Shiller, the Yale professor quoted in that article called this bust about 3 years ago. I used to read his stuff whenever I saw it. It was very funny…all the “EXPERTS” thought this guy was out of his mind. (Remember, we’re talking about early 2005 here) He has also predicted a possible depression in the U.S. directly attributed to this house bust.
This is going to get a LOT worse. Real Estate is a confidence game. If people feel good about their prospects, the economy, and housing prices themselves, real estate works! But…when everyone of those factors is negative (like now) there’s only one way this is going…
fdjake,
Yes I remember the call he made and how unpopular it was amongst the RE Bulls at the time…It’s amazing how complacent people become when they make a few dollars…They almost seem invincible and that’s when it all starts to unravel…You know the old saying " don’t confuse a bull market with brains", well now it pretains to real estate as well…I guess we can use "sell when you can and not when you have to " as well to the list…
I do believe it’s going to get worse,I don’t know how much…What I do know is our govt should stop showering the markets with liquidity because it’s not helping much…This will have to take it’s course…I’m sure you remember Japan in the 90’s,the govt cut interest rates to %0 and it did nothing to stop the freefall…What we have been monitoring is the huge inflow of foreign interest into American banks/financial firms…There are some huge discounts to be had right now and some very wealthy foreign conglomerates are stepping in to snap up big bargains…We are starting to slowlyaverage our way into some very well backed closed end funds that we feel will fall under that golden parachute but there are no guarantees…That’s the reason we are piecing our way in at a measured pace rather than pulling an Eddie Lampert…Either way it will get bloody but you know the old saying “it’s always darkest before dawn”…The risk takers are always rewarded the most and the first major bounce is always the strongest and as you know stocks/markets are always leading indicators…Point being most RE related closed end funds/mutual funds/banks etc have been cut in half or more…I’m willing to bet it’s a decent time to start the entry process and average my way down…But as for the actual brick and mortar end of RE,that’s got a long way to go…Especially the over inflated markets (NYC,FLA,Vegas,CA etc)…
Everybody knows the word “Gravity”. However, it seems that everyone often forgets the famous physic law of the Universal Gravitation : what goes up, must come down. It had happened in the stock market back in year 2000 and now is the real estate market.
Very interesting to compare Japan in the early 90’s to what we have brewing here. The interesting thing is that while that comparison on the surface looks equal. The Japanese are actually HUGE SAVERS!! They save something on the average of 20-30% of their income. Japan’s REAL problem was trying to convince those people to CONSUME during that period. As you know, THAT… has NEVER been a problem for the dopes in this country.
On a side note… I saw what I consider one of the scariest things I’ve seen in a long time today. It was a promo for a book about how much the rich in America spend and on what… It was incredible how many people are on waiting lists in this country for FERRARI’S, MEGA YACHTS, and Private Jets. Gulf Stream has a 3 year WAITING list for Multi million dollar planes!!! As I watched this only one thought came to mind…
THIS IS NOT GOING TO END WELL.
Pick a time in history, any time, and whenever the scales get tipped too far in one direction market forces pull it all back into alignment. This is EXACTLY what we will see here.
We are not only OVERDUE for a good old fashioned financial house cleaning, we’ve actually been BUILDING up for it. The roaring 20’s didn’t get that name because things were loud back then. It was due to the ROARING ECONOMY (sound familiar). How many people here REALLY understand what caused the depression in 1929??? This has been the source of countless PHD work so I won’t belittle those efforts by claiming to know the answer. But…I do know this, the fuse was lit by a REAL ESTATE BUST, not a stock market crash. That did happen, but the real catalyst was a HUGE number of banks going broke due to losses sustained because of REAL ESTATE SPECULATION in the 1920’s.
Nothing every repeats the same way. This isn’t any different. The one thing that NEVER changes is PEOPLE. Their reactions to still unknown events will be the cause for whatever pain is ahead. That is a Guarantee.
