What If The Real Estate Market Doesn’t Recover?


The real estate market has to recover eventually, doesn’t it? Maybe, maybe not. Blasphemy you say? It really depends on what your definition of “eventually” is. You would be hard pressed to find someone who doesn’t know that there was a stock market crash in 1929. That crash was one of the precursors to the Great Depression of the 1930s. But how many people would know that the stock market’s 1929 peak wouldn’t be reached again for almost 30 years? If you adjusted the peak for inflation that peak wasn’t reached again until the mid-1960s. That’s a pretty long “eventually.”

There are many that feel depression-breadlinethat the housing market crash may lead to our next great depression. Certainly the politicians are scrambling to find a way to prevent that from happening. They are throwing everything at it that they can think of in the hope that something works. But surely we can’t compare the stock market crash to the housing collapse, can we? It is different isn’t it? Sure it’s different, but in many ways it’s very much the same.

The Same, But Different

  • An overheated market where prices were bid up to irrational levels.
  • Excessive use of leverage in the form of easy credit.
  • Misguided Federal Reserve monetary policy
  • A banking structure lacking oversight.
  • Amateur investors lured into the market with the vision of easy money.

Stock market crash or real estate market collapse? Both, and a devastated economy followed.

The Case For No Recovery

Everyone wants to believe in a recovery. After all, people need to live somewhere and they will buy when renting is perceived as being more expensive that owning. Or will they? Maybe not. After the 1929 stock market crash many investors who were burned by the collapse never returned. What they did, however, was talk about how dangerous it was to invest in that manner and the scars were passed on to the younger generation. That younger generation didn’t touch the stock market either. That’s why it took three decades for stocks to reach their previous high point.

How many people who lost homes to foreclosure are going to be eager to buy a house again? Many real estate investors lost a tremendous amount of money and dignity in the process and will look for safer ways to invest. It doesn’t matter how easy borrowing becomes if people don’t want the money. What many of the former investors will do is talk about how risky real estate investing is. Will they pass this fear on to the next generation?

The Future of Real Estate Investing

Everyone has a theory of what the future of real estate will bring. For most people that theory is simply what they want to believe or what they hope will happen. As far as I’m concerned, investing for appreciation is a fool’s game. If prices rise, fantastic, but I’m not going to base investment decisions on something that may or may not happen. I will invest in real estate because I am able to get it significantly under current market value and/or it will provide good cash flow as a rental. For those who wish to speculate on appreciation I say good luck with that.

If Stupidity got us into this mess, then why can’t it get us out?Will Rogers

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  1. Investing with an eye towards appreciation (thank you, market speculators…) has never really been a true investor’s tactic. I think you’re spot-on when you say that you’ll invest for (1) market value, and (2) cash flow. If a property appreciates to the point where you can profit from sale – great! Sell the sucker and move on to the next potential for cash flow. Otherwise, investment property itself should generally be something that lends towards solid below-market pricing where rent rates make the purchase fall in the realm of positive cash flow.

    Great post, and thanks!

  2. Great article. I, too, think that we need to evaluate the reality that we may be splitting in to another Depression. The signs are there that another Depression may happen. The value of homes are going doing at a rate of 3.2% a month and in some cases as fast as 3.2% a week. The only blessing is that no matter how low it gets it will never get to zero unlike the stock market. This fact in and of itself should keep investors interested in real estate, but it all remains to be seen.

    Serena Brown’s last blog post: Thinking of Becoming a Real Estate Investor

  3. Great post. Good food for thought. I agree that there is a very strong probability that real estate values in the bubble markets will never return to the peak bubble prices of 2005-7, or at least not for many decades, but not necessarily for the reason you specified. The banking system and availability of credit have been fundamentally altered for a very long time, and that may have an even bigger affect on asset prices than the fear of real estate investors who’ve gotten burned.

    Economists talk about an economic “recovery” in terms of returning to the mid 2000’s peak credit bubble levels in, hopefully 3, 4, 5, or 10 years. As if that were easily achievable. Dream on. What they are missing is that that whole episode was predicated on a reckless Ponzi style of unsustainable and completely irrational explosion of leverage that was completely removed from real world math. We may be on the downslope of Peak Credit, in which the world will be very different for generations to come, and will entail a level of consumer/corporate debt ratios that will be much lower than in the past 10-20 years, with the corollary that the potential level of sustainable GNP (and asset prices) that can be attained will be much lower.

