Real Estate/Credit Bubble Deflation 17: Foresight Is 20/20

By: Steve Moyer | Wed, Oct 1, 2008
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"And what a bunch of numbskulls - Greenspan, Paulson and Bernanke! Every word they've said so far has been financial poison. "Greenspan relaxed about house prices..." reported the Financial Times in 2005. "Most negatives in housing are probably behind us..." said the same sage in October 2006. "We believe the effect of the troubles in the subprime sector...will be likely limited..." said Bernanke in March 2007. It's "not a serious problem...I think it's going to be largely contained," added Paulson in April 2007.

But these are the same numbskulls who now say they are saving capitalism from itself. Ah, there's the rub...amid all this giddy merriment is a serious threat. The feds have bailed out the bankers, the insurers, the mortgage lenders, and half of Wall Street. But who will bail out the feds?" ~ Bill Bonner, The Daily Reckoning

Of course all of this post-bubble stuff has been utterly predictable, including our Fed and Treasury's preposterous attempts to beat back asset and credit deflation with a broken popgun. We know that because we predicted it. Our first Real Estate/Credit Bubble/Asset Deflation (call it whatever you want) article hit the racks one month before the statistical peak in the housing market (May of 2005) and our calls since then have been on point enough that we now have a wonderful, loyal (and fairly modest) contingent of readers who write in and bug me when I get busy and don't offer another update. I'm writing one for publication in a week or two that will offer a bit more perspective, but for now I'm sitting at a piano bar -- vodka martini "up" with a couple of olives to the side -- and I just got a request.

Albert N. of Tampa, Florida checked in last week and asked me to do a retrospective, offering excerpts from our three-year series of articles on Asset and Credit Bubble Deflation. "You helped me save a lot of money. If people see what you've written over the years, they'll probably take your advice in the future."

All right, Albert -- this one's on you:

May, 2005: True, deflation is not creating headlines right now but that monster is quietly lurking in the background as existing pockets of inflation ironically add fuel to the deflationary fire. There is really no way around it, money supply pumping or no money supply pumping. Safehaven readers should take heed and, in some cases, take action - the relentless drag of deflation is coming soon to a theater near you. I hope you'll ready yourself for it....

Credit bubbles don't have happy endings. Eventually, folks decide they have borrowed enough and they cut back. The credit-driven economy falls of its own weight. Even low interest rates no longer entice people to borrow. The short-term fix ends up adding to the post-bubble, long-term problem, as the increasing burden leads to a braking economy, a credit contraction, falling asset values and not enough liquidity left in the marketplace to prop everything back up. The result is a full-blown liquidity crisis, affecting all asset values - stocks, bonds, real estate, precious metals, collectibles - at least for a time.

June, 2006: 2005 featured the last drunken push with respect to the Fed-induced, borrowing-infused, post-NASDAQ bubble money supply trade. Frankly, the 2003-2006 "recovery" was substantially a mirage -- built upon the ability of individuals to borrow money against their homes in order to stimulate the U.S. economy. U.S. central bankers did their best to give a Code Blue post-bubble patient handfuls of amphetamines to keep it on its feet until it had no choice but to collapse. But that predictable college try is over now; asset deflation has begun to take its inevitable post-bubble hold and the next several years will offer investors a sobering view of what really happens when investment manias end.

My solace will be to prepare Ponder This...readers for the coming investment era so you can work to protect your existing net worth. Asset preservation will be the buzzterm for the rest of this decade and, very possibly, beyond. Keep what you currently have and you'll not only survive financially, you'll be in position to flourish....

August, 2006: Alas, deflation is coming because one by one, Americans are figuring out that the jig is up. They have figured out that you can't borrow your way to prosperity, and they're hearing about the houses and condos around town that aren't selling. With little savings in the bank (Americans have a national savings rate below 0%), their only alternative is to stop spending money. Deflation is coming because the psychology is changing. From here on out, Americans will prove that we have simply had enough.