Speaking off Eddie Lampert…Sears Holding is basically a REIT at this point. Down from a high of $190/share last year to just about $100 now.
Eddie’s no dope, buying that stock at this point in it’s price cycle might not be a bad play as far as commercial real estate goes.
Very interesting to compare Japan in the early 90’s to what we have brewing here. The interesting thing is that while that comparison on the surface looks equal. The Japanese are actually HUGE SAVERS!! They save something on the average of 20-30% of their income. Japan’s REAL problem was trying to convince those people to CONSUME during that period. As you know, THAT… has NEVER been a problem for the dopes in this country.
This is exactly the reasoning behind being long the Nikkei for a few years to hedge against the US real estate downturn…Japanese are quite the opposite of the spend it all American who has to super size his/her life (keeping up with the Joneses)…The Japanese save it all and spend very little and could care less about the material things Americans so cherish…If history repeats itself like it has already the Nikkei will soar to new heights in the next 3-5 years while the American markets stay stagnant and or move sideways…Choppy markets will destroy many in RE and equities because of the many “false” takeoffs that appear, only to be sold into time and time again…The only way to get around these issues is to buy hammered down quality issues and invest a % abroad in more stable economies…
I remember eating dinner in 1999 with some friends at Tribeca Grill…The waiter was a nice guy who seemed a little on the nosey side of our conversation…He then proceeded to tell the group of traders sitting at the table that he owned Cisco,Sun etc and how he felt they would go to $1000 a share eventually etc…After he walked away I clearly remember a gifted trader sitting amongst us say “tomorrow I’m starting to get short”…His reasoning was when you have some waiter betting it all on stocks and not understanding P/E’s and overvaluation and negative earnings it’s time the baby is going to get thrown out with the bath water…I should have listened to him,but my ego was too big at the time…The same can be said for real estate…IMO it’s even worse than the stock mania of the late 90’s…because every Joe Schmo and his mother were flaunting how much their house is worth,and how much they are worth now etc…Failing to realize that no one they knew or themselves were “liquid” so all of their assets were essentially worthless…Don’t ever count your money until you sell,but common sense is a rare commodity in society…
For this reason I never invested one single dime in real estate in the 5 boroughs of NYC…I was often puzzled at how anyone made money (besides appreciation) which is pure gambling…If it wasn’t for a wealthy RE investor who had been in the game for 30 years schooling me I would have surely been tempted to pull the trigger…After a few meetings with this old seasoned investor/developer he assured me had been in a all cash position since 2005…He owned tons of prime commercial/retail RE which he gladly sold to willing Korean buyers who had tons of cash to invest…I haven’t called him a few months and I plan to after the spring comes to see what he is up to…He likely saved me from the infamous train leaving the station mentality…
Those old tile bathrooms are built like Sherman tanks!! That tile was laid into a full inch or more of concrete mud.
You’ve got that right, fdjake! I had to pull up my parents toilet and found that the only thing holding the thing up was the tile! Apparently, over the past 20 years or so, a small leak had COMPLETELY rotted out the subfloor. NO SUBFLOOR at all. The 2 inches of concrete mud worked wonders.
And you’re right, perception is reality which is WHY the market is worse now than it should be. Media hype made the boom, and media hype is making the bust. Once again, THERE IS NO SUCH THING AS A NATIONAL HOUSING MARKET. Real estate is intensely local, even in the age of internet. In fact, Jake, you’ve hit the nail on the head of WHY everyone perceives that the market is bad.
You’re complaining about a property sitting on the market for 70 days. A few months ago, I was speaking with a Realtor in Washington state and he was saying that their market was simply awful. How awful, you ask? Shoot, it was taking them a whole 30 days on average to sell property. UNBELIEVABLE! Maybe we should just all pack our bags and go home (assuming that we still have one). Real estate is Dead!! It takes a month to sell a house.
In the real world, that’s the one where the local market’s weren’t jumping 20-30% annually, it actually takes some time to sell property for value. Here 6 months is average for the market. Heck, if we get it sold in 3, we’re in a BOOM! Are we in a downturn? No. In fact, we had a very good year.
i admire your posts fdjake, do you think the buy 50% sell 85% will continue to hold water as we spiral further down over the next year(s) or will you eventually stop flipping till the market levels off. also you mentioned double closings, are you saying you dont do double closings and if so how (forgive me im a rookie).
EXCELLENT point on the 30 day theory!! You are 100% correct, in a “normal” market it actually takes, on average, about 6 months to sell ANY home. GREAT point about the Washington realtor who thinks his market stinks because a house sit for 30 days. I know a LOT of people in Rhode Island who would be jumping for joy if their homes would sell in 30 days. Hell, I know people here who would be VERY happy to see them go in 6 months!!! I agree with you Roger, every market is different, and you can make money in ANY of them with the right strategy. This media coverage is not making it easy, and I do see this mess spreading to what was untouched areas of the country. Let’s face it, we had, on average, a national housing boom. Boom was a good word for it, like an explosion, you SEE it BEFORE you hear it.
Most of us here saw this coming years ago. I know from Rogers previous posts he certainly did. The key now is to recognize this for what it is…a BUYING opportunity!!
people9300,
To answer your question… the 50 cents on the dollar business plan will always work. Simply because, as prices drop so will my offers and so will my selling price. 50% is 50%, it doesn’t matter if your talking about $100,000 or $100. If your buying something at a substantial discount (half off), selling it for a profit should never be a problem. Will those profits potentially move lower??? Maybe…but if your doing this right you should be AHEAD of the market with your homes price. In other words, if I’m 15% under market on January 1, the house should sell within a few months. I’ll always take an offer for slightly less than asking to get a deal done, then the next one I buy just gets bought lower and priced lower. In the end it’s still the same percentages.
I don’t do double closings because the market has slowed down so much there is really no need for them. When things were screaming you could buy a house on Friday, have it sold that afternoon to another investor, and close both transactions (ie double close) on the same day, in the same office. Those days ARE OVER!
Property values are not affected much in the midwest — especially where I live. So it does not (will not) effect me at all. I’d only be REALLY worried if I was a California or Florida native… =)
Like we said, real estate is very fragmented. YOU know YOUR market.
If you never saw the insane price increases we had in certain areas of the country…I agree, this won’t have much affect on you.
Thank you all for your input! I was thinking that the usual 70 cents on the dollar was a little too high now, and should be lowered, when buying an investment property. I will definitely be playing it extra safe until this all starts to simmer down.
RE is intensely local in nature. That said, I don’t think that it is wise to simply say that the current national condition “won’t” affect your market. In fact, it probably already has affected it.
My market never had a big boom period. We are still chugging along with a slow 2-3% annual appreciation rate. However, the media coverage of the “national housing meltdown” has slowed down potential buyers. While we haven’t experienced a downturn in prices, the length of time that properties are on the market have increased. We also have certain price ranges that have been negatively affected as well, which I think is directly because of the current National situation.
What might have an effect nationally is the tightening of mortgage standards.
I think it is good for real estate long term to stop giving mortgages to unqualified people, but it will slow down sales.
Locally, the banks are still giving really attractive mortgages to home buyers, but I don’t know what it takes to qualify.
I don’t think my local banks got into that sub prime lending thing to begin with, but even the nationals with local branches are advertising really attractive mortgages. So money is available.
I think it is good for real estate long term to stop giving mortgages to unqualified people, but it will slow down sales.
It will not slow down sales. All it will do is bring sales to “normal” rather than the major market boom (and thus, the bust) that it created in the first place.
There is still alot of money available, and it’s still easy money. The difference is that every Tom, Dick and Harry that calls themselves a mortgage broker doesn’t have access to it anymore. Local banks have always been a source for money if you (or your buyers) have a relationship with them, as frequently, they gauge you based on their knowledge of YOU vs. your credit score.
