How Close is a Real Estate Meltdown?
Are we to a "housing bubble" meltdown? Are we going to see the real estate boom reverse and turn into a real estate bear market anytime soon? Will 2006 see the onset of declining property prices on an intra-regional basis? In short, I think we'll find the answers to at least the first two of these questions will be answered in the negative. For select regions, however, there will be rather pronounced slowdowns in construction and housing sales that may seem like the bubble has burst, especially when compared with the high growth rates of the previous 3-4 years. We'll discuss some of these regions here.
The latest report on the housing sector showed new home sales for the nation tumbling 10.5 percent in February, according to the Commerce Department on Friday, Mar. 24. This represents the biggest one-month drop in nine years.
Foreclosures were up 13 percent during February, according to RealtyTrac, which said 117,259 properties nationwide entered some stage of foreclosure in February. That's 68 percent higher than a year ago, and one foreclosure for every 986 households. It's the third straight month of higher foreclosures and the second above 100,000 (Georgia had the highest foreclosure rate according to an article appearing in the March 23 Investors Business Daily).
The slowdown/leveling off process predicted in my book "America's Housing Bubble" for 2006 seems to be materializing, part and parcel with the 8-year cycle bottom scheduled for this year. But this should only be a temporary slowdown and not the beginning of a serious crisis or severe housing market downturn.
Some real estate markets will undoubtedly be weaker than others. For example, my friend Robert Campbell, in his Campbell Real Estate Timing Letter (www.SanDiegoRealEstateReport.com), writes of the rather large slowdown in the San Diego market since his timing indicators gave a sell signal last August. In a recent newsletter he wrote, "...San Diego, Orange County, and Los Angeles housing prices have peaked and are now starting to roll over to the downside." He points out that existing home sales for the SoCal area hit a five-year peak in June '04 and have declined steadily since, along with new home building permits. He also points out the recent price reductions in the asking prices of all major SoCal listed properties (between 25-30 percent).
Yet other property markets, particularly east of the Mississippi, aren't slowing down as much. Some even continue to expand, albeit at a much slower pace than the past couple of years. This will probably be the extent of the housing slowdown for '06 for most regional markets, i.e., a slowing of the rate of change (momentum) but not necessarily a major reversal. The demand for Southeast coastal property is actually increasing, however, and is projected by experts to continue to remain strong for the next few years.
Another area of the real estate market that is worth watching is the market for multifamily and rental properties. In his book "The Next Great Bubble Boom," author Harry Dent forecasts that these two markets will be the next hot spots in real estate. Judging from what I've seen here in the coastal Carolinas in the past few years, I believe Dent is correct in his guesses about the rental market boom.
As far as multifamily housing, this appears to be a good "guestimate" since the latest sales and building trends show a definite increase in the multifam market. For instance, an article appearing in today's (Mar. 27) Boston Globe reported that in the Metropolitan Boston area multifamily construction is outpacing single-family housing. Elsewhere, the multifam market is described as "white hot."
Southeast coastal real estate continues to boom and should continue to do so for the rest of this decade. Property markets all along the southern Atlantic coast are gearing up for even more development as the first wave of Baby Boomer retirees hits in 2007. Florida will continue to be a huge beneficiary of the Baby Boomer property bubble as the state is bracing for an even bigger influx of retirees from other states in the next few years. According to Donald Rowe of the Wall Street Digest, "The state is reviewing infrastructure plans to accommodate an influx of approximately 600,000 people annually for the next 20 years. Florida has no income tax and no inheritance tax....Because of the low taxes, sunny beaches and more golf courses than any other state, more people move to Florida and bring more of their wealth with them than to any other state."
Who controls much of the real estate in this country? Many would be shocked to discover the vast amount of lands and commercial and private buildings owned by foreigners, particularly Arabs. According to the Cape Cod Times foreigners now own 1.53 trillion dollars worth of factories, office buildings and investments. European nations control two-thirds of direct investments in the U.S. and the Middle East controls 9.3 billion dollars worth of direct investments.
With fresh gains from the oil bull market, Middle East investors are now looking toward the U.K. to invest their wealth. An article appearing in the May 2 edition of the Financial Times of London illustrates this point. It was stated in it that a consortium of Middle Eastern investors is poised to buy one of London's most prominent office buildings this week, the Shell-Mex House on the Strand. The article went on to say that Middle Eastern money accounted for 11 percent of the total foreign investment in U.K. commercial property, compared with just 4 percent in 2004.
Foreign investors are salivating over the prospects that the U.S. real estate prices will come down at least somewhat this year in certain regions so they can step in and buy up prime locations as the trend toward foreign ownership continues to accelerate. This is another reason why the bubble won't be allowed to collapse outright.
Another "psychological support" to keep the real estate market from crumbling prematurely is the fear of a real estate collapse itself. This fear manifests itself in many ways, including in the headlines of newspapers. We see examples of the fear of an impending real estate collapse in the news all the time and it continues to grow with each passing month. The amount of fear expressed in these news items is in part reflected in the Financial Times Fear Index, shown below, which measures the number fear-laden news headlines minus the headlines reflecting optimism on the financial outlook.
It is not in the best interest of the nation's financial controllers to see real estate prices collapsing within the critical 2006-2009 time frame. Although the real estate bubble could see some "air" escaping during this time, the overall bubble probably will not burst until the last of the longer-term cycles peak in 2009-2010. Any slowdown in real estate will eventually be met by eager buyers waiting in the wings for the slightest downturn, and that will provide support for the market. Real estate is historically weaker during the year of the 8-year cycle bottom (the next bottom is in 2006). With the lifting of pressure from the 8-year cycle later this year, real estate will likely turn up again and continue its uptrend as the recovery in stocks and the bull market in commodities builds momentum.