Every talking head telling you "now is the time" to invest in real estate is selling the idea that real estate is a great investment. Every single one. (The home shown was bought last year.)
I’m not selling you anything. If you can find a bargain to live in, something you can afford with a conventional mortgage instrument (30 years fixed), then go for it. But you’re not investing. You’re getting a place to live in.
Real estate is not like stocks. It takes months to close a real estate transaction. It takes more months for sellers to get real, especially with all these talking heads going "buy buy buy."
This is always true in a real estate crash, but we haven’t seen one in over 30 years so there is no one out there who has experienced one and can tell us what to expect. You’ve got to rely on history.
The last real estate crash, which followed the 1973 Arab Oil Shock,
lasted a half-decade. (The picture was taken during the crash. Note the ugly leisure suits.)
This was the time of "stagflation," stagnant
growth, of disco and double-digit inflation. There wasn’t much money around, and
mortgages had to be priced at over 10% in order to stay ahead of the
shrinking dollar. For 15 years analysts dreamed of "hat-sized yields,"
that is loan rates of 6-8%, saying that would get things moving again.
It did. Oil deflation drove down total inflation, and by the early
1990s you could make a long-term loan at 7% with some expectation it
would pay off. As rates continued to fall, and federal agencies created
massive subsidies for real estate lending by packaging loans through
Freddie Mac and Fannie Mae, you had the boom.
The real estate boom has gone on for over a decade now. The average
home buyer simply can no longer afford the average home, using the
average note. Millions of people have been pushed into notes designed
for speculators — interest-only, wildly adjustable — and this has to
work its way out of the system.
How long will that take? Years.
Meanwhile, you’ll have rising foreclosures and tightening loan
standards. That means more homes for sale and fewer qualified buyers.
That means falling prices.
For years. Until homes become "affordable" under the conventional
definition of that term, that is, using conventional 30-year
instruments and conventional repayment assumptions, like 25% of income
going into housing.
How low do prices go? I don’t know. It depends on the market, on the
underlying economy, on the local economy, and on how long the happy
talk can keep suckers buying on a falling knife.
But based on history, I’d say pretty darned low.
