Cracking the Code on the next Real Estate Bust
(c) B.K. Haynes, Accredited Land Consultant
T
iming the next attack on the home market is like decoding one out of ten words to predict a coming crash. Guessing trumps analysis.
Almost everyone has a financial stake in real estate. Many of us stand to make or lose big money by buying too late or selling too soon. Here’s what no one is telling you about the real estate bubble burst:
(1) The collapse is yet a few years off.
(2) The crash will occur in concert with some other calamity.
(3) A setback and precursor to the crash will occur in 2007-8.
Most people don’t know much about U.S. history. For example:
(1) Real estate trends follow the ups and downs of the economy.
(2) Major economic downturns usually occur at the decade’s end.
(3) The economy generally moves up in the 2nd year of a president’s term
New homes are popping up in record numbers across the country. And even the boonies are booming. While most of the world’s economics are starved for growth, housing mania in the U.S. is feeding global demand and actually counterbalancing the burden of higher gas prices on the American consumer. Economists with the National Association of Realtors expect housing starts in the U.S. to proliferate until long-term mortgage interest rates approach double digits and until a surplus of overpriced investment properties causes mortgage payments to significantly exceed already declining rental income. This said, over the past year, home prices have soared by almost 15%, exceeding household growth by 10% and providing a buffer against wholesale bankruptcies and mortgage defaults.
Yet, in the midst of prosperity, many minds are still not content. Growing numbers of homeowners and investors are focusing on their fears rather than on their blessings. From the oceans, into the concrete canyons of the cities, out in to the bucolic countryside, across the prairies, and onto the purple mountain majesties, the buzz drones on about the calamity to come-the bursting of the real estate bubble. This specter looms heavily over hot housing markets in the U.S., among them California, Arizona, Nevada, New York, New Jersey and Florida. USA TODAY reports anecdotal evidence that worried homeowners in these states are now pulling up their profit stakes by “cashing out". God has indeed blessed America’s homeowners. Still, from the depths of this great blessing, there are many who continue to predict immense and imminent sorrow.
Who is to blame for this monstrous threat of bubble burst in real estate? The tendency for most is to blame others, such as greedy investors for flipping homes, aggressive lenders for looser standards, or perhaps the Federal Reserve for fiddling with interest rates. In reality, investors have only themselves to blame if the bubble monster bites them. Many observers feel that none of these alleged “boogiemen" is at fault for the inevitable coming crash. Based on my research and 40 years of experience, I am convinced that the trend line in real estate generally parallels the charting of the economy. Growth spurs growth. Calamity incites concern. And rumor rules.
In a nutshell, boom now rules, and gloom is the primary force pushing the growing hysteria of an imminent bubble burst in real estate. I feel that the collapse, if the past is any guide, is yet a few years off, and will occur in concert with some other calamity at the end of this decade. But any minor disruption in our socio-economic sphere before, say 2009-10, is likely to spike fears that end is here, when such a setback would actually be a precursor of the ominous quake to come.
When I read articles and reports suggesting an immediate and sudden crash in home and land prices, I have to discount them because the facts don’t add up. When you see that most economists now agree that the economy is strong and that they accept that as fact rather than theory, it must mean we’re on the right track. This reality reflects a favorable match between the profit makers and the politicians. And these are the two main contenders in the developing world.
Looking back over the past 50 years, I’ve noticed that a weak economy and some kind of calamity have ambushed our entry into every decade. Another thing I noticed was that a precursor to disaster is usually at play in the years before the real crash.
It’s important to remember that, in recent history, the economy collapsed two years after the election of three presidents who took office in the years ending with the number “eight"- Truman, 1948, Nixon, 1968 and Bush, 1998. The next president’s second year in office will be 2010, a now suspected year of doom. Following this prescriptive timeline, a precursor to this doomsday scenario can occur as early as 2007.
I feel that the odds are against a real estate bubble burst in 2005- Bush’s second year of his second term—and in favor of an emerging bull market, this until the curtains drops at the decade’s end. These trends aside, doom and gloomers, may still believe that they can hold back the night by selling now.
As the nineties came to a close, my eyes were certainly on the dark woods ahead. So I scaled down my operations, built up a house of hard cash and waited for those downside real estate opportunities available to investors when the bear would shake up the market. Surely, my house would remain intact. Closing the book on the twentieth century, I made millions, while the bear proceeded to trample all growth from the market, smashing the “dot.com" bubble, laying waste to Wall Street, and destroying the paper wealth of millions of investors.
The other predictable shoe fell on the economy in 2001 when airborne terrorists launched a calamitous attack on the World Trade Center Twin Towers in New York City.
What does the future hold for real estate investors? Baby-Boomers, born in 1945 will be 65 years old in 2010. Many will take early retirement in 2008. I feel the economy will continue to boom for up to three more years as more jobs are created. Crime will increase as the gap between the “haves" and “have nots" grows wider. Unbridled immigration will continue to swell our population, expanding the need for homes and land. And if the past is any guide, some calamity will occur toward the end of the decade that could have unsettling and potentially disastrous repercussions. All of these projections point to a continuing exodus from the cities and considerable upside potential for sound investments in homes and country properties.
Should you sell your home how and cash out now or wait for prices to go higher? For every reason there’s a season. If you like your home and plan to live in it for the long haul, it may be foolish to sell now. If you’re in it for the money, then you may want to consider cashing out before long-term mortgage interest rates hit, say, 8% or 9$. This may be the first that the almost inevitable harbinger of worse things to come is close at hand. The cumulative effect of lost equity, unsustainable mortgage payments, and burdensome property taxes, can saturate the real estate industry with homes, wipe out profits, and lead to lower real estate prices and financial ruin for overextended investors.
If you’re an edgy homeowner, you should look at who’s buying up the most of real estate in your area. If investors are taking the cream of the home and land crop, it’s time to review your strategy and consider selling before they take their profits and run. The real estate bubble won’t burst suddenly like a stock market crash. Damage will first occur regionally in overheated markets. You’ll have time to decide. And rising interest rates are a good sign that the economy is flattening.
So be prepared.
B.K. Haynes is an author, real estate broker, educator, and land developer with over 40 years experience in the field of country real estate. His latest book is titled, HOW I TURNED $50 INTO $5 MILLION IN COUNTRY PROPERTY--PART TIME--And How You Can Do The Same. For more information. Go to http://www.bkcountryproperty.com.
