Real Estate is dying? Investment-wise what is the next Asset Class Du Jour?

http://www.siliconinvestor.com/readmsg.aspx?msgid=20753944

"We live near both Orange and San Diego Counties, in Riverside County. The new tract homes next door start at 890K. I don't see lines at the sales office and we're supposedly the 'poor neighbor' of those two counties. They have tract homes (3000 sf. but tiny 6-8000 sf lots) over a million. Home sales have slowed way down, prices have leveled off. Every hike in interest makes it that much harder for these overleveraged, half dead commuters to keep it all hanging together.

************What were those 337,000 or whatever new jobs? Probably not the kind that can support the kind of house payments people are making.

But either the country is going to go completely to heck in a handbasket long term or real estate will be okay after a 'correction'. If it's the going to heck in a handbasket scenario, I'm still opting for real estate when the circumstances warrant.

I remember just before the bubble broke here last time (around 1989), people were coming out here from Orange and San Diego counties wanting to buy land. The bubble burst soon afterwards and many lost it due to lack of holding power. The ones with holding power made alot of money a decade later.

I've also seen people over 40 losing their homes/equity through divorce lately and moving into apartments; a neighbor and his wife just over 60 and someone from my husband's church in his 40's. Tough to start over at that age. If you lose the market forget about catching it again without a minor miracle.

I also heard yesterday that the condo market is picking up from Baby Boomers/empty nesters scaling down and first time buyers trying to get some equity instead of shelling out rent. With rent in our town in Riverside county at $1000+ for a one-bedroom apartment, and gas for commuting in the hundreds per month, you wonder how people are making it."
 
Home-price 'correction' forecast
CSUF foresees up to a 20% dip by 2006 but no need to panic.

By JAMES B. KELLEHER
The Orange County Register
http://www.ocregister.com/ocr/2004/10/27/sections/business/business/article_288939.php

House prices in Orange County could drop by as much as 20 percent in the next two years, according to researchers at Cal State Fullerton.

In an otherwise cautiously upbeat forecast for the region, Anil Puri, the co-director of CSUF's Institute for Economic and Environmental Studies, insisted that property price declines - which could rival those that convulsed the region in the early 1990s - represented a correction after years of double-digit gains, not a market collapse.

Although the median price of a detached house in the county has more than doubled in four years, thanks in part to record-low mortgage rates, Puri said, "I don't think we have a bubble."

Still he said: "There's no question (prices are) going to come down" by 10 percent to 20 percent.

Puri characterized his forecast as "reassuring." Even if the median price for resale homes in Orange County falls by 20 percent - from $575,000 to $460,000 - that would only take homeowners and buyers back to where they were in spring 2003.

But that may be cold comfort to more-recent homebuyers and any longer-term homeowners with a memory.

That's because, if Puri is right, Orange County could be about to experience a warp- speed version of the 1990s real-estate crisis - a déjà vu that some localhomeowners would rather skip. After peaking in 1990 at $240,000, according to market tracker Data Quick, the median price of a resale home in the county fell to a low of $193,000 in 1996 - a 20 percent drop over six years. Now, Puri says a similar decline in one-third of the time is "highly likely."

Among the other key predictions contained in CSUF's forecast, which was released Tuesday at a breakfast event in Irvine that drew 700 business leaders:

Job growth in the county will be anemic in 2004, with local payrolls growing by 4,500 jobs, or 0.3 percent. But that will pick up in 2005, with local payrolls growing by 1.9 percent, or 27,000 jobs, and by 2.1 percent, or 30,000 jobs, in 2006. That's an improvement over the net gain of 16,000 jobs seen in the past three years and close to the average gain of 31,000 seen in the past 10 years.

The local unemployment rate will stabilize near the current level as the improving economy draws more workers into the labor market. CSUF forecasts that this year's 3.4 percent unemployment rate will slip to 3.2 percent next year before inching back up to 3.4 percent in 2006.

Personal income will rise 5.1 percent in 2004, 5.9 percent in 2005 and 6.2 percent in 2006. Per capita income - a slightly different measure of local prosperity - is forecast to rise 5.0 percent this year, 3.7 percent in 2005 and 4.6 percent in 2006.

Nationally, CSUF says it believes that the recent spike in energy prices - crude oil prices touched $55 a barrel for the first time last week - has been driven by short-term factors. But while the researchers predict prices will moderate in the coming months, the rise of China and lingering refinery constraints in the United States mean that prices will remain high - somewhere above $40 a barrel – for the next year at least.

