Can we wait out the storm?

The Sunday edition of Barron's reports that second home prices are plunging in certain areas of the U.S., and says it may signal a multi-year correction for the housing market.

Take a look at some of this evidence from Barron's:

In Litchfield, CT, home prices in the $300,000 to $600,000 range are down 12%-14%.
In Naples, FL, sales of homes costing less than $1 million declined 45% in unit volume in the first four months of this year. More expensive homes fell 34%.
In Scottsdale, AZ, unit sales now are down by 40%-42%, and the city's inventory of unsold homes has shot up more than five-fold, to 39,000.
In the Cape Cod area of Massachusetts, the number of homes for sale on the Multiple Listings Service in the Falmouth area is up about 65% from a year ago, says Lynette Helms of the local Real Estate Associates. Median home prices in the Cape Cod town of Barnstable are down 1% in the first quarter, to $385,000.
Barron's implicates speculative investors as the main reason for the pull back in prices. It points out that six out of 10 second-home owners own two or more homes in addition to their main residences, according to a survey by the National Association of Realtors.

"The danger," says Barron's, "is that if enough of those investors decide the market has peaked, they could trigger a selling frenzy throughout the second-homes market. That, in turn, could add to the pressures in the main housing market. After all, second homes now account for a full 40% of homes sold in America."

The Local Market Monitor, a Wellesley, MA-based consulting firm, tells Barron's that 58 percent of homes in Myrtle Beach, SC, were owned by investors as of 2004. In Wilmington, NC, 38 percent of homes were investor-owned. Florida had a large percentage of speculator-owned homes: Naples at 45 percent, Cape Coral/Ft. Myers at 40 percent, Miami/West Palm Beach at 21 percent. The average level of investor-owned homes is generally 14 percent.

Ingo Winzer, president of The Local Market Monitor, comments to Barron's, "This makes me very worried because it implies that the price increases have been driven more by speculators than by people who are going to hold onto these properties, and indicates to me that there's a speculative boom."

The price jumps of the past decade or so have brought homes to (un)affordability levels not seen in years. Cleveland-based National City, a top banking and mortgage concern, says that homes are overvalued in Florida, California, and several other vacation-home spots.

Homes in Naples, FL, says the company, are 96 percent overvalued based on income levels, population densities, and historical prices. Port St. Lucie/Ft. Pierce, FL, homes are 75 percent overvalued, and Ft. Lauderdale homes are 54 percent overvalued.

Cities in Arizona, New Jersey, Oregon, New York, Nevada, and others are also overvalued, according to National City.

Alan Skrainka, chief market strategist at broker Edward Jones tells Barron's, "People don't believe in the laws of supply and demand anymore. We're not saying it's a bubble, but we're saying prices are overstated and will likely correct 20 to 25 percent over four or five years."

As that correction happens, says Barron's, the primary people to suffer will be the so-called "mass affluent" - people with investable assets of $100,000 to $1 million. A Chicago-based consulting firm, Spectrem Group, says that this demographic has more than one-third of its assets in real estate.

But, Barron's does leave some room for hope. The magazine points out that the baby-boom generation continues to pile up inherited and earned wealth. And those baby boomers will likely buy a second home to retire to. In the long-run, points out Barron's, these may just be profitable investments.

The question is do you have enough time to wait out the storm?