    Check out the article on Peak Credit by Mike Shedlock of MISH’S Global Economic Trend Analysis for some sobering food for thought about what is in store for our future: http://globaleconomicanalysis.blogspot.com/2008/06/peak-credit.html

    Here’s a summary:

    Peak Credit

    “Peak credit has been reached. That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and attitudes have changed.

    It took nearly 80 years for people to get as reckless as they did in 1929. 80 years! Few are still alive that went through the great depression. No one listened to them. That is the nature of the game. The odds of a significant bout of inflation now are about the same as they were in 1929. Next to none.

    Children whose parents are being destroyed by debt now, will keep those memories for a long time.”

    The one positive about the floor on real estate values that Richard Warren didn’t mention, though, regarding the difference between the stock market crash and real estate crash, is that there are 300 million Americans who have to live somewhere. You can’t live in stock certificates. Homes have a value beyond investment value that make these assets desirable to own. There is a point where home prices are low enough, probably somewhat below comparable rent values, in which people will buy the houses (if they have the means) regardless of the potential loss, just to have your own place to live in. That can override their fear of losses in the future value value of the house.

  4. Sorry folks, but this is just the beginning. I think at best we are one-third through real estate devaluation given the Alt-A and other subprime resets that are about to come on the horizon.

    There are two bigger problems however.

    1. The government is destroying our currency, the US Dollar by so-called bailouts, Fed redemption of US Treasuries and other assets, etc. Once the bond auctions go without buyers, the jig is up because we need foreign investors to loan us over $ 3 billion per day to keep this illusion of prosperity going. Now that inflation will soon kick in, interest rates will have to go up substantially to offset the loss in purchasing power due to government caused inflation. The outstanding unfunded liabilities on the federal government alone has been estimated between $ 60 – 95 trillion dollars! What does that mean? The politicians have spent us broke, with money that isn’t their’s, and money we don’t have. Now the challenge is to preserve what you have worked your entire life. You’re not interested on a return on the money but a return of the money!

    Solution: Hard foreign currencies, gold, silver and oil.

    Fiat currencies are dying and only a few will remain after the collapse that is now taking place.

    2. The world is not prepared for the prospect of global peak oil production. This is a geological problem in that all the easy to obtain oil has been found and existing fields are depleting rapidly. The US peaked production of crude in the 1970’s. Mexico, our number three supplier, its largest field, Catarell, is declining at about 14 – 20 percent per year. In about 4 years, Mexico may not be able to supply us crude oil. We’ll be in big trouble as almost all other fields have effectively peaked as well. I’ve been told the Mexican federal government relies on 70% of its operating revenue from Pemex, the national oil company. So it seems that Mexico will collapse about the same time as we will with our moronic politicians spending us into serfdom.

    The big picture of peak oil production is that not only will crude oil fall in terms of supply, but prices must rise, due to demand. With the US Dollar being the reserve currency of the world, losing value so rapidly, how can we expect foreign nations, most of whom don’t like us, to continue giving us valuable oil for worth less (and soon worthless) dollars?

    With the lack of adequate liquid energy supplies, we cannot grow our way out of our financial dilemma because our very society depends upon petroleum products not only for driving cars, trucks, trains and airplanes, but food production, fertilizers, essential chemicals, medical supplies, pharmaceuticals, plastics and literally thousands of things we all take for granted today.

    So, real estate is the least of our worries. Best solution may be to invest in prayer. That does not cost very much and it might be the best medicine yet.

  5. The recovery will occur in line with the most basic principle of economics, supply and demand. When demand starts to outpace supply then prices will rise. This will take some time. Because many areas are overbuilt, and the increased supply was largely driven by investment speculation – the need for new housing couldn’t keep up. At some price real estate becomes attractive again. The market needs to drive prices down to that level. If that price gets low enough people will start buying again and prices will rise.

  6. The real estate market will never recover as it is a horrible investment.

    – Liquidity: How long does it take to complete a real estate transaction even during the boom compared to how long it takes to buy or sell shares in an ETF?

    – Transaction costs: How do they compare to the costs associated with buying or selling shares of a ETF?

    – Cost of carry: Compare tens of basis points for the vast majority ETF verses at least 3% for a house.

    A house is as standard of living choice and just a place to live…nothing more.

    The secular shift that is occuring in consumer psychology will persist for the next several generations.

  7. Wanna-be landlords beware! Rents are just starting to fall. We will have a wave of foreclosures in two years from “investors” who caught knives looking to become landlords. Take the figure you think you can rent for now and cut it in half!

