|click to enlarge|
We know two things about housing bubbles: apologists and pundits always deny housing is in a bubble , but they always pop with devastating consequences.
This chart reveals the tight correlation between real (i.e. adjusted for inflation) new house sales prices and real wages/salaries. Every time house prices get ahead of earnings, house prices decline sharply. Since these are real prices/wages, they go down when prices/wages don't keep up with inflation. So while nominal house prices didn't sag much in the late 1960s as inflation took off, they fell sharply when adjusted for inflation
- Housing is relatively cheap when it is well below earnings. Housing was an attractive buy in 1945, 1970, 1982 and the mid-1990s.
- Housing Bubble #1 is clearly visible as house prices skyrocketed far above earnings in the 2004-2008 period. The gap between house prices and earnings widened to an unprecedented degree, and this extreme resulted in an equally unprecedented crash in housing valuations.
- Now the gap between real house prices and real earnings is even wider than it was in Housing Bubble #1. History (and common sense) suggest that housing prices will once again fall sharply. The situation today is so bad that even in countries like Canada Real Estate prices start to cone down. To expect anything different is unrealistic and highly dangerous to one's financial well-being.
30 Reasons to sell Real Estate:
|A Real Estate investment with mortgage is a one sided leveraged and extremely dangerous investment !|
(click on the chart below to enlarge and to check the tops for other Real Estate markets)
In real estate investment, real property is often valued according to projected capitalization rates used as investment criteria. This is done by algebraic manipulation of the formula below:
|Capital Cost (asset price) = Net Operating Income/ Capitalization Rate.|
For example, in valuing the projected sale price of an apartment building that produces a net operating income of $10,000, if we set a projected capitalization rate at 7%, then the asset value (or price we would pay to own it) is $142,857 (142,857 = 10,000 / .07). This is often referred to as direct capitalization, and is commonly used for valuing income generating property in a real estate appraisal.
One advantage of capitalization rate valuation is that it is separate from a "market-comparables" approach to an appraisal (which compares 3 valuations: what other similar properties have sold for based on a comparison of physical, location and economic characteristics, actual replacement cost to re-build the structure in addition to the cost of the land and capitalization rates).
Given the inefficiency of real estate markets, multiple approaches are generally preferred when valuing a real estate asset.
Capitalization rates for similar properties, and particularly for "pure" income properties, are usually compared to ensure that estimated revenue is being properly valued.click here for more
A shelter always costs money, either you pay rent, either you buy and hereby invest capital in it and cannot use it for other purposes..
"Stock markets can come down swiftly and loose 50% in only weeks time. Traditionally, they recover quickly (often in less than 6 months' time). Historically, Real Estate markets need about 26 years to recover. In some cases, like Florida, they never recover."
Real Estate Cycles Real Estate cycles are by definition LONG TERM (+76 year) cycles. Most people will during a life time, only experience one cycle. For this reason it is extremely important to locate each sub cycle in the Long Term secular up or down trend. Secular trends last up to 75 years. When I see the misery the Real Estate market is in and I make a link to the historic low interest rates, I hold my heart when I realize what will happen once the interest rates, under pressure of (hyper)inflation, start to move up .
There is no doubt we have seen the end of the Secular bull trend and the euphoria of the Bubble we have seen all over the world will end up in all history books. The actual Secular Bear market trend for real estate is real and things are getting worse each month.
The main difference between Real Estate and Stocks is that it usually takes a generation before real estate losses are recovered (Florida 1926). Stock market losses occur more frequently, can be severe (-50% in 2008), but recovery of all losses often happen in less than a year time.
Previous Tops & Bottoms in Real Estate:
How low will real estate prices fall?
When you own a house and your monthly mortgage payment is double the rent your neighbor pays, you definitely know something is wrong.
I completely disagree with the Talking Heads shouting that what we see today is nothing more than a insignificant reaction and that within 3 years from now, Miss Goldilocks will be back holding the hand of Real Estate. One should understand the potential dramatic consequences of a Long Term Secular Bear market that has been initiated at a point where the general level of worldwide INTEREST rates is LOW. Once interest rates go up (they already do in countries with weaker economies - and THEY WILL ) under pressure of inflation, the only way for Real Estate is down.
Looking at historical prices (including Japan), real estate prices, on average, tend to come down by 75 % to 80 % from peak to bottom.
Basically, it is said that after a parabolic run-up, prices always fall back until on or below the base where the run initially started from. Conditions in Japan after 1990 and into 1993 are certainly confirming this. Another rule is that Real Estate prices will come down until the nominal value equals 100 times the monthly rent. In other words, if the nominal rent is 1,000 $/ € per month, the property's value will fall back to $/€ 100,000.
REAL ESTATE CAN BE CHEAP!
This home comes with 4 beds/4baths, two car garage, installed kitchen, AC and central heating, central vacuum system, nice garden, up market area...more
Real Estate is a High Order Capital Good and will be adversely affected by the economic depression, the over-supply, higher interest rates, lower real income and aging Baby boomers...but any crisis also offers opportunities and opportunities we have if we can buy NEW Homes at half the price it would cost to built them today......AND Real Estate is better than Fiat Paper Money and Treasuries.
