Monday, June 25, 2012

How Long Before Housing Turns Around? Long.

How long before the housing market turns around?  If history is any guide, at least another five years.

In the media you hear lots of idiotic things and also idiotic comments from citizens.  Many are in wonderment why their homes don't immediately turn around in value, and want to "blame" someone for the housing market not re-igniting its rocket.

But that is idiotic.  It would be akin to blaming the banks or government for the rain.  They have no control over it - despite what you may think.

Just as they had no control over the housing bubble.   Housing prices skyrocketed in the 2000's because 330 Million people believed they were going up.   Banks can offer funny loans all day long, it takes a boatload of consumers to think a simple house that sold for $150,000 a few years ago is now worth $500,000.

Market values are determined by markets - not banks or governments, period.

And this is why your government or the banks also can't re-ignite the housing market.  A market depends on the values and perceptions of the players, and for the next few years, most players are not going to be rushing off to pay too much for a house.

And that basically is the problem, right there.

And I can say this with authority, as we saw this same pattern after the last Real Estate Bubble, in 1989.

In case you weren't born then, or were still young and pissing your pants during those years (or like most Americans, just conveniently chose to forget), what happened in the years 1985-1989 was a run-up in Real Estate prices, in many markets on the order of 20-30% per annum, or more.

Stop me if this sounds familiar.  And no, the Real Estate bubble of 2009 wasn't "different" in any respect.  Bubbles are bubbles.  The Gold Bubble of today is the same as the Gold Bubble of 1982.  They are all alike, no one is unique.

Anyway, in 1989, the bubble burst - housing prices went up so far as to be unsustainable, and "suddenly" people realized they could not afford a house, and moreover, it was cheaper to rent.  And like a cascading set of dominos, the decrease in demand - albeit very slight - sent shockwaves through the market.   Condos and townhomes were hurt the worse- often plummeting by 30-50% or more.

In the next few years, the market was pretty quiet, even as interest rates eased (our mortgage, in 1989, had a rate of 11.625% if you can believe that!).  People were afraid and had a good reason to be afraid.   I had friends who lost what little they had saved.  One buddy had to bring $10,000 to the closing table to sell his condo.  He lost his down payment (they used to have those, back then) plus ten grand - close to $30,000 over all - enough to buy two brand new Camrys, back then.  For a guy in his early 30's, this was pretty devastating.

But it didn't turn around in 1990, or even 1991.  And 1992 came and went and the market was still stagnant.

In 1995, I bought a distressed property in Old Town Alexandria, for $210,000.  It was on the market for $425,000 and even at that price, didn't represent all the money the previous owners had thrown at it in remodeling.

Now bear in mind, this was six years after the meltdown of 1989.   And I was able to finance this on a "nothing down" deal at 9% (again, rates were much higher then than today!).

I bought my next property in 1997, a foreclosure sale that sold for $95,000, which was $35,000 less than the balance owed on the mortgage.    Now, this is 1997 we area talking about - and foreclosure properties were plentiful even then - we had bid on several at the time.

We bought our last distress-sale property in 1998 - a condominium that a Stewardess sold us for less than she paid for it.  Why did she do this?   There were no other buyers, period.

That was 1998 - nearly a decade after the 1989 bubble burst!

By 1999, things started to turn around.  We found ourselves being outbid on some properties, or losing them because we didn't jump on them right away.   And increasingly, we got nervous, as a lot of amateurs started getting into the game after reading articles in the newspaper about how home prices were going up.

In other words, it was amateur hour, with Joe Consumer doing what he does best - jumping on whatever the TeeVee said to do - buying Apple stock after  it went up to $600 a share, buying gold after it went to $1900 a share, buying houses after they shot up in value.   Buy High, Sell Low - the middle-class road to bankruptcy!

Why consumers do this, is beyond me.  When something goes up in value that is not a sign it will continue to go up but more likely that it is due for a decline.  The trick is to buy before it goes up in value, not after the major gains have been made.

But whether it is houses, gold, or Apple stock, what ends up happening is that yes, there is still some headroom left  in pricing.   So the commodity goes up another notch, and Joe Consumer says, "See! I told you this was a good deal!" and they start talking about plebeian houses being worth a Million, or Apple Stock going to $1000 a share, or gold hitting $5000 an ounce.

But of course, this is just fantasy.  And by 2005, I was getting very nervous and started selling out.  I sold some properties before the peak, some right at the peak, and some after the peak.  Overall, I did well, mostly because I bought in the 1990's - and not in 2005.

So what does this mean for this time around?

Well, there are three things that are different today than in the past.

First, housing prices went much further up in this bubble than in the last.  So we have a lot farther to fall, to be sure.  This may extend our housing depression for longer than the post 1989 depression.

Second, our demographics are narrower - we do not have a widening base of home buyers, but rather a cylindrical age "pyramid" (which is no longer a pyramid).   So demand for "first time home buyers" may be slack (and you are still against immigration?  Brilliant!).

Third, our interest rates are at staggering all-time lows - which could jump-start the process, provided you qualify for a loan (and those of us who got out early, qualify, don't we?).   However, a smart investor isn't going to buy a place unless he is convinced the price is not going to drop further, and moreover that he can make money from it - rent it for more than the carrying costs.

In many markets, even at sub-4% interest rates and skyrocketing rents, this has yet to happen.

And that is one reason I am staying out of the market.  There is a duplex for sale here on the island that appears to be attractively priced (but needs a lot of work).  It could be made into a vacation rental and rent easily to vacationing Canadians by the month in the winter, and local good-old-boys by the week, in the summer.

But cranking the numbers on it, I can't see it being that profitable, even at an "attractive" price.  And the local investors seem to agree - staying away from the property in droves.   It would have to drop another $30,000 to $50,000 before I could see myself buying it.

And frankly, at this point in my life, the last thing I need to be doing is gambling a quarter-million dollars on a risk-taking venture.   And I suspect a lot of others in this country feel the same way, as they age.

And there will be more bargains on the market in the future - a lot of people are foolishly trying to "hang on" to upside-down properties, often cashing in their life's savings to do so.    They will eventually give up, and, utterly broken, let their homes go to foreclosure in 2014 or 2015.   That was, of course, their choice.  Myself, I would have bailed out from the get-go, before ever, ever touching my life's savings to save a house.

It has been about three to four years since the market crashed (depending on which point in time you want to pick as the nadir  - 2008 or 2009).   I suspect that, even with ultra-low interest rates, we will be seeing foreclosure sales well into 2012 or 2013 at the very least.  And I suspect we won't see big gains in Real Estate prices until about 2018 or 2019, if history is any guide.

So, if you are cashing in your 401(k) to make mortgage payments on your house, on the premise that "any day now" the demand for end-unit townhomes in Foreclosure Mews Estates will skyrocket, think again.  You will have the better part of a decade to wait.   And cashing in your savings to keep a possession is idiotic.  Completely idiotic.