Puri acknowledged those prices were high but predicted that "the economy can grow without significant consequences" with prices at that level.

Although high energy prices, higher interest rates and continueddevaluation of the dollar will create more price pressure than we've seen in recent years, the CSUF researchers aren't worried about inflation getting out of control. Indeed, their overall assessment of the economy is positive. The gross domestic product – the sum of all goods and services produced within the United States –is expected to grow 4.5 percent in 2004, 3.6 percent in 2005 and 3.4 percent in 2006, and payroll employment is forecast to grow for three consecutive years for the first time in three years.
 
Hey Oneway,

I read those 2 reports and the energy in me just drains out. There is something disheartening about a govt. pump job claiming a 20% drop in your home equity should be reassuring.

Your equity drops 20% (not accounting for a falling dollar).

You're paid in dollars that are falling in value.

Your pension, if you can count on it, is falling in real value.

Personal income is down for 2 consecutive yrs. for the first time since WWII.

The production jobs have left our shores and we are left with a growing service and regulatory sector. Both those fields are dependent on making money by servicing and regulating wealth.

At this point I start to lose heart in even posting this. The whole thing is simple 2+2=4. Even the govt. must live within its' means. We are getting ready to balance the nation's books, AGAIN.

Those who can't see it are being ripped off by their own paid "advisors".
 
Quote from Billbuild:

Hey Oneway,

I read those 2 reports and the energy in me just drains out. There is something disheartening about a govt. pump job claiming a 20% drop in your home equity should be reassuring.

Your equity drops 20% (not accounting for a falling dollar).

You're paid in dollars that are falling in value.

Your pension, if you can count on it, is falling in real value.

Personal income is down for 2 consecutive yrs. for the first time since WWII.

The production jobs have left our shores and we are left with a growing service and regulatory sector. Both those fields are dependent on making money by servicing and regulating wealth.

At this point I start to lose heart in even posting this. The whole thing is simple 2+2=4. Even the govt. must live within its' means. We are getting ready to balance the nation's books, AGAIN.

Those who can't see it are being ripped off by their own paid "advisors".
More...

Agreed...the divergence forming between lowered wages (in real terms) , falling dollar, job losses, vrs. rising real estate appreciation in the last two years has to work itself out somehow. I don't think it will have a happy outcome. This is the third real estate bubble I have lived through. I think I know how it will resolve.

And I don't think the average person comprehends/remembers what a 20% decline in real estate can do on a real world level. Twenty percent does not sound too bad to most. But in my area the last "correction" from 1990-95 brought bankruptcy, financial ruin, and even divorce for hundreds of thousands. The bubble forming on the chart below is much greater than the last downturn as you can see. If (when?) this chart reverts back to the long term trendline it will be a lifechanging event for hundreds of thousands of homeowners.

In my opinion even a flat real estate market will be ruinous to a untold number of homeowner/speculators "banking" (by margin buying without sufficient back-up capitol) on continued appreciation. The risky loan products offered to speculators these days is simply stunning when you think about it.

A 20% decline will bring blood in the streets in "high beta" coastal areas where appreciation has been great of late. This will happen sooner or later depending on the area...Las Vegas will be one of the first ones to watch for this effect IMO.

homeprices2004.gif


Another divergence forming is that since June of this year long term interest rates have been falling to the super low levels that were around during the spring time. In the spring time though the real estate market responded in kind by prices blowing up through the roof. But now with declining rates the market is pausing and very lackluster. This big danger sign now seen on this chart is finally the downtrend line has been broken and it looks like long term rates are finally heading up. This could indeed finish things off in a rapid fashion... a "double wammy" or "perfect storm" in a negative sense.

click attachment...technical damage has been done to this chart. It may come back within the trend line for a few days, but the damage is done. It will be heading back up much higher.
 

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Billbuild and onewaypockets,

Thank you all for your excellent posts. I may be suffering from confirmation bias (reading things that confirm what I already think), but I agree that there's a huge bubble in RE. A 20% drop in home equity is no big deal IF you own it outright or are not leveraged to the hilt (say no more than 50% leveraged). But the way RE is leveraged today and with the mindset of RE buyers, I think the slightest drop will be the beginning of a huge RE debacle. The psychology is far to bubblish to allow just a minor correction to occur. Once the pendulum starts the other way it will be impossible to stop.

To me, it's the Nasdaq all over again, and the max margin on stocks is 50% for the avg. retail investor if I'm not mistaken.

