Real Estate Bubble Deflation Blues
Real estate continues to deflate. More simply put, prices of homes continue to go down.
In a 10/28/09 Wall Street Journal op-ed, Jeremy Siegel, professor of finance at U Penn's Wharton School, famous in investment circles as the author of "Stocks For The Long Run," gives us some perspective on the real estate bubble that blew up between 2000 - 2006: home prices rose 88.7% vs. rise in the consumer price index of only 17.5% and in median income of only 1%.
Looked at this way, you can get some idea of the size of the real estate bubble. And I hope you can understand that we're not going to just "bounce back" to "normal" in the real estate market anytime soon.
For some people, this isn't a huge problem. If you bought a home many years ago, the value of your home is probably much higher than what you paid for it. On the other hand, if you bought a home (or a condo or co-op) during the bubble years, you may have significantly overpaid for it. Now you've got a piece of property that's declined in price and may not regain its purchase price for...well, for how long?
Ah, that's the thing we don't really know. But here's one comparison that may shed some light.
Japanese real estate blew up into a gigantic bubble in the 1980's - even greater than our own. It began to deflate in 1989. In fact, real estate in Japan is still deflating 20 years later!
I don't think real estate here will deflate for 20+ years as it has in Japan, if only because our bubble wasn't as huge. But I would also be skeptical of any "signs" that things are turning around, or might turn around anytime soon.
One way to gauge the progress of the deflating real estate bubble might be to look at the mortgage market. After all, so many Americans have mortgages on their homes, the mortgage market and the value of real estate work hand in glove. And that's where you can see an ongoing problem for at least the next couple or years.
While the subprime market problems is now more or less behind us, there are gobs of Alt-A, Option Arm, and "prime" mortgages that are picking up the slack. By slack, I mean that we can reasonably anticipate millions of home owners with these mortgages facing foreclosure starting in 2010, and extending into 2011.
The Alt-A's are basically mortgages where people didn't have to produce much, if any, documentation. The prime are what the name implies: people who were well-qualified according to the standards at the time, and who provided documentation to back up their claims.
Why should those "prime" mortgage holders be having problems? Simply this: they bought at the very top and the value of their homes is now significantly below the purchase price. Worse, if the mortgages were "teaser rate" type mortgages (artificially low initial interest rates), the re-set of those rates will now raise their monthly payments. And the final nail in the coffin: unemployment continues to go up, and many of these folks have lost their jobs and can't pay the mortgage.
Can you see why the real estate bubble deflation blues will continue for the time being?
In a 10/28/09 Wall Street Journal op-ed, Jeremy Siegel, professor of finance at U Penn's Wharton School, famous in investment circles as the author of "Stocks For The Long Run," gives us some perspective on the real estate bubble that blew up between 2000 - 2006: home prices rose 88.7% vs. rise in the consumer price index of only 17.5% and in median income of only 1%.
Looked at this way, you can get some idea of the size of the real estate bubble. And I hope you can understand that we're not going to just "bounce back" to "normal" in the real estate market anytime soon.
For some people, this isn't a huge problem. If you bought a home many years ago, the value of your home is probably much higher than what you paid for it. On the other hand, if you bought a home (or a condo or co-op) during the bubble years, you may have significantly overpaid for it. Now you've got a piece of property that's declined in price and may not regain its purchase price for...well, for how long?
Ah, that's the thing we don't really know. But here's one comparison that may shed some light.
Japanese real estate blew up into a gigantic bubble in the 1980's - even greater than our own. It began to deflate in 1989. In fact, real estate in Japan is still deflating 20 years later!
I don't think real estate here will deflate for 20+ years as it has in Japan, if only because our bubble wasn't as huge. But I would also be skeptical of any "signs" that things are turning around, or might turn around anytime soon.
One way to gauge the progress of the deflating real estate bubble might be to look at the mortgage market. After all, so many Americans have mortgages on their homes, the mortgage market and the value of real estate work hand in glove. And that's where you can see an ongoing problem for at least the next couple or years.
While the subprime market problems is now more or less behind us, there are gobs of Alt-A, Option Arm, and "prime" mortgages that are picking up the slack. By slack, I mean that we can reasonably anticipate millions of home owners with these mortgages facing foreclosure starting in 2010, and extending into 2011.
The Alt-A's are basically mortgages where people didn't have to produce much, if any, documentation. The prime are what the name implies: people who were well-qualified according to the standards at the time, and who provided documentation to back up their claims.
Why should those "prime" mortgage holders be having problems? Simply this: they bought at the very top and the value of their homes is now significantly below the purchase price. Worse, if the mortgages were "teaser rate" type mortgages (artificially low initial interest rates), the re-set of those rates will now raise their monthly payments. And the final nail in the coffin: unemployment continues to go up, and many of these folks have lost their jobs and can't pay the mortgage.
Can you see why the real estate bubble deflation blues will continue for the time being?
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