Real Estate and Asset Deflation 10: Ballgame Over

By: Steve Moyer | Fri, Aug 10, 2007
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When those of us at started writing about "the coming asset deflation" in May of 2005, my, my, did our mailboxes fill up with, "Boy, are you ever wrong. The Fed will make sure these bubbles go on forever, stupid!" emails. Still, we had our small, rather quaint following of "fans."

And a motley group we were indeed!

As we developed our argument and saw our stuff get increasingly picked up by financial websites around the world, our "real estate deflation/credit contraction/liquidity crunch will sink all boats" theme took hold and the overwhelming majority of respondents began moving into our camp. Now we receive a stream of emails from readers demanding an update, wanting to know where things will go from here, and/or trumpeting their decisions to get out of (name almost any asset class) while the gettin' was good. Most now think that asset deflation has taken hold. In two years' time, the worm has certainly turned.

That's probably because, um, for the record -- we were right., 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…I am referring to the coming Big Kahuna - a contraction in credit that, once its psychology takes hold, will change the rules of the asset game for at least a decade.

Update: Indeed, I hope you heeded our advice to sell in May of 2005. That happened to be the absolute peak of the real estate market, give or take a 60 day escrow or so. And that Big Kahuna is now moving relentlessly through American markets, one neighborhood at a time., June, 2006: 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. (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 (in this case, I'm referring to the initial 80% crash of the NASDAQ, which took place from 2000 to 2002).

Update: You do realize that there really was no "NASDAQ Crash" recovery at all, right? If not for our idiot Fed's sponsored-borrowing/lending orgy (1% discount rates do have a way of getting people to run around naked and drunk), our post-bubble shakeout would have been painful, yes, but relatively short-lived. Instead, by carelessly adding real estate and credit bubbles to the mix, the Greenspan Outcome is going to be much more devastating and possibly decades long. Meanwhile, despite the massive liquidity pumped into the system by Alan Greenspan's Merry Men, the NASDAQ barely made it back to 50% of peak 2000 value., June, 2006: Using history as our guide, our call is for a grinding asset deflation, a painful credit contraction, a potentially severe liquidity crisis (exacerbated by our country's currently negative savings rate) and an astonishing percentage decline in real estate values over the next ten years.

Update: 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 very eyes. Credit markets worldwide are seizing up and major financial institutions around the world could soon be going bankrupt., June, 2006: If you currently hold investment real estate, it will likely serve you well to sell it immediately. Those who work to eliminate debt and maintain safe cash positions in the coming environment will see the buying power of that cash increase substantially relative to other asset classes, and those investors will eventually position themselves to buy assets at substantial discounts.

Update: The credit market meltdown has already dampened buying psychology, and remaining, unaware, knuckleheaded buyers are finding purchase loans ever-more-difficult to come by as lenders clamp down. If you stayed in the investment real estate game, you've already lost money from peak values and it's only going to get worse. Properties placed on the market tomorrow will likely languish and buyers will demand discounts of as much as 20% versus prices achievable just a few short months ago., August, 2006: Homebuilders are catching on, offering free custom upgrades or extras or free swimming pools, even showcasing "$50,000 discount days." Americans are backing out of contracts. They're "waiting 'til the price comes down." They're demanding lower prices and, by George, they're getting them. And it's only the beginning. Wait until everyone catches on that if you wait six months or until next year, the prices will be lower still. Wait until this deflationary psychology takes hold completely.

Update: The Homebuilders Index began its retreat in July of 2005 and it has essentially crashed at this point. Huge quarterly profits have turned into massive quarterly losses in one year's time and companies like D.R. Horton, Standard Homes, Lennar, Pulte, and Beazer Homes are refusing to offer earnings guidance, walking away from huge deposits and swimming in red ink. Incentives are everywhere, "25% off!" sales are the rage and some builders are even trying to finance their sales with their own goof-ball mortgages (and we're supposed to believe that median prices are down 0.6% year over year!). 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., August, 2006: 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.

Update: 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., September, 2006: 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.

Update: These words ware starting to dominate the evening news, so while we're at it, let's add a few more to the list: default, contagion, dislocation, credit crisis, stock market crash, real estate "crash," derivatives, halted withdrawals, bank runs, REO's, systemic risk. I could go on., September, 2006: If you have leveraged anything, it is time to de-leverage -- now!

Update: That is never more true than today. Don't wait a minute longer to get yourself out of any and all leveraged positions., April, 2007: Robert Prechter, Jr.: "If people and corporations are unwilling to borrow and unable to finance debt, and if banks and investors are disinclined to lend, central banks cannot force them to do so. During deflation, they cannot even induce them to do so with a zero interest rate. Thus, regardless of assertions to the contrary, the Fed's purported "control" of borrowing, lending and interest rates ultimately depends upon an accommodating market psychology and cannot be set by decree. So ultimately, the Fed does not control either interest rates or the total supply of credit; the market does."

Update: Unfortunately, the Fed is already powerless to do much of anything. This is a multi-trillion dollar problem and market participants simply will not have the appetite to borrow, buy or lend., March, 2007: Ordinary Americans -- statistically with zero savings and previously able (and optimistic enough) to borrow whatever they needed not only to buy houses but goods and services -- will be hard-pressed to borrow more and frankly, in a declining market, not at all in the mood to do so. 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. With no savings to support the average American's rapidly-evaporating net worth, people will stop spending, stop borrowing and stop hiring as they hunker down for the coming deflationary depression.

Update: 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., March, 2007: 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.

Update: Tune out the CNBC cheerleading or government statistics that attempt to assuage your concerns. Trust your instincts. Bookmark our site and keep an eye out for our weekly market updates. Post comments on our forum. Log on to each day to catch up on financial market headlines. Remember, those cheerleaders don't give a whit about you and they won't be there to help when you lose your assets., March, 2007: 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.

Update: It's truly a perfect storm for real estate: Credit market dislocations, mortgage-backed securities disruptions, tightening lending standards, too much consumer debt, too little consumer savings, zero pent-up demand, rampant foreclosures, excess homebuilder inventory and the unfolding coup de grace -- severely damaged buying psychology., March, 2007: Eventually, everyone will come to the realization that 1) just like when the NASDAQ bubble burst back in 2000, real estate values are going down, down, down, then 2) that this time it's not a "normal real estate cycle" but instead a relentless, post-bubble and post-bubble-bubble real estate deflation that we expect will have no historical rival.

Update: Don't underestimate the unfolding change in psychology as pertains to real estate. As the crisis takes full hold, it will soon be broadly accepted that "real estate is a bad investment." We expect the asset class to fall completely out of favor, and possibly for a generation.

Update:, March, 2007: I applaud you for being here now, keeping an open mind and putting yourself in position to salvage your family's finances. If so, we will still buy you a beer and give you a hearty and well-deserved pat on the back when the time comes. For you will be one of the true survivors.

Update: If you ask me, you're a certifiable APS (Asset Preservation Stud), just for reading this right now. And, if you've played your cards right already (or do so now), you'll not only survive -- you'll prosper. Bookmark us at and we'll do our best to help you keep what you have. Don't forget: There's plenty of money to be made on the other side.



Steve Moyer

Author: Steve Moyer

Steve Moyer,

Steve Moyer is a columnist and assistant editor of the monthly newsletter, Ponder This.... ( He has been an investment real estate broker since 1982. Contact Steve at

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