Perspective On A Long and Deep Real Estate Downturn
By Greg Hunter’s USAWatchdog.com
Many people I talk to and hear from are having a really hard time grasping how severe the real estate crisis is in America. Let me sum up how bad the problem is in one simple sentence. The real estate market (both residential and commercial) is the worst EVER! According to Yale Economics Professor Robert Shiller, the real estate boom a few years ago was the biggest in history! The bust we find ourselves in now will, also, be the biggest in history.
Take this comment I received from a USAWatchdog reader last week. He asked, “Are you preaching that I rent a house rather than get a mortgage? Because getting a mortgage puts me in debt for 30 years? No you wouldn’t say that because everyone knows that at least with a mortgage you are actually getting a house.” The latest housing figures released just last Friday from the National Association of Realtors report home sales are down 7.2 percent in January. In another report, prices are down an additional 10% in some regions of the country. Yes, with a mortgage you will get a house, but how much of your down payment will be there in 2 or 3 years?
People keep asking if is this a good time to buy a home? Shiller, also one of the founders of the Case-Shiller Home Price Index, told USAWatchdog just last month in an exclusive interview, “Even if (interest) rates do not go up, prices can still go down.” Guess what?—they did! Shiller also stated that the housing market is “being supported by the government.” Meaning, the government is printing money to buy bonds to artificially suppress mortgage interest rates. What happens when that “support” stops? You are going to hear another giant “thud” and it will, once again, be the real estate market.
The commercial real estate market will be the next giant debt problem America will face. In the next 5 years, $1.4 trillion in short term loans will need refinancing. Things such as malls, office buildings, hotels, and other commercial real estate have fallen in value so much the bad debt will likely take down 3,000 community banks. That is 40% of the banking system! Elizabeth Warren, Chairman of the Congressional Oversight Panel, says, “There will be significant bankruptcies among developers and significant failures among community banks.” Warren talked about the coming commercial real estate problem below in a video recorded in mid February:
The rough ride in real estate will be very long. Prices will not bottom until after 2013 at the very least. What we have is not just a problem in real estate–but a threat to the stability of the entire economy. My advice, be conservative in your investments and protect your capital because you will need it before this financial crisis is over.
I am in the northeast, and commercial real estate is my business. I say, “You ain’t seen nothin yet”. Yes the easy money drove up prices with false demand that I’m sure allowed a multitude of equity pyramid schemes (buy and finance a new property with equity value of an owned property) much like the consumer level use of equity in residential. But then, add on what the “tax free exchange” did and the appraisal practices at the time. The desperate hustle that went on to quickly find and buy a new investment property inside of six months to dodge capital gains on one just sold, heated the demand even more. And the wishful thinking appraisals were based on ten-year projections of sustained net income growth instead of proven historical net income patterns that inflated the commercial prices even further. They were all out of their minds! Commercial investment portfolios and their lenders are going to topple like dominos when they “mark to market”.
I offer one simple golden rule of thumb for real estate, commercial or residential = You can always refinance but you can never change your purchase price. This means you save for a down payment, buy when interest rates are high, refinance later, and sell when interest rates are low. Making emotionally based real estate decisions based on the latest hype will inevitably get you in trouble. But right now, the real estate, mortgage and general lending market is SO fiddled by the government, no one can know what the REAL value of any property is until the government gets out, lets the massive correction run its course, and we come back to some reality based supply and demand market. That day however, seems to be very, very, very far off in the future.
Your site is scary , everyone’s comments were really educational for me. THANKS
I need to pay the mortgage at the end of the month but don’t believe that I can make it, is it possible to aid?
Among the things I like about Greg Hunter is his positive outlook.
A couple-few other factors about real estate the learned one’s keep missing are:
1. The boomers are done moving up and are either downsizing or shutting off rooms.
2. The vast majority of Gen X, Y and the millenials aren’t earning even livable wages.
3. Anecdotal but after talking to more than a handful of agents I’ve learned that banks are taking 30 days and longer to respond to offers on listed REO’s. So much for teh claue in off to purchase contracts that read, THIS OFFERS EXPIRES IN THREE (3) DAYS.
4. Two weeks ago we bought flowers for planting but didn’t shop at the Home Depot around the corner. We truck pooled into L.A. and went to the Flower Mart. What a shock!!! Foot traffic from the garment district through the flower district and on to the jewelery mart was done about 80% from our last visit a couple years ago. The beer garden (seats a couple-3 hundred) where we went for lunch had two counter customers and 3 tables in use.
With banks institutionally paralyzed the credit markets remain frozen. With foot traffic down 80% in one of the world’s busiest shopping districts. With fewer credit worthy buyers available for an over built real estate market.
No recovery in real estate before 2013? Let’s hope Greg “happy talk” Hunter is right and I’m wrong.