Of course, we could wait until next year to write this. At that point we'll likely be in agreement that real estate deflation is a fact of life. But we'd rather put it on the table now and give you a chance to make important financial decisions while you still have a chance.

September, 2006: Homebuilders are quaking in their boots as right before your very eyes, ordinary folks have figured out that if they wait 'til next year, prices will be lower. Soon they will figure out that prices will be a LOT lower. The speculators have run kicking and screaming from the housing market (step one) and the general consensus is already that the "housing boom is over."

You should probably get accustomed to the following, coming-soon-to-the-business-section-of-your-local-newspaper phraseology: Oversupply, excess inventory, "hard landing," foreclosures, "upside-down" mortgages, contract cancellations, "fire-sales," bankruptcies, foreclosures, bank failures, credit crunch, credit contraction, bank crisis, Fannie Mae crisis, liquidity crisis, real estate deflation, asset deflation, price deflation, foreclosures, meltdown. Real estate values will fall from peak values somewhere in the range of 50% to 90%, depending on area, location, property type, "intrinsic value" and scarcity....

For those of you who think the Fed can engineer their way out of this inevitable mess, just understand that that money-supply concept is built on people maintaining their willingness to borrow even more money. But history shows that when folks see asset values declining (and debts mounting), they lose their appetite to borrow more and banks become much more hesitant to lend them money. The Fed will effectively be wielding a popgun in its effort to beat back that massive elephant.

All of you who made bets in the other direction have a chance to get out now before the real pain begins. If you have leveraged anything, it is time to de-leverage -- now!

March, 2007: One of the nice things about our series of Safehaven articles on Asset Deflation is that we have been on such a tiny island compared to the "All Markets Will Continue To Rise Forever and Ever Amen Because It Is Our Birthright And The Fed Will Surely Guarantee It" set, our small legion of open-minded and perceptive readers write in with increasing frequency and say things like, "Yo, Steve, isn't it time for another deflation update?"...

The savvy men and women are already out and have completely sidestepped the coming storm, but when "everyone else" figures out what's going on, it's sayonara to pretty much everything we hold dear (like having money and assets, for instance).

Do not -- I mean, DO NOT -- put your financial fate in the hands of those same CNBC (aka General Electric) cheerleaders, Wall Street pimps, Pollyannaish U.S. policymakers or guys who write articles featuring a bunch of charts as a means of convincing you that they know what the hell they're talking about. Don't listen to Treasury Secretary Henry Paulson when he steps to the podium to say that the "world economy is strong" (What's he going to say? "The world economy is unbelievably precarious and we're all going to hell in a handbasket!"?). In the coming months, quotes from Paulson, Ben Bernanke and George Bush will sound an awful lot like another famous assurance from long ago: "The Titanic is unsinkable, Molly! I tell you -- unsinkable!"

Instead, my friends, use your gut, your instincts, your sense that the economy is slowing down in your own community and that people are pulling in their speculative horns. Turn off the nightly Larry Kudlow sis-boom-bah routine and utilize your own ability to see through the lunacy. Asset values have begun heading down and we are nowhere near "the bottom." More like mid-to-high forehead, if you really want to know....

Lenders and mortgage securities players will no longer be so absurd (or solvent enough) to take on increasingly risky loans and the rules of the game will change very substantially. The elimination of subprime (poor-credit) borrowers, nothing-down borrowers and "NINJA" (Steve Pearlstein's "No Income, No Job, No Assets") borrowers will whack the market in a way no one could have ever anticipated.

Stocks will crash and fall completely out of favor for a generation, precious metals will take a liquidity-short nosedive of its own (before, I might add, becoming the investment of the decade). The shockwaves of falling property values, zero savings, credit contraction and liquidity squeeze will resonate throughout the real estate industry as the common perception will shortly become, "Why should I buy real estate when it's obviously going to be worth less next year?"...