Buy a condo in sunny Florida for € 50,000 or a Single Family home for € 149,000 !
|PGA Village||The Lakes||Tradition|
Posted August 18, 2011
Increased taxation and expensive hard to get mortgages adds pressure on a market which is already suffering from lower demand as a result of lower Real Income and higher supply as a result of the Real Estate bubble and the retiring Baby boom generation..
Following graphs are for Japan but also apply for other countries: USA, West-Europe, Belgium, The Netherlands, France, Spain, UK, Germany ....click here to select your country and see for yourself what to expect for the local Real Estate market. A narrowing base = Lower Prices, a widening base = Higher prices.
Other negative factors for Real Estate: taxation, regulation, expensive energy, declining real spendable income of the general population (middle-class), growing unemployment , falling immigration , ...
During the Weimar hyperinflation one month's rent barely paid for one loaf of bread. Many tend to forget that Real Estate (especially a home) wears out, gets old, is badly isolated,...During recessions and depressions Authorities do all they can to keep rents as low as possible (housing is part of the inflation indexes) and as a rule block rents during hyperinflation. As a result Landlords see their income and right amputated, the income on their property disappear and try to sell.
My parents bought a small three-bedroom house in Texas in 1960 for the seven of us in the family. My brother and I shared one bedroom, my parents had the center bedroom and my three sisters shared the back bedroom. The house cost about $12,000. Today it’s probably worth $120,000. My parents put down about 15%, that’s all they could afford on a 15-year mortgage.
They didn’t look at it as an investment. At best they may have considered it a sort of savings plan. Owning a house was viewed as an expense just like operating a car. You might need shelter but painting and small repairs were constant. If someone had gone to them and suggested it was a great investment because housing could only go up, they would have looked at him like a goat with three heads. Housing an investment? Are you kidding? At best you might break even and it would take 18 months to sell.
Home price drop in the USA exceeds the Great Depression. Home prices have fallen 26 percent since their peak in 2006, exceeding the 25.9 percent drop registered in the five years between 1928 and 1933, the housing data company said in a report on Monday. Prices fell 0.8 percent over the month...more
Updated December 2010 [ posted November 27, 2009] - This is the REAL PRICE evolution of Real Estate...
US Gold price - Gold ratio
Posted November 2010
How to dig a financial hole of $/€ 600,000!? Amazing is that many Europeans refuse to LEARN from what happened in the USA and Spain and still BELIEVE what the Authorities say...In 2005 RIGHT BEFORE the American Real Estate busted, Bernanke himself testified that there was no Real Estate Bubble and that it was safe to buy property. In 2006 the bubble busted and today somebody who bought a house in 2006 at $ 500,000 and made a $ 100,000 down payment has a debt of $ 800,000 (capital plus interest). His house however is worth ONLY $ 200,000. The end result is that instead of being better off by buying a property, those people digged a financial hole of $ 600,000 ! Those who have the guts to watch the clip to the end will understand what we are talking about...
September 23, 2009
A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose – on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound...click here for more...
May 22, 2009 - With this huge supply of new homes, there is no room for improvement
May 1st, 2009 - Danger as we move out of the Eye of the storm into the 2nd Wave!
More bad news for Real Estate. The number of foreclosures in the US keeps going up. What people are looking at is the schedule of mortgage resets for option ARM loans [also called liar loans]. These will begin to reset in a couple of months and the process will not peak before 2011.
April 22, 2009 : in the USA 600,000 foreclosed houses are kept off the market by the lenders.
“’We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market,’ said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. ‘California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You’d have further depreciation and carnage.’
According to the Wall Street Journal: “Ronald Temple, co-director of research at Lazard Asset Management, expects home prices to fall 22% to 27% from their January levels. More than 2.1 million homes will be lost this year because borrowers can’t meet their loan payments, up from about 1.7 million in 2008.” (Ruth Simon, “The housing crisis is about to take center stage once again,” Wall Street Journal)
A similar pattern is used by Spanish banks. (Spanish banks over invested in Real Estate as they were sure trees would grow all the way into heaven)
April 17, 2009 - the next shoe to drop is Commercial Real Estate -
Updated March 31, 2009
This is a very interesting long term chart of Real Estate. To see just how unusual recent price activity has been, take a look at Yale economist Robert Shiller's inflation-adjusted housing chart, going back more than a century.
The chart makes it crystal clear that the current overvaluation of real estate in real terms grossly exceeds the one during the 1920s. The coming correction in real estate will be protracted and gut-wrenching, with an expected cumulative effect that is much worse than the Great Depression.
Posted March 31, 2009
The Real Estate Boom was nothing more than a desert mirage. The direct result of fractional reserve banking and the creation of money out of thin air.
- The Real Estate crisis and the freefall of home prices is expanding to commercial properties. Other countries like the UK, Spain, France, Belgium, Morocco, Canada, Costa Rica, Belize, Austria and East European countries have joined the USA as their real estate bubbles also are deflating.
