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February 13, 2008

Asset Deflation 13: Sell Your Real Estate Immediately!
by Steve Moyer

"I always felt very secure and very safe with real estate. Real estate always appreciates." ~ Ivana Trump

Before we begin our next hair-raiser, I notice a lot of people scratching their heads as global stock markets decline in the face of a "strong global economy." What you are seeing is the "pricing in" of approximately $2 trillion of lost homeowner equity in the U.S. (soon to be $3 trillion, then $4 trillion and so on). And it's only a matter of time before that equity squeeze wreaks havoc across the economic board and takes down the stock market and commodities, too. Picture a five year old trying to beat back an elephant with a Wiffle bat -- eventually that will be the metaphor for a declining global economy trying to chase from the living room the growing, immovable force that is asset deflation.

Meanwhile, sell your real estate now. Sell it now. Now. Get rid of it. All of it. Even if you can't get 2005 prices (and you won't). Get what you can now, set the money safely aside and buy the property back (or one like it) several years from now, for a lot less money.

You might make a case to retain your personal residence, particularly if you bought it prior to 2002 and/or have a very large equity (60% or more). You need to live somewhere, and that stability (and home ownership) can be worth more than money. But whatever equity you can pull out of any other property now will pay greater dividends later on, when the mother of all credit/liquidity crunches -- continuing to unfold right before our very eyes -- makes safe cash King in a way few of us can fathom right now.

At this point, the cancer -- now exacerbated by a pronounced, continuing, anticipatory drop in retail, office and apartment REIT values and a developing storm in securitized commercial mortgage markets -- is spreading unfettered and ALL U.S. property values are poised to take an increasingly substantial dive in the next 24 months, followed by an even greater one the next several years after that. Japan-style real estate deflation -- only worse -- has arrived; it is no longer a matter of speculation.

I now expect every property category to become significantly affected -- houses, condos, fourplexes, apartment buildings and complexes, shopping centers, office buildings, industrial complexes, lots, land -- you name it. The evidence (and a growing and overwhelmingly negative real estate buying psychology) has me convinced that no property type will be spared.

Thus, the time has come to sound an even more definitive and clarion call: Sell your real estate now!

Given my grave doubts that a combined Fannie Mae, Freddie Mac crisis plus credit-derivatives-nightmare can be averted as asset deflation intensifies, I now expect a frightening systemic event in the U.S. at some point, possibly within the next few years, which will take property values out at the knees and cause transactions to come to an utter standstill for a time. At that point I expect loans to become almost impossible to get and buying psychology to be so damaged, a generation of people will tell you "you should never buy real estate." Regardless, the economy will be shaken by these unfolding events to the extent that the mere thought of buying real estate (absent a massive cash discount) will be considered by most a preposterous notion.

The farther you look out onto the decade-long horizon, the lower I expect prices to be. The good news is, if you like real estate (and, as a 26 year veteran of the investment RE business, I certainly do), you will be able to buy it back later on for a lot less money -- IF you take particularly good care of your cash in the meantime.

Foreclosure flyers and "Price Reduction!" announcements fill my email box and "foreclosure seminar" ads dominate the morning paper. TV news accounts highlight "savvy buyers" who have worked with cooperative lenders and purchased "bargain" real estate. Surely, with the daily dose of bad news, this is the time to bottom-fish, isn't it?

The answer is no; you're much too early and you'll probably end up losing your money. It's like buying a sofa at a 15% or 20% off sale, then finding out later on that the price ended up being slashed by 40% or 60% or more. Today's "great deal" will be tomorrow's loser, as real estate deflation continues to take greater hold and we find ourselves in The Incredible Shrinking Equity economy. That "$605,000 house" you can buy for $470,000 today will be worth $370,000 in a couple of years, then $270,000, then $170,000, then possibly less than that when it becomes cash-on-the-barrel-head time at some point down the road.

Yes, we've been suggesting you sell your property since 2005 and many of our intelligent readers got out at the right time (and benefited), but I'm still hearing investment real estate sellers say things like, "You don't want to sell in this market" or "People are always going to need a place to live" or "I'll just pull it off the market and wait for prices to go back up" or "I'll sell it in a few years when the market improves." Boy, are these folks going to learn the hard lessons of post-bubble/bubble real estate deflation, especially when the U.S. economy continues to fall of the weight of falling asset values, no savings and hamstringing debt. Wait until accelerating job and stock market losses add further to the malaise and all appetite to borrow disappears.

Remember, none of those optimists have ever experienced a post-investment mania deflationary meltdown, where gun-shy lenders and cash-strapped and no-mood-to-borrow consumers/homeowners/investors unwittingly contract the money supply and lay waste to asset classes one by one. None of them have ever witnessed a central banking system running out of answers and ammunition; at this point a virtual certainty even as the Fed drops interest rates like a bad habit.

Luckily, you can still sell property, albeit for less money, to 1) dunderheads, 2) folks who have pawned off other property and foolishly want to exchange into another to "avoid paying tax," 3) folks who don't recognize that we are post-bubble and therefore think this is a short-term phenomenon or "typical real estate cycle," or 4) folks who think this is a good time to buy and hold to the notion that "real estate values will always go up in the long run." Hey, god bless 'em; that's what makes horse races.

You will probably be a bit disappointed with what price the market will bear for your property right now, but that's nothing compared to losing 70% or more of value when the shinola is all the way done hitting the deflationary real estate fan. When property values tanked during the Great Depression, it took them more than 20 years to get back to "par"; do you really want to run the risk of waiting an entire generation for the real estate market to return to 2005-2006 values? Don't.

The answer to the question I get the most on these pages is that it won't be "time to buy" until the vast majority of Americans concludes that buying real estate is both "too risky" and "a bad investment." At that point, smart (and wealthy) people like you will find themselves able to buy desirable properties for nickels and dimes on the dollar.

This is not to say cash buyers won't be able to pick some lovely cherries well before we hit "bottom." I expect they will find select opportunities, and on an ever-more-frequent basis. But there's no reason to do so until we've reached at the very least what Robert Prechter, Jr. describes as the "point of recognition," and people lose all faith that values will recover. Once we reach the point where buying psychology is damaged to that degree, credit is relatively unavailable and liquidity has vanished, that safe 2005-2008 cash will quickly make you "real estate rich."

Our call has been for falling real estate prices, damaged buying psychology, lack of savings and tightening lending standards. Check, check, check and check. Now the banks are yanking the rug out from under economy-crucial home equity lines of credit, while credit card and auto loan defaults are beginning to soar. Subprime and Alt. A problems are quickly becoming prime problems, and a commercial real estate slump is the next developing story. Our societal craving to "borrow to buy things" has run its course and lenders aren't so hot on the idea anymore, either. More importantly, we're not in a mood to borrow to buy real estate, as prices drop and lenders have the audacity to require larger down payments. Welcome to the slippery-slope world of post-bubble-bubble credit contractions, my fellow asset preservationists.

P.T. Barnum was known to say, "There's one born every minute." Sell your property now, to that guy, while he still has some ability to borrow and money to lose. Remember, all's fair in love and real estate.

Steve Moyer,
PonderThis.net

Steve Moyer is a columnist and assistant editor of the monthly newsletter, Ponder This.... (www.ponderthis.net). He has been an investment real estate broker since 1982. Contact Steve at StephenLMoyer@aol.com.

Copyright © 2005-2008 Steve Moyer

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