Real Estate News & Commentary

A Bumpy Road Ahead for Real Estate

Expertise: Commercial Real Estate, Real Estate News & Commentary
30 Articles Written

Despite all that has happened over the past four years, many real estate “experts”, economists, and politicians continue to believe that property values will soon start climbing.  My opinion is that the opposite will happen — a slow decline over several years with occasional steeper drops.  Very few markets will avoid this direct hit.

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Why am I so convinced about this trend?  Among several reasons, the biggest one by far is that household incomes cannot sustain the current price levels, especially in high-priced areas like California and part of the Northeast.  The official unemployment rate is just over 9%.  However, truer gauges of unemployment that include the long-term unemployed, part-timers wanting to work full-time, etc. show that the real rate is more than double that amount.  This doesn’t even address the fact that, compared to a couple of decades ago, a larger percentage of those who are employed work in the lower-paying service sector.  This has driven down average incomes across the nation. 

Even if Wall Street creates new types of loans to replace such horrible programs as option ARMs, more wage earners won’t be able to afford a house.  Over time, less demand with a still high supply of properties will mean lower prices.  The price-to-income ratios will have to come back down.

Piling on to this income weakness is the level of household debt in our country.   The debt carried by the average household is 119% of annual after-tax income.  This is better than the 135% level reached in the third quarter of 2007, but much worse than the 89% level during the 1990’s (all three figures are from the Wall Street Journal).

Besides low household incomes and too much debt, a third factor is the most frustrating and unpredictable – the U.S. government, and to a lesser extent, state and local governments.  The U.S. government is facing a $1.6 trillion official deficit, though the number is actually closer to $5 trillion if one accounts for Social Security and Medicare from this year alone.  Our politicians are nowhere close to solving this debt problem.  My expectation is that the current debt ceiling arguments will be resolved by small spending cuts that will hardly make a dent in the deficit.  Even if they do agree to cut the deficit by $4 trillion over ten years, that averages to $400 billion per year – about a quarter of this year’s deficit.

Of course, the debt problems haven’t stopped the bureaucrats from launching useless programs like HAMP and homebuyer tax credits.  After all, they feel like they need to do something other than just let the markets self-correct.  More harmful programs are on the way.

While there will be some bright spots – rental properties in certain markets, for instance – the next five years look bleak.  Be careful with your cash until we see how this all plays out.  It took the country many years (decades actually) to get into this mess, so it’s a safe bet that any journey of recovery won’t start for a few years and will even then be flat or show very gradual growth.

Alan Noblitt is a nationwide note buyer and a licensed real estate broker in California. His business, Seascape Capital Inc., started in 2002.

    Jeff Brown
    Replied about 8 years ago
    Amen Alan! It’s good to have an ally on this. 🙂 My brethren in San Diego are giddy with anticipation of the local market recovery and imminent return to rising values. They don’t like to hear what guys like you and I have to say. Welcome!
    Joshua Dorkin
    Replied about 8 years ago
    I thought you guys would like one another, Jeff! Alan is a savvy guy and I’m excited to have him on board.
    Alan Noblitt
    Replied about 8 years ago
    Jeff, Thank you for your kind words. I am still amazed at how many people listen to and agree with NAR (Realtor’s association) economists and TV talking heads, even though those guys have been consistently wrong for the last several years. I also live in San Diego, and wouldn’t buy an investment property here unless it was a fantastic deal.
    Kyle Hipp
    Replied about 8 years ago
    You nicely diagnosed the true cause of our recession which is better than most of our policy makers in washington. We are in a balance sheet recession similiar to Japan’s of years past but ours is with households as opposed to their corporate. The only place I disagree with is on the national debt problems. This debt ceiling debate isn’t needed but because our leaders don’t understand our monetary system they will cut off the needed spending (tax cuts, or regular government spending, not through the banking system for as you pointed out money creation through the government via the banking system contributed to our current predicament) to send us back into recession. Here is a great article describing it better than I can. I don’t believe prices will shoot up but rather balance out as households repair their balance sheets. I also see a better future as hopefully many people will actually learn something from the personal debt problems many have faced. Great post!!
    Alan Noblitt
    Replied about 8 years ago
    Kyle, I think that you and I are on same page. The good thing about the debt ceiling debate is that it opens the eyes of Joe Sixpack to what is actually happening to our country’s finances. I will check out that article you recommended. Thank you. Alan
    Greg Bellefleur
    Replied about 8 years ago
    Hi Alan, You mentioned “While there will be some bright spots – rental properties in certain markets, for instance…”. What areas do you think will be the bright spots for rental properties and why? Thanks, Greg
    Alan Noblitt
    Replied about 8 years ago
    Greg, Well, certainly not San Diego, where I live, or some of the very volatile markets like Florida and the rest of California . I would recommend that you look into places where the housing market has shown relative stability over the past ten years and that has low unemployment. So, much of Texas, the Midwest (except parts of Michigan and Ohio), and even the Rockies would seem to offer better investment opportunities. I hope that helps. Alan