  8. “There is a point where home prices are low enough, probably somewhat below comparable rent values, in which people will buy the houses (if they have the means) regardless of the potential loss, just to have your own place to live in. That can override their fear of losses in the future value value of the house.”

    This is true if much of the work in the future is govt and/or local to a region. I suspect that the bottom would be when rents are just slightly higher than the true costs of ownership and this would start to attract those with local work (store owners, govt employees, etc) to the housing market. On the other hand, for much of the wired population, being mobile, in other words, switching cities every 3 to 5 years, may be the only way to stay marketable. That could be the professional class of the future and if so, then homeownership will definitely take a back seat to securing mobility. People will need the option of packing one’s bag and being able to move, within a few months notice. And now, with all the excess condo build outs, there are plenty of apartment complexes to be converted towards, in the near term future. All and all, it points to a major bear market in RE.

  9. @A Real American – Can you please tell the rest of us unpatriotic folks how the Real Estate Market suddenly recovers in the next few months? I guess anyone who is realistic about things is now an American Hating Liberal. Sad…..

  10. “A Real American”
    “Just more unpatriotic negativity from liberals who hate America, and the troops.”

    Is this a joke to personify and caricature just how absurd and clueless the desperate and discredited American Right (who are more accurately called the American Wrong) have become?

    If you are for real, dude, can you show is if you actully know anything? That is, other than worn out right wing cliches and memorized talking points from the Bill O’Reilly Faux News commedy show?

    Hey, I’ve got an idea for ya: See if you can address any of the actual issue we are discussing here, and then try to say something of substance. M’kay?

  11. the economy won’t recover until people start working again, the longer people stay unemployed the worse things will get, the bad thing is the trickle down effect that takes place from one industry to the next and with uncertainty in your job most people are cutting a big portion of their spending. i don’t see the real estate market picking up anytime soon, those who do buy real estate have saved money for awhile and many have lost these savings in the stock market and 401k

  12. Housing is the KEY to the economic recovery. Since real estate is their largest investment, American don’t feel too good when their real estate prices are down. Not necessary to sell the properties, but being able to pay for things, such as, medial emergency, entrepreneurial activities, kids college education, etc.

    Entrepreneurship takes a big beating when their is no equity in real estate to pledge against start-up loans.

    Therefore I urge people to buy the excess real estate inventory to spur the economy. I wrote the two blog posts recently:


    I hope that your Twitheads out there will Tweet the articles for the sake of the economy.

  13. I thought people bought houses to live in, raise families, come home after work and rest, have a place to sleep? When did it become an investment, as if I were buying commercial property or rentals that I plan to make a profit off of? The 30-year mortgage was designed to keep the working masses in debt. You have that mortgage, you probably won’t quit your job on a whim. By the time you’ve paid that baby off, you’re old and you’ve paid nearly twice as much as the house was worth when you bought it. You sell it and you’re lucky if you get your money back. That cash in the bank would at least have earned something, if not much, but something. If you can’t pay for your home in less than 10 years, don’t do it. Don’t be a slave to the bankers and a system that is slanted in favor of the rich.

  14. I speak from the other side of the pond (the UK) but I’ll add my tuppenny worth given that what’s happened in the US has caused a domino effect the world over.
    I think the issue of how far prices have to fall depends on how high they rose during the bubble years of the 1980s and 90s.
    Take the UK, where in effect we had an unsustainable boom inflated by reckless credit. Prices are between 15-20 per cent down on their Autumn 2007 peak and experts think we have another 15-20 per cent reduction to come.
    On the other hand, take Italy, where much tighter lending restrictions during the 90s meant far fewer mortgage-holders and a much more modest rise in values. Italian prices fell by a much more modest 5-6 per cent in 2008 and it’s generally agreed the Italian real estate market is better placed to weather the credit crunch than most in Europe.
    Real estate will recover, but much more quickly in some countries than others.

  15. Just have to say that I bought investment property in 1999 and we are still renting it cash positive even in the downturn. I own a home that I will live in for quite some time and its still at a value higher than I originally paid for it in 2001. Homeownership is still one of the best wealth creators we know. My renters have given me over $300,000 in the last five years. Money I have and they don’t. Real estate is still a good investment. “They are’nt making more dirt” a Realtor friend of mine said. Buying in a desirable market and holding onto the property for the long haul is just good business sense.

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