On housing front, it's beginning to get ugly

There are plenty of reasons this occurs. First and foremost is that the homebuilding and home-selling industry depends on the perception that housing is a no-lose investment in order to continue hawking its wares. Agents, of course, get paid based on selling price, so you can be darn sure they'd rather see under-the-table concessions than straight price drops.

Homebuilders don't want to cope with the revolts that come from the first crop of suckers ... er, buyers when they have to drop prices on the new development of "executive estates." And finally, as I've seen firsthand in some interesting D.C.-area online chats, neighbors buying into the top of a bubble can get very angry when someone breaks rank and sells a home for (gasp!) what the market will pay, rather than what the bubble-equity dreamers hope and suppose it's worth.

The problem is that these real costs don't appear in the selling price, thus distorting reality and effectively continuing the pleasant myth that Americans have become comfortable embracing: House prices don't drop. Unfortunately, they do. The Wall Street Journal recently published a  harrowing tale of someone who got only half the $1 million-plus she thought her D.C.-area home was worth. Isolated case? I'm sure there are a lot of folks out there hoping so.

Twisted ARMs
If my suspicions are correct, even this little magic trick won't shore up prices for long. Oversupply in the face of negative growth in real wages, together with higher borrowing costs, eventually will have to lead prices downward. And I think we're only at the tip of the iceberg when it comes to seeing other forms of mild and wild financial shenanigans that pumped this bubble to the bursting point. I've been saying for some time that I thought the appraisal business was a funky racket, and it appears to be giving some folks big problems when they want to refinance.

And speaking of loans, how about those adjustable-rate mortgages? In another good story by Wall Street Journal reporter Ruth Simon, recent numbers and analysis confirm what I've long been predicting, that many of the people talked into these gimmicky "affordability" products did not, in fact, know the consequences. Now that they've tapped all their bubble equity and rate adjustments are coming, dropping prices are leaving them in a very bad spot.

This statement, from a broker out of California, says it all: "They've upgraded their houses, put in a pool and bought themselves Hummers and BMWs. Now they can't get it refinanced and they can't sell."

Foolish bottom line
What that means for the rest of us, even those of us who didn't jump in and pay half a million for a run-down wreck — well, that's a good question. Personally, I think that our high-end retailing friends, from Nordstrom to Coach, have less to fear from the gas-price bogeyman than they do from the hissing housing bubble.

If the amount of consumer spending that arose from fictional home equity is as large as some predict, the American consumer is going to have a lot less dough to blow on $600 backpacks, $350 jeans, $3,000 flat-screen TVs and the like. Let's just say that, as much as I'm a fan of Best Buy, I'm not sure I'd be buying shares right now.

If you think I'm overreacting, take a look around. My fears and suspicions are a dose of sunshine compared to what some others foresee. If NYU economics professor Nouriel Roubini is correct — and his reasoning looks pretty sound — the coming bust will trigger a pretty hefty recession. This would be a recession that would make the tech bust look like good times.

Is your portfolio ready for that? Are your personal finances ready for that?

They should be.

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