The fundamentalists may argue that population growth will stem any significant RE drop, but I'd argue that once the psychology changes, lenders will be less willing to lend and people will find a way to live in a cheaper place...whether that's moving to a cheaper area, combining families in one home, or moving into a smaller house. When people need $, they can get creative. I'm speaking from experience here.
 
Quote from chisel:

Billbuild and onewaypockets,

Thank you all for your excellent posts. I may be suffering from confirmation bias (reading things that confirm what I already think), but I agree that there's a huge bubble in RE. A 20% drop in home equity is no big deal IF you own it outright or are not leveraged to the hilt (say no more than 50% leveraged). But the way RE is leveraged today and with the mindset of RE buyers, I think the slightest drop will be the beginning of a huge RE debacle. The psychology is far to bubblish to allow just a minor correction to occur. Once the pendulum starts the other way it will be impossible to stop.

To me, it's the Nasdaq all over again, and the max margin on stocks is 50% for the avg. retail investor if I'm not mistaken.

The fundamentalists may argue that population growth will stem any significant RE drop, but I'd argue that once the psychology changes, lenders will be less willing to lend and people will find a way to live in a cheaper place...whether that's moving to a cheaper area, combining families in one home, or moving into a smaller house. When people need $, they can get creative. I'm speaking from experience here.
More...

I agree with your comments...

I too hear people saying about desirable places to live " there is no way you can lose investing in California real estate, etc". I used to hear and read that in the paper back in 1989 almost every day, but that didn't stop the market from going down 25% in 4 years in my area. And there is NO WAY that population and income growth fundamentals can stem a real estate decline as seen in this chart. You can see population and income trend line at the bottom.

The only thing that explains the hyper real estate market is cheap and easy money and a casino/"won the lottery" mindset.

homeprice_chart.gif
 
this is the only useful thread on ET right now, very informative. given the japanese experience, i don't think it's a slam dunk mortgage rates are going anywhere drastic anytime soon. given that, i think the graphs might be more informative if they plotted mortgage cost rather than house price. because in the end, people aren't buying the house they can afford, they're spending the mortgage they can afford.

it is cheap and easy money, of course, but we have existence proof it can remain cheap and easy for a very very long time.

going back to lurking...
 
Oneway,

Always enjoy your post and content.

I posted this in the other RE thread. I found her comments interesting and very much along the lines of buy now or else you pay more later, missing the train leaving the station:

>>Talked to a realtor friend yesterday and she said that there have been MAJOR price reductions in the local South Orange County, CA area. One of the hyper-inflationary markets.

One home she has listed was originally priced at $780K four months ago, now has a price tag of $690K and the ONLY offers that have been received on the home are at least $50K below the reduced asking price.

Last year the home would have sold in one day, now it's on the market for a long time.<<

Guess the train is heading backwards on the track in regards to the current pricing and offers received.

Starter homes are requiring approx. $3300/ month in housing cost, PITI + PMI + HOA, with 3% down. Same places rent for $1200-1600/month.

Doesn't make much sense to me....... :D

If you bought a median priced home in SoCal at the peak of the last bubble, around 1990, it took 12 years to get back to parity/breakeven. My last condo went from 115K to 220K to 130K to now 425K in an 16-17 year period.
 
Oneway and all,

Great charts Oneway. I've saved them for my kids to see.

I'm just hoping, that those that read these very good posts will do the things necessary to preserve their wealth.

I used to buy forecloseres until HUD shut it down. Very sad to experience even if the people were gone. Even in silence, the look of the place, the regret of the people who left was palpable. I could sense the broken families and dreams lost. When the people were still there, camping out, man, nothing but tears and begging.

Folks, these posts are right on. But it is one thing to write and read, it is a completely different thing to experience first hand.

Real Estate has to go down to help balance all our county's huge debts. Home equity (asset) balancing National and personal debt (liability). It is a debt bubble that will be corrected.

Please protect yourselves. It's not your fault. It is USG over spending and over monetizing.
 
Quote from Billbuild:

......Folks, these posts are right on. But it is one thing to write and read, it is a completely different thing to experience first hand.

Real Estate has to go down to help balance all our county's huge debts. Home equity (asset) balancing National and personal debt (liability). It is a debt bubble that will be corrected.

Please protect yourselves. It's not your fault. It is USG over spending and over monetizing.
More...

So once again the US citizen/taxpayer is forced to take measures to protect themselves from the reckless actions of the USGovt and our politicians.

The politicians have found it politically expeditious and convenient not to deal with overspending and the huge deficit directly. And instead of balancing the budget with taxes, they have chosen to tax by way of monetary policy and inflation.

It's still a tax nonetheless because it takes wealth away.
 
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