Real Estate Bubble Popping

[Rich Baer]

Be careful out there people. Whether this is day one of the bubble popping or we have a few months left, everyone needs to reevaluate their holdings and future plans. The evidence is everywhere. Housing prices are quickly approaching 2006-2007 levels, new types of easy loans, questionable appraisals, new investors with no experience jumping into real estate like 06-07 (just see this website), New York City real estate prices descending, big name real estate investors selling, world markets in turmoil. It is my belief, that once the downward bell is rung, we will see the 2007 debacle again. No bubble lasts forever and this one will deflate quickly. Foreclosures will quickly escalate and those who have cash will again do well.

There are plenty of people here who went through the last bust and saw it coming. What do you currently believe?

Rich Baer, Esq.

[David Faulkner]

Who knows ... I have a few points for and a few points against:

For a bubble popping:

Prices certainly are historically high and affordability is once again quite low. And this low affordability is with historically low interest rates. When those interest rates rise, either already low affordability will have to go lower, incomes will have to go up, or prices will have to go lower. Of those 3, the 3rd is most likely ... who knows when or how rapidly interest rates will rise, though, but I don't think they are long term sustainable at these levels. Also, when the next recession hits, the Fed is basically out of ammunition to combat against it, so for the first time since the great depression I think we will feel the full brunt of the recession because there will be nothing there to smooth it over. Finally, this is the case on a global scale, and out international markets are far less decoupled than they were a decade or so ago, so it is possible that could further compound the scale of the next recession. Stock market valuations are also quite high, in spite of all the uncertainty.

Against a bubble popping:

Lending standards still are fairly tight ... nothing as loose as in 2006. Balance sheets of most home owners are far better than they were then, so they are in a better position to ride out the next downturn without being forced to liquidate or get foreclosed on. Yes, there will still be some who lose their houses, but it is not likely to be as large of scale or widespread as the last time.

My conclusion:

We have an elevated risk for a worse than average recession coming, but I do not think that RE will be the epicenter like it was the last time. So, I think RE will likely get dragged down some but not crash ... how far it gets dragged down and for how long is a function of how bad and long the next downturn is, which is not known or knowable. I am still taking some chips off the table by liquidating anything that is not performing well, doesn't meet my long term strategy any longer, or anything that I would not want to hold for the next decade. I would not acquire anything to hold for any significant amount of time unless I got an absolutely great deal on it, which is sound advice in any market. This does not mean that skilled flippers, RE agents, and wholesalers can't make good money with short or no holding periods, but this up until now has not been my game and I'd be hesitant to start playing this as a new game at this time. Finally, I would not be so fast to jump to the conclusion that we will get into hyper inflation. In fact, at the moment, I think that more things point to deflation over inflation ... though I don't believe we would see long term deflation, we could see it in the mid-term and it would be bad news if you have 30 year fixed mortgage, good news if you have cash. If I'm wrong on that and we have inflation, then the opposite is true ... good news for 30 year fixed mortgages and bad news for cash. If you are free and clear or hedged with equal amounts of cash and fixed debt, then it doesn't matter as much and you'll be fine either way, so this is a more conservative positioning in the face of uncertainty rather than going for one extreme or the other.