The all-out collapse of the real estate bubble will mean that anyone left standing with 2005-2006-2007 cash -- you know, gobs and gobs of funny-money cash -- will ultimately be able to buy stocks, property and precious metals at ever more substantial discounts. My wish is that when the time comes you'll be there with me on the courthouse steps, buying distressed property for prices we can't begin to fathom right now...

It is time to sell all of your real estate, save for possibly your home. If you don't, you will likely regret it. You will gradually watch all of your equity disappear into thin air. And then, unless you have little debt against it, you will likely lose your property to foreclosure. It's as simple as that....

That realization will pervade the consciousness of real estate buyers across the board, as they hear about ever-more distressed and foreclosed inventory competing with already-languishing housing stock. Buyers will conclude that, just like computers, "prices will be lower next year" and they will demand significantly discounted prices; sellers who resist selling now will find an even weaker market and a greater dearth of buyers with each passing year. Nightly news reports will further the psychology, and that dampening mind-set will spread to all real estate types: office and retail buildings, industrial and income property, single lots and land. The implosion of the real estate bubble will quickly translate to snap-the-pocketbook-shut consumer spending, declining rents, more bankruptcies, a moribund job market and fire-sale drops in real estate prices. Fannie Mae, Freddie Mac, bank and lending crises are sure to be sprinkled on top of that soggy cereal at some point, too.

Surviving lenders, under constant pressure due to rampant foreclosures, will make lending standards increasingly more stringent and loans more difficult to procure, meaning more equity will be required to buy property. But Americans have been living on borrowed money and have no such equity; they've been conditioned to borrow to buy things because they assumed that the value of their homes would continue to bail their finances out forever. Another segment of the buying marketplace will therefore be lopped off.

As time goes by, those in a position to buy will consider real estate not worth the headaches and a bad investment, to boot. It goes without saying that the real estate market's take-down, concurrent with its attendant, severe and involuntary credit contraction, a stock market pratfall, not enough U.S. savings, the corresponding liquidity crunch and an inevitable value decline in all asset classes will mean that anyone left with 2005-2007 cash will come out the winner.

April, 2007: As real estate values deflate in the U.S., it is clear that different markets will take their lumps at different times, much the same way dot.com stocks bit the dust one at a time when the NASDAQ collapsed in 2000. Some areas will buck the trend and hold up better than others. But scattered markets throughout the U.S. have already experienced the onset of real estate deflation, more communities are faced with that reality each day, and the psychology is getting damaged beyond repair.

Ideally, you will have sold your investment real estate in 2005-06, but you still have time to come out just fine. You will be a winner if you sell now and set the cash safely aside, even if it's a week, a month or a year too soon in your area.

During the credit contraction/liquidity crisis portion of the post-bubble meltdown, anyone who is leveraged will get punished. So do not borrow against one property to buy another, do not buy with little or nothing down, do not use your line of credit to buy real estate, and do not take on a teaser or negative-amortization loan betting on market appreciation going forward. Look at everything with the most critical eye you can muster right now. In fact, resist your urge to use leverage to buy any investment, including stocks and precious metals. All asset categories will fall together in the coming deflationary environment -- at least for a time. The term "leverage" should become passé for quite a while.

I know it will require an adjustment in thinking and old-school budgeting, but if you plan to keep your home and are fortunate enough to still have substantial equity, you must make the decision to live within your means. Pay down debt wherever you can. Work to pay down your equityline, do not use your home mortgage any longer to "consolidate your bills," close that preposterous checking account which automatically adds to the balance of your home loan. Implement a tight and disciplined budget. Become lean and mean. Take at least 10% of your paycheck and tuck it away safely for savings. Safe cash will be king in the coming environment and you'll be able to use that money to make money.

May, 2007: Just to prove that every village has its idiots, an article in the San Francisco Chronicle's Sunday Real Estate section last week featured an assortment of irresponsible "mortgage consultants" and "financial strategists" speaking enthusiastically about the idea of borrowing against the equity in your home in order to invest in the stock market (or wherever else you might want to take a chance on achieving an investment return higher than the interest rate you would pay on a home loan).

