The funny thing about bubbles is that sooner or later they burst. Once again I get to be the master of understatement. What fun!
After having survived these past 2+ years as each of us has watched the housing bubble burst in most parts of the country and deflate everywhere else, we are being told that the worst is over. We can come out of hiding and start to resume normal activity.
Hmmmm… I’m not buying it!
Consider the chart below, that reflects that housing is still overpriced relative to the affordability index; also consider that housing prices in general still have a way to travel, downward, before they are in line with the public’s ability to pay to own them.
In other words . . . all of the air isn’t out of the bubble!
What isn’t apparent in this chart is the fact that the Government is continuing to prop up the housing market with things like the $8K credit, loan mods, etc. As an investor I love this stuff. But as a pragmatist, wanting to get all of this crap behind us . . . it drives me nuts!
Impacts of Further Housing Price Declines
- Instead of inflationary pressures we could be poised to see real deflationary tendencies across the broad spectrum of our economy. If you think the last year of trillions in dollars of lost wealth was tough… the next round could be even worse.
- Banks, you may recall, are still holding the majority of their bad/foreclosed loans at their original values (thanks to changes in Mark-to-Market rules) and if housing prices continue their decline to parity with affordability, bank balance sheets will be hard pressed to recover if they ever can.
- Bank failures are not stopping. Nor will they, as their real estate assets continue to decline in value. In fact there are predictions that we will see another 500 to 800 more failures before this is over. This may seem like a small number compared to all of the banks still in existence… but remember the FDIC is now out of money.
This sounds like dire stuff. And it is!
Surviving as a Real Estate Investor…
The great news is that we provide a product that is one of the basic human needs. Food, clothing, shelter! People will always need a place to live. Good news for us.
Our Challenge…
Our challenge is to not become a part of the unbridled enthusiasm that seems to be sweeping the housing market… again. This means:
- Sticking to the fundamentals.
- Not counting on appreciation to give you your profit. And…
- Not being over confident and ensuring that you buy at prices that won’t leave you exposed to further declines.
As I have heard said… Be Careful Out There!
As always your comments and thoughts are always welcome.
Related posts:
- Banks Want Free Field That Could Lead To Another Real Estate Bubble-Burst Cycle
- The Great Obama Real Estate Bubble Fix Has Burst
- The Top Housing Bubble Blogs
- Treasury Secretary Awakens From Coma: Finally Realizes Housing Bubble Exists
- Senate Hearing: The Housing Bubble and its Implications for the Economy
Article Author: Peter GiardiniPeter has written 87 articles for us.
Visit Peter's Website: http://www.theclubmastermind.com
Peter is an active and successful real estate investor in the Baltimore Maryland region for the past 8 years and is one of the founders of The Club Mastermind a real estate investing coaching program focused on local coaches helping investors to perfect their game.
Joshua Dorkin
{ 3 comments… read them below or add one }
Home prices don’t necessarily have to fall to the affordability line. Income can rise to meet prices. That is one of the reasons why jobs are the key to an economic recovery. More job creation and increased productivity and the wage growth that comes with it are essential. Unfortunately Government policy that seeks to redistribute wealth or transfer it from the productive to the unproductive undermine the chances of that happening.
I agree with this article…good points…There is a great article on this subject title “Setting up The next down leg in housing” by Charles Hugh Smith (Of Two Minds) at:
http://realestateinvestordaily.com/market-information-news/setting-up-the-next-leg-down-in-housing/
Its no secret folks. The only thing worth paying for right now is cashflow. Hard to care what the underlying asset is worth when its kicking off cash like a regular paycheck. This is especially true when you dont have to worry about mortgage payments on the properties you hold. It’s a good time to be an all cash investor.