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This is about some people moving into their new "Home by the Sea" where they encounter some ghosts. The ghosts start to tell their story and in doing so they condemn the new tenants to an existence as prisoners in their own home.
This song was particularly popular in Eastern Asia, because of its use of the pentatonic scale, which contains 5 notes per octave and is the basic scale of Chinese music.
Phil Collins in an 1986 interview: "What we did on a song like 'Home by the Sea' was to record with a programmed drum machine. Tony (Banks) would play a guide keyboard part, Mike (Rutherford) would play a guide guitar part, and I'd sing a guide vocal. These 'guide parts' enabled us to settle on the format for the songs. If we liked what we got, we would then go in and record. Tony would go in and record his keyboard parts, Mike would record his guitar and bass parts, I'd replace the Linn drums with my drums, and after all of that I'd go in and rerecord my vocal." (courtesy: philcollins.co.uk
This was the first part of a 2 song suite. The second part, the nearly all instrumental "Second Home by the Sea," ends with the main theme of "Home By The Sea." (thanks, Edward Pearce - Ashford, Kent, England, for all above)
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Who writes a song about a name they found in a phone book? That's just one of the everyday things these guys find to sing about. Anything in their field of vision or general scope of knowledge is fair game. If you cross paths with them, so are you.