Mark my words: The writer, her story's "experts" (the paper's term, not mine), the Chronicle's real estate editor and its publisher will all have blood on their hands a few short years from now.

Be sure to watch for the Chronicle's next real estate section cover story: "Why Homeowners Should Extract Another $100,000 of Home Equity and Put It All on Roulette Black."

Manias involve too much speculation, too much borrowed money and too many financial dislocations and as all that credit contracts, liquidity disappears and asset values decline. The S&P 500 could fall to 350 and even lower as asset deflation takes complete hold, and scores of publicly-traded companies will go bankrupt in the coming deflationary depression.

Everyone seems to be in agreement that the dollar is headed down, down, down, and when everyone agrees on something, it is usually time to double-down on the other side. The dollar's collapse may well be inevitable, but for now it is oversold and poised to rally for an extended period of time. While you may be on the right side of the long-term trend, you must allow for countertrends along the way and that's where we are right now. It may be several years before the dollar faces its greatest crisis.

Over the next several years, gold and silver will continue to decline in value as the credit contraction becomes more pronounced and lack of liquidity and savings forces people to sell assets under less-than-ideal conditions. You will likely be able to buy gold and silver at values significantly lower than they are today. My plan is to wait for a significantly bigger silver drop and to start buying gold when it drops below $500 an ounce on its way to ever-lower levels as the liquidity crisis takes full hold. Once all the bubbles deflate, then-bargain gold will become the asset class of the decade.

August, 2007: Now that the credit contraction/dislocation is making headlines, hedge funds and mortgage-backed securities markets are getting caught with their pants down, and the subprime meltdown is moving into Alt. A and even prime mortgage markets, our call for a credit collapse and liquidity crunch is right on schedule. It is no longer a question of "when." You're seeing it take place now, right before your eyes. Credit markets worldwide are seizing up and major financial institutions around the world could soon be going bankrupt.

As rampant foreclosures add to the mix of inventory, zero down home loans disappear, lending standards tighten and buyers figure out that now is certainly no time to buy, the Home Value Nuclear Fallout story edges closer to reality. Look for a "real estate crash" -- a sudden 20-30% drop in home values across-the-board by late 2008, and, unfortunately, that won't be the end of the decline, either.

Our sell signal is still intact. Do not sit around waiting for a miracle from the Fed or for asset values to bounce back. We have barely begun the asset deflationary spiral led by real estate's pratfall, along with the stock market and commodities, including the precious metals. You will be able to buy these assets later on for less money if you safely set aside as much cash as possible now.

Market cheerleaders will tell you that "the economy is fine, employment is high, interest rates and inflation are low, earnings are up, it's only a correction" and so forth. But as real estate and asset deflation spreads like a disease, all lagging economic positives will quickly turn negative. Stop looking back; it is time to look forward and play some serious defense. It's all about financial survival at this point.

Investors who come to believe that certain investments are "sure-things" often learn painful lessons at the most inopportune times (like when far too much leveraged speculation pushes the asset class to unsustainable levels). And, by definition, those lessons are learned when investors least expect it. The NASDAQ crash of 2000-2002 should have indoctrinated people to some extent, but our Fed's goofball monetary policy was so extreme, any sense of the first leg down ("hey, maybe you really CAN lose all of your money investing!") realization was lost like a fart in a hurricane.

Fast-forward to today. Herd investors as far as the eye can see -- until a month ago confident to the point of unqualified complacency -- find themselves wide-eyed and scared, trying to hopscotch across a fertile minefield as fellow investors get their legs blown off one "sure-thing" at a time.

And as those "sure-things" continue to fall by the wayside, along with them come ever-greater and more unimaginable problems. We all know how much money has been bet on the same real estate and mortgage horse (don't ask). But try to imagine the consequences if other legions of whacked-out, over-leveraged speculators start encountering similar fates.

The Fed's reflation "strategy" enabled all boats to rise -- at least for a while -- on pretty much the same swelling sea. It lasted just long enough for most investors to be lulled into a false sense of guard-down security. Alas, it looks like those speculators were all partying too heartily on the same boat.

