The term “luxury homes,” became a bit of a misnomer over the last few years. The massive quantity of “McMansions” built on the back of insane lending rules is quite stunning. Although the amount of foreclosures in the market segment is rising fast – albeit a little behind the foreclosure rash affecting the lower priced properties, there is another segment set to cause an even bigger impact on the value of real estate – the luxury home builder who managed to survive by the skin of his teeth until the inevitable day of reckoning with the bank.

According to a few of my sources, the amount of inventory likely to be foreclosed upon in the commercial sector over the next two years will make the current excess look like a drop in the ocean. The big banks are already the largest property owners in the USA, but when the commercial defaults start taking down small to mid-size luxury home developers – as they are starting to - there will be yet another wave of foreclosed homes in the upper price brackets.

It is hard to predict exactly how much stock the banks can carry, but most of the government bailout money provided to BoA, Citi, Wells Fargo and JP Morgan has gone into the black hole of existing foreclosures or defaulting international credit default swaps – not to increase lending to consumers. Although many of these properties are ostensibly for sale – the pricing does not in any way reflect the true state of the market – i.e. supply and demand. If the banks were forced to actually sell these properties, the market price would be such that every American would be able to afford to buy their own home.  I do vaguely remember some ex-president mentioning this as being the American dream, so it makes you wonder why they are preventing it from being realized. On the other hand – the banks are far more important that the typical citizen, so perhaps not.

The is a world wide issue, and if you thought the amount of so-called luxury homes for sale in the US was high – take a peek at Dubai. The boom years there created a massive over supply that will take decades to clear – if ever. The only thing keeping Dubai afloat is the fact that it is one of the few remaining places Citibank can launder money cleanly.

Shortly after being bailed out by the American taxpayer last year, Citi somehow managed to find eight billion dollars to “invest,” in Dubai infrastructure works. As a matter of interest – on the 24th of November 2008, the government agreed to a $20 billion bailout of Citibank. Citi “invested” $8 billion in Dubai on the 17th December 2008. If you were wondering what happened to the rest, $10 billion went to the Spanish government for toll roads.