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Has The Housing Bubble Burst Completely?

Peter Giardini
2 min read

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

  1. 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.
  2. 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.
  3. 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:

  1. Sticking to the fundamentals. 
  2. Not counting on appreciation to give you your profit.  And…
  3. 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.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.