And that boat happened to be the Titanic.

January, 2008: Values have a long way to go (down), both in terms of price and timeframe, and the longer you keep your investment capital safe and secure, the more purchasing power that cash will have when the time is right. We're likely just 15 or 20% of the way there, so patience remains paramount. Just know that with each passing year, the buying power of your safe cash will surely grow.

At this point, buying psychology is becoming strikingly damaged, as the mainstream media drone on day after day about the real estate slowdown, the mortgage meltdown, rampant foreclosures, rising homebuilder inventory, massive bank, CDO and SIV writedowns, stricter lending requirements, a choked-off secondary mortgage market, a troubled banking system and an extremely concerned but powerless Federal Reserve Board. Trouble is, the die is now cast; there is absolutely nothing that can be done to turn this growing psychology around, Fed pom-poms and band-aid solutions aside.

February, 2008: 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.

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.

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.

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.

March, 2008: Those of us familiar with 18th, 19th and 20th century post-bubble economies were the ones asking questions as the Fed took its indefensible course of action. You know, questions like:

"What happens when the music stops playing? What happens when the real estate market no longer benefits from falling interest rates? What happens when people can no longer buy houses on margin? What happens when home values drop a trillion dollars at a time? What happens when equity shrinks? What happens when teaser and liar loans are taken off the table? What happens when lousy credit borrowers can no longer qualify for loans? What happens when homes stop selling? What happens when fully-leveraged homeowners start walking away from their homes? What happens when millions of properties face foreclosure at the same time? What happens when those foreclosures come back on the market? What happens when homebuilding, construction, real estate and financing boomtimes end? What happens when homeowners stop tapping the shrinking equity in their homes? What happens when houses no longer "appraise?" What happens when consumer credit defaults mount? What happens when banks take away equity lines of credit? What happens when financiers lose trillions of dollars on leveraged and poorly-collateralized loan portfolios? What happens when credit market begins to seize up? What happens when consumer confidence declines, the economy contracts, earnings turn down, jobs are lost, the stock market drops, people begin to cash in their 401(k)'s, structured finance unravels, Fannie Mae wobbles, the Fed becomes powerless, buying psychology is damaged and there are no savings to fall back on?

"In other words, what happens when the post-NASDAQ-crash, Fed-generated real estate and credit bubbles implode?"

The further we get into this developing quagmire, the more people (or their lenders) will find themselves forced to sell whatever they have to try to keep afloat. This includes everything one might consider to be an asset (yep, commodities too) as liquidity continues to dry up, loans become due or go into default, and lenders seize assets to sell for cash under less-than-ideal circumstances. The further our economy sinks -- led by the accelerating decline in real property values -- the bigger the fire sale will be, and Bear Stearns provides the blueprint/slash/foreshadowing for Americans near and far who edge ever closer to owing far more than they're worth: "I know what your assets were worth 14 months ago," the creditors will say, "but they're not worth that anymore so we have no choice but to sell them for whatever we can get". In other words, beware the coming "Mother of All Margin Calls."

May, 2008: This is no cyclical downturn, friends. This is post-bubble-bubble-bubble time in the U.S. (and now we've added deflating China and India stock bubbles to the mix). When the happy talkers on CNBC tell you about real estate or investment cycles "since World War II" or yammer on about "typical bear markets," just know that that's why bubbles inflate in the first place; few know (or want to know) anything about investment manias, credit implosions or deflationary depressions. Few know that bubbles go bust with frightening consequences, or that housing bubble deflation is the most onerous one of them all (because far more people own houses than stocks). The "don't worry -- values will always go up!" crowd, emboldened by some sense that the Fed will surely "take care" of everything, will be the one turning bitter in the months and years ahead, while asset preservationists rule the roost.

In response to a request from one of our readers, I decided to make like a cobbler and throw out the next dozen shoes to drop as real estate and credit deflation take greater hold. I accept the challenge, and understand that these answers might have some bearing on a 2008-2009 investment decision or two. So here goes:

1. The Fed won't turn around rapidly developing and contagious "depression psychology." Can't, isn't and won't. Picture Bernanke, Paulson and the other United States' Economic Dictators standing around an emptying toilet bowl, frantically using their bare hands to keep water from going down the drain. Such is the case of these Dictators vs. the awesome force that is real estate/credit deflation.

2. Nothing will stop real estate values from continuing their decline; they will continue to fall, from coast to coast, category to category, setting up an eventual "crash" when a global systemic event takes the entire market out at the knees. Just laugh in the face of those who say real estate is bottoming now or will bottom "later this year," in 2009 or any other time in the next five years (at least). Certainly there won't be a "bottom" until a meltdown of one sort or another comes to pass and until most conclude that buying real estate is a losing proposition. Anyone who says we've reached bottom in the meanwhile surely has something to sell you (probably real estate or stocks).

When "the government" starts bulldozing entire tracts of houses -- and they will at some point -- in an attempt to do SOMETHING about chronic and persistent housing oversupply and blight, we'll start talking about "the bottom." Until then, there is no bottom.

3. "I can't get financing." Each month will bring additional categories of loans lenders will no longer be willing to make. For example, financing for condominiums (except within mature, well-established projects) is already almost impossible to get, which is sure to knock condo values down another 30-40%.

The Fed may lower short-term rates, but as we're learning, that doesn't mean lenders will follow suit. Now that they're back to imputing risk, they want higher returns, and the only way to achieve that is to raise interest rates, no matter the Fed. Truth is, the Fed has little to do with market interest rates for real estate.

4. Banks will be under more pressure, and bank failures will follow. When the stock market's countertrend rally is finished and the summer/fall dive in the market takes hold, the cover story will likely be centered around failing financial institutions -- large and small -- and the "We Don't Have Enough Fingers for the Dike!" Fed. As one leak is plugged, three more will appear, and market confidence will be shattered as all major asset classes fall in value at roughly the same time. Nothing like a major headline run on the bank (or several) to get Americans heading into full-on depression mode.

5. The "Wealth Effect" will morph into the "Broke Effect." The U.S. economy boomed and the stock market benefited from artificial, Fed-induced 2003-2007 reflation, mostly because folks felt wealthy due to phony home value "increases." This meant boomtimes in real estate, a seemingly healthy economy, further expected value increases, little incentive to save and an American cultural rush to "borrow to buy things." Now that home equity is disappearing by the day, homeowners saddled with too much debt feel ever poorer, not wealthier, and they'll do what most people do when they feel broke: They'll watch every penny and say no to more debt.

6. Consumers will spend less with each passing month. The downturn in retail sales will become increasingly pronounced and force scores of bankruptcies in the retail sector. Face it, cash-strapped Americans, getting clobbered each week by the high cost of food and gasoline, forced to buy things with money they don't have (I'm talking cash, not disappearing credit), and already saddled with too much debt, have no choice but to snap shut their pocketbooks. More importantly, they're in the process of discovering that almost any discretionary purchase will cost them less next year. Discount retailers might weather the storm, but the more optional the purchase, the worse-off the retailer will be.

Obviously, retailers who opened outlets from coast to coast to take advantage of the borrow-to-buy-things spending spree of 2003-2007 will not be able to withstand such a striking reversal of fortunes. Look for going-out-of-business sales, sudden store closures, an epidemic of empty storefronts and rashes of bankruptcies (including a few "headline" big box names). Shopping mall and shopping center values will quickly get clobbered.

7. The commercial real estate value decline will intensify. The homebuilding index led the way downhill in 2005 and home values soon followed suit; the same is now true in the commercial real estate game. Values on the commercial side have held up fairly well through the 2nd half of 2007 but commercial and office REIT's are now getting hammered (there's your fair warning) and the commercial mortgage sector is in the process of joining the growing default party. Seasoned real estate investors are increasingly willing to wait on the sidelines; they see the handwriting on the wall and are happy to look for better deals. They MAY buy, but only at risk-premium discounts (i.e., higher capitalization rates) and that means lower prices.