Likewise, larger lenders have developed an “in-house” lending area where they send clients that would not qualify for a “normal” loan. Like FHA, the primary factor in getting a loan is NOT your credit score BUT your ability to pay.
Then there is FHA, which is in the process of getting a higher lending limit. Again, the ability to pay is primary over the credit score.
That along with the fact that interests rates will continue to fall in the near future means that sales will continue.
I wouldn’t gamble on it. The Fed has interest lower than it should be, to try to bail out the housing industry, but at some point, they are going to have to address the rising prices of every other consumer good. That’s dealt with by raising interest rates.
I think it is a very good time to lock in interest rates long term and not wait, thinking that they will go lots lower.
tatertot,
It seems you,me and Jim Rogers are the few people who feel the fed needs to RAISE interest rates to stop everything else from continuing to unreal cost levels…I’m afraid to say Bernake is a puppet and will continue to lower until summer time to appease the stockmarket…All the while destroying the working class with $4 gas and sky high consumer prices…
Yes, I guarantee it! In fact, I am predicting that they will drop rapidly. The government and the Fed have both really screwed up. The government and the ignorant politicians have turned the United States into one GIANT ENTITLEMENT STATE. A huge number of our citizens consider themselves victims and are too lazy to work. The socialists love that because they get people to vote their way since the government (the taxpayers) support them. The only tinsy-weensy problem is that the baby boomers are retiring and there isn’t enough money for all those entitlements. The government has been promoting consumer spending for a long time and the American People have no savings. World competition has driven our manufacturing overseas. Our economy is now basically a service economy with lowering wages. Lower wages don’t allow the government to confiscate enough taxes to keep things afloat.
All this crazy spending led to the stock market boom of the late 90s. When the stock market bubble burst, instead of letting things settle out, the Fed threw cheap money at the problem. That CAUSED the housing bubble. Not to worry because the American People thought they were getting RICH as their home prices soared (even though that was just an illusion). Now the housing market has burst and their riches are gone. The government’s solution, lower interest rates to keep consumers spending. Unfortunately, it’s not going to work this time. Americans are upside down on their houses and all their refi’s. Service sector jobs don’t pay much. Americans are maxed out on their credit cards. The consumer is about done!
The Chinese know that the US promises of repayment are fales and their dollars are becoming increasingly worth less. They will soon flood the US market with dollars in an effort to get rid of them. That will cause run-away inflation (as if inflation isn’t already rampant).
The gig is up. What is the Fed going to do? In a DESPERATE to keep the economy afloat, they are going to repeat their mistake one final time and keep lowering interest rates until they’ve destroyed the economy.
Mike,
Not to sound like a broken record but the Fed should only look to the past to realize lowering isn’t going to work…Markets cannot be manipulated anymore than they already have been…It’s insane to think this moron (Bernake) will continue this illusion of adding liquidity to the markets every time Wall st hits a bumpy path…Greenspan (Mr.Bubble economy himself) knowingly flooded the markets with cheap money artificially lifting home/equity prices…Sad part is it’s the average American who is paying the price…Because the intelligent people profited from all of this and took the money and ran basically…It’s unreal how stupid the average American can be (I’m %100 American so I can say this)…They are sitting back watching their homes triple in value so instead of selling and moving to Mexico to live like a king what do they do?..They keep refinancing repeatedly and taking the money and buying Hummers,flat screen TV’s,living like pimps all the while not thinking for second how am I going to make these payments…I’m %100 against these bailout packages to save homeowners,they deserve what they have coming to them and it undermines the responsible Americans who actually have discipline and common sense…
The Dow is down like 1200 points in 60 days,doesn’t look like the cuts are doing much imho…I would raise rates ,kill the oil market,kill the gold market,raise the value of our currency,and at that same shot deflate the overvalued real estate and equity markets once and for all…Let’s get back to reality…It will hurt but this country and every American working class citizen will be better off in the years to come…