new units, some of which are at the pre-construction stage today. The companies’ minimum investment requirements vary: anywhere from $30,000 to $50,000 at the low end to $1 million at the top.

Their acquisition strategies will depend upon the opportunities available but will include holding and managing properties for extended periods, or shorter-term ownership followed by profitable resales when the market begins to recover.

The companies expect to buy for all-cash in some cases, or use financing to increase leverage.

“We think there will be very attractive opportunities” beginning in the first quarter of 2006, McCabe says.

Even now, there are signs that the speculative bubble may be in its final phase. Developers in the Miami area are beginning to limit the number of investors they will sell to in certain projects. Lenders are cutting back on higher-risk loans for speculators, especially low downpayment, interest-only and “payment option” plans that allow substantial negative amortization (rising principal balances).

McCabe thinks speculation-driven price excesses — Federal Reserve Chairman Alan Greenspan called them “froth” in a recent speech — can be found in dozens of other markets.

“The dynamics are similar” in California, the Washington, D.C., area, Florida’s west coast and other high-fizz areas where speculators are active.

Opportunities seen

In Denver, Tom DiMercurio, a veteran specialist in owned or defaulted properties, also sees a rising tide of distressed-property opportunities ahead. He has launched The Mercury Alliance, a firm to work with lenders “in the 15 hottest markets” to dispose of homes, condos and other properties that go sour.

DiMercurio thinks any significant increase in interest rates will cut short the boom psychology puffing up many markets. That, in turn, “will trigger a substantial increase” in real estate available for resale to distressed property buyers or for management on behalf of lenders.

Even in cities such as Denver, where recent price gains have been modest, DiMercurio says an oversupply of loft and condominium projects is likely to trigger property devaluations and a decrease in willing purchasers.

DiMercurio attributes a major part of the problem to mortgage lenders themselves. Too many have come up with what he calls “hairball programs” that allow unsophisticated borrowers to take out loans larger than even the inflated appraisals on the properties they are financing.

“People think they can only make money and there’s no risk” when they invest in real estate. “That is ridiculous,” DiMercurio says.

Kenneth R. Harney: