Do Valuations Continue to Slide for Years? What’s The Answer?


The Ultimate QuestionI’m like everyone else. All I can do is take what I’ve been taught couple it with my experiences and what I’ve learned to make what to me appears to be an informed decision.

Therein lies the rub at least as far as this real estate debacle is concerned. I look at the foreclosure filings in my county and see they are up. I read articles that tell me other areas, with few exceptions, are also experiencing an uptick in foreclosure filings.

I combine the two pieces of information and come to the conclusion the foreclosure mess will be with us for the remainder of 2008 and likely throughout 2009. I also deduce, maybe incorrectly, that the turn around won’t happen until 2010, if then.

On the other hand, I also read articles that tell me this mess will bottom out in 2009. One of the reasons stated is that people are staying away from the real estate market today because they don’t want to buy an asset that might lose value right away.

Wouldn’t it stand to reason that if the mess isn’t predicted to turn around until 2009 anything you buy today will lose value? And if it doesn’t turn around, won’t you continue to lose value?

In fact, if I am right and this thing doesn’t turn around until 2010, today’s buyers will be in the same position their predecessors were in, i.e. owing more than the asset is worth. What is to prevent them from walking away? Does this mean the “turn around” will only be two or three months in duration?

I also factor the rising costs of such things as gas prices, groceries, utility bills, clothes and other life mainstays into the paradigm and for the life of me can not see how anyone can say, with a straight face, 2009 is the bottoming out year.

Let’s not forget that big brother is pumping tons of cash into the economy at break neck speed. For the economists in the audience, you already know this is inflation. For the rest of us, it is still called inflation.

Inflation is nothing more than robbing the citizens of their wealth and transferring that wealth to the government. There are many good sites that explain the principle more eloquently than I could so if you want to learn the mechanics, please visit one of them.

If what I said is true, this spiral can only continue one way. Again, if that is true, ALL of us will be living in homes worth far less than they were yesterday and indeed may even be worth less than their current mortgage balance. Heck, they may be worth even less than what we paid for them ten years ago. How about that for a kick in the pants?

Mind you, this won’t be because we were bad borrowers or because we didn’t obey the laws of economics or finance. We did but the 800 pound gorilla didn’t. Is there an answer?

If you weren’t born yesterday, you know there is an answer. You also know the answer is to change the players and not the game. The game was working just fine and sustained both people and economic growth in an orderly manner.

The players who need to be changed are the regulators.
At least I think that is the first crew who should be sent to Exile Island. It is these guys who took the reins off sensible lending practices and looked the other way when every Tom, Dick and Harry in the lending business wrote their own rules instead of following established guidelines.

Rather than make this a 5 page post, I’ll stop here and ask that you to tell me what you believe is/are the answer(s).

Read PART II of this Post.

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  1. Tom you make a great argument. Yes inflation is a concern that is definitely heating up in the short and long run. However, I do believe that the fed has now shifted their attention to long run inflation possibilities and will begin to raise rates sooner rather than later. In reviewing the fed minutes it shows that they are paying close attention to inflation and are preparing markets for their eminent action.

    Without a doubt you are right about putting money into the economy sowing the seeds for future inflation. It will be very interesting to see how quickly the fed acts to prevent inflation from getting out of control while staring at a struggling economy. For an economist this is the worst case scenario. Let’s hope they are up for the battle!

  2. Mark McGlothlin on

    Thoughtful article Tom, there’s no question, several things need to change to restore some sense and order. There’s an interesting op-ed up over at the WSJ today – “Let’s Try Market Oriented Reform” in which Bert Ely suggests that both the players and some of the rules need to change. Food for thought…..

  3. I do have another answer and it is called “don’t re-elect one single incumbent”. Yes, there are some good legislators but a complete house cleaning is the only method we seem to have left to send the life long politicians a message.

    Today’s scenario reminds me of an old Jerry Clower story about one of the Ledbetter boys climbing up into a tree to get a racoon. As the story continues he tells how the “coon” starts putting up one heck of a fight.

    As his brother is watching and listening to all the commotion, he shouts up to the brother in the tree, “do you want me to shoot?”

    The answer comes back, “yeah, shoot. One of us needs the relief.”

    Forgive me for shortening the story but I think you get the idea. If enough of us yell yeah shoot and actually follow through, I bet we see a steadier course designed with real economic principles as the guide marks.

  4. I think you are definitely making a great case that we all must look at. The foreclosures are on the rise and the ARM’s are now coming due. There is a lot of money coming due because loan officers put people in loans that they did not know what they were into.

    I heard a figure that 1 out of every 194 homes is going into foreclosure. That is an extreme.

  5. In Maryland they just passed emergency legislation which will add about 120(?) days to the foreclosure process. This means all foreclosures have stopped and there will be a tremendous backlog when they start up again. Just watching foreclosed properties it seems that banks take up to 6 months to list them. So there is quite the time lag and this will prolong the problem.

    My question is will inflation cause real estate to go up or will higher costs of everything else cause lack of affordability to hold prices down?

  6. Here is something else to consider. Assuming markets hit bottom, stabelize and start coming back, I think we will see modest appreciation in most markets. However, how ab out all the baby boomers who are retiring. After they stop buying, where will the replacement buyers come from? This is likely to precipitate another slide in values.

  7. We are all making valid points; however, we must keep perspective as to where “most” foreclosures are coming from. If you review the national foreclosure data you will notice that in fact, the majority of foreclosures are in CA, AZ, FL and Nevada – speculator central. The other states with high foreclosures are Ohio, MI, Indiana… basically the armpit of the mid-west with failing local economies tied to manufacturing.

  8. DailyWealth editor Steve Sjuggerud isn’t perturbed, however, by gloomy foreclosure predictions…

    “Don’t believe all the gloom and doom you read… The U.S. housing bust may be just about over. We should be darn close to the bottom… possibly within one year of it.You probably don’t believe me. That’s okay. I’m used to being the contrarian –- it’s a position I prefer to be in actually. But bear with me, and at least hear me out…”

  9. Steve Sjuggerud is one hell of a huckster. I’ve read his material for years and he will tell you anything to make the sale. Mind you, that is my opinion. Once you get on one of their mailing lists, it is impossible to extricate yourself from their computer. They have more deals than the proverbial Mr. Carter has pills.

    I appreciate the good laugh Murray. Thanks a million.

    MasterPlan Capital LLC: Unfortunately that was the answer prior to FDR. It no longer holds any weight. Why? Because the sheeple actually believe the government is the answer.

    Here is an example that is from my own backyard. I moved to Nevada to escape the choking California regulations. I had been preceded by thousands who did the same thing.

    Guess what they brought with them – the same regulatory mindset. I won’t bore you to tears but should you wish to check out our Nevada Revised Statutes, you will see my point.

    I still would have moved here by the way but it would have been much earlier. Freedom doesn’t evaporate overnight, it erodes slowly. Now that more Californians have arrived, the regulatory mindset is even stronger.

    Proof of this lies in the draft legislative bills. I got tired of reading the laws being proposed as I was always ill after a stroll through the “new” law proposals. Government intervention is here to stay and is gaining strength as you read this post.

    Coincidentally, this Friday I’ll have a post about government intervention. After you read it, make up your own mind.

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