- Trees nor Real Estate grow all the way into Heaven! I understand that for many it is extremely hard to understand what is happening right now as a Real Estate cycle is in most cases a 'once in a lifetime experience' and they saw nothing else than rising prices (apart from some short term corrections). Even the Paradise of Real estate: the city of London, Manhattan and the paradise resorts in the Gulf petro-monarchies are becoming a real estate hell.
- The real estate crisis has become a self feeding monster. The Real Estate crisis is amplified because banks keep reducing the number of mortgages and real estate loans to potential buyers.
- As a rule of thumb, in a secular real estate bear market Real Estate prices fall until the price equals 100 times the rent.
- Another rule is that a Home should cost no more than three times annual household income.
- Purchasing a house creates dead capital. It does not create jobs once the construction is terminated, but consumes capital through the financing.
- The wealth created by Real Estate is mainly an illusion created by currency movements. (South Africans bought automobiles, drove them a couple of years and sold them at a profit because the Rand used to be so weak).
- The harder it gets to borrow money to buy a home, the harder Real Estate prices will fall.
- Best case scenario, the Debt crisis and the US-Real Estate won't bottom until 2011 and probably 2017. For the EU and other countries, as the crisis started with a delay, expect to see the bottom with the same delay. For the EU this could well be 2014-2020.
- When the Argentinean Real Estate sector bottomed it had become impossible to get a mortgage to buy property (it still is).
- Real Estate is a LEVERAGED good. Hence it's general price level is directly affected by the level of interest rates.
Monetary inflation is even more deceptive - or dangerous - when it is working with asset deflation.
What happens when monetary inflation meets asset deflation is not understood by most of the population. Hidden within the convergence of those two fundamental forces will be the likely "solution" to the current housing crisis, as well as opportunities for astute individuals to protect and even increase their net worth during a time of falling real home prices."
Posted January 9, 2009
When I discussed the imminent crash of the Japanese Real Estate and Stock market in 1989, experts said I was crazy. Japan was an overpopulated island and for this reason alone a Real Estate crash would and could never occur. And yet, 15 years later, a house selling for 220,000 yen in 1989 can be bought for 80,000 yen. Not only has Japanese real estate crashed, but the Yen has also...a terrible shock for all 1989 non-believers. Today similar conditions occur for British real estate owners: on top of sliding British real estate prices, the Pound is also crashing.
People are so naive to believe that what happened in Japan would never occur in the United States, Australia, the City of London, the Costa del Sol in Spain or Belgium...and yet it is happening in all of these countries!
Stock markets can come down swiftly and loose 50% in only weeks time. Traditionally, they recover quickly (often in less than 6 months' time). Historically, Real Estate markets need about 75 years to recover. In some cases, like Florida, they never recover.
Posted December 22, 2008
December 2008, the commercial Real Estate bubble is - as expected - bursting. In November analysts at Credit Suisse said two big commercial mortgages that had been packaged into securities in the past year were likely to default. The rapid deterioration of these loans fed worries that the weakening economy and higher unemployment rate would drag down the $800 billion market for commercial-mortgage-backed securities, or CMBS, which so far has withstood the credit crisis with low delinquency rates.
Updated March 17, 2009
"You don't get rich by buying a house! You get rich by investing your money wisely. By buying a house in today's market, you could even get poor!"
"What asset or Real Estate deflation (in inflation-adjusted terms) and monetary inflation have in common is that they are complementary (not opposing) forces of financial destruction. Asset deflation destroys the purchasing power of your assets even as monetary inflation destroys the purchasing power of your money".
Today one can buy Real Estate below $ 10,000. Some of these opportunities are wise investments! The housing market for the next several years will undoubtedly take a severe hit. In the end the torrential flood of homes that come to market for sale will be bought at much lower prices by my children as well as yours at prices which are affordable. Those who count on 'a dip' in the market will be amazed how deep the Real Estate market can slip!
Posted July 23, 2008
Only $ 50,000 for a three-bedroom house! This is a foretaste of what Spanish builders may expect in the near future.
July 23 (Bloomberg) -- Fannie Mae, the largest U.S. mortgage finance company, couldn't find a buyer who would pay $6,900 for the three-bedroom house at 1916 Prospect St. in Flint, Michigan. So broker Raymond Megie, who is handling the foreclosure sale, advised cutting the price to $5,000.
Megie still couldn't sell it. ``There's oversupply,'' he said. The home sold in 2005 for $110,000. Click here for more...
There are also some people out there -- and I know at least one of them -- who decided not to put their money in the stock market but rather base their retirement portfolio on rental properties, typically a very safe and responsible that. Nonetheless, the recession has now gotten so bad that even these types of investors are suffering.
Anecdotally, the story I heard from one poor soul is that three of four of his rental tenants are least three months in arrears on their rent, and this has put him in arrears on his mortgage payments. It would be a tragedy for someone like this to wind up in bankruptcy and without retirement money because of the ripple effects of this recession.