As real estate deflation takes further hold, no commercial real estate category will be spared. Current investors will have their own problems to deal with (rising vacancies, lack of fresh leasing interest and declining rents) and they'll lose interest in buying until THEY think the shakeout is complete.

Interestingly, apartment rents have increased solidly in 2007 and into 2008 as housing sales have come to a standstill and folks choose to rent (or have to), but that trend will reverse itself soon enough. The last time the U.S. experienced a deflationary depression, residential rents fell for 18 consecutive years. Expect the same or worse this time around. The market has held up fairly well for residential income property, but it won't be immune to deflationary real estate forces. If you don't sell your residential income property given everything you know now, you'll have no one to blame but yourself as values decline and management headaches multiply. It's still a very good time to get out.

8. U.S. real estate deflation is now the world's real estate deflation. To make matters worse, much of the rest of the Western world is now experiencing the same, steep housing price drop/credit crunch. Real estate deflation has arrived on a worldwide scale and the pressure on the global economy and banking will be too great to hold back the spreading deflationary forces. Central bankers cannot and will not control the outcome, try as they might to slow it down during the plague's early stages.

9. Yes, your area will be hit, too. It's just a matter of time. Each passing month brings another state or two -- and more counties within each state -- afflicted by real estate and credit deflation. It's only a matter of time until the cancer spreads. First off, the number of sales in less-impacted areas is down substantially (fewer stupid buyers willing to pay last year's prices). Second, instead of "discounting to sell," frustrated but well-heeled sellers just take those properties off the market while they "wait for things to rebound and prices to go back up;" so entrenched is their view that values will keep going up, with occasional pauses along the way. In this case, it'll be like waiting for Godot.

10. Stock markets around the globe will face ever-more downward pressure, dragged down by real estate and banking woes in the United States and beyond. When the real estate pain becomes bad enough, those markets will crash, too. Will a stock market crash cause a bigger real estate crash, or vice versa? The answer is yes.

It doesn't really matter which is the chicken and which is the egg. With credit and real estate markets collapsing worldwide, a woeful lack of consumer confidence, ever-greater effects on the consumer and the economy (not to mention employment), people will be in no mood to buy stocks. There might be a countertrend rally or two yet to come, but the late-2007 "top" is in and the post-triple-bubble deflationary drift will be overwhelmingly down. When the majority of people realize that the global economy has no chance of turning itself around, the United States stock market will crash and world markets will follow, causing real estate and other asset values to ratchet down even further.

11. Local and state governments and school districts, already under pressure, will feel the crunch more each day, and deficits, layoffs and bankruptcies will follow. Declining property values + far fewer transactions = significantly less revenue for state and local governments. It will be interesting to watch overtaxed and cash-squeezed citizens battle state and municipal entities as politicians try to float more bonds and work to raise taxes and fees in order to offset huge reductions in revenue. Meanwhile, necessary layoffs and budget cuts in the public sector will just add to the post-bubble, deflationary pressure.

12. One bad thing leads to five others. Falling home prices will affect confidence which will affect buying psychology which will affect home sales which will affect the economy which will affect employment which will affect creditworthiness which will affect availability of credit which will affect earnings which will affect stock values which will affect social mood which will affect employment which will affect consumer spending which will affect home prices which will affect confidence which will affect buying psychology which will affect home sales which will affect.....Ah, hell, you get the picture.

If your neighbors can't connect the dots by now, there's really not much hope for them. I'm just glad you're here, reading stuff like this, taking good care of the eggs in your basket. Risk is everywhere, and something inside of you is telling you to be alert to the possibility. You're in a very select group, and I applaud you for it.

Look for our next update, coming soon to a computer screen near you. Your readership has been -- and is -- most appreciated.

 


 

Steve Moyer

Author: Steve Moyer

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 © 2005-2010 Steve Moyer

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TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/