What If Real Estate Goes Nowhere For Years?

If you thought real estate "always goes up," you've been in for a real surprise in the last few years. It's down 20%, 30% or more, depending on what part of the country you live in.

Lately, we're hearing that real estate's turning around. Is it really? Or is going to keep falling? I don't know. But I think asking this simple question - What if real estate goes nowhere for years? - is important. This applies to you if you're looking for bargains in real estate now, or if you bought real estate during the height of the bubble in 2002-2006.

If you’re looking for a bargain, don’t make the assumption that you’ll buy low and watch your “investment” rise. Take this question very seriously.

Why? All you’ve got to do is look at how blown up the real estate bubble became. Prices were so far above the normal average, they broke all previous records. Real estate became more overpriced than ever.

So the first thing to be aware of is that when a bubble of epic proportions breaks is that the prices will collapse way past normal – and may go down farther than real estate prices ever have…and then stay there. I'm not saying it will happen. I'm saying it's not something that should surprise you.

When real estate collapsed in the Great Depression, the prices had not been bid up as far in the 1920’s as they were in the early 2000’s. In the 1930’s, prices plummeted and stayed there until the 1950’s – almost twenty years in many places.

Again, that doesn’t guarantee it’ll happen that way now. But it does say that there are good reasons to consider the possibility something similar may happen now.

Those who bought near the top are in a tougher bind. If you’ve got a mortgage that’s worth more than the property, it’s tough to hang on and pay that monthly mortgage payment. But it may be your only choice unless you want to sell at a loss (and pay the bank more than what you can sell the house for) or stop paying and let the mortgage go into foreclosure – which will do a number on your credit rating.

Every situation is different, but there are solutions. For example, if the property’s a rental and the rent covers all your expenses (mortgage, taxes, upkeep, etc.) – and we mean ALL – you might hang in there. One thing you may want to check on, though, is what is your “opportunity cost” of holding the property. That requires you to calculate what you would make if you sold the property today and invested the proceeds wisely for a period of time. Of course, if you take a loss on the sale of the property, you’ve got to factor that into your calculations too (what you would have made on the money you lost). It’s not a simple analysis and easily varies significantly in individual circumstances.

I would add this: it’s possible that government “reflation” policies might push real estate up in the coming months, even years. But reflation efforts can easily reverse in the future. If reflation does push real estate up, and you bought at the top of the market, you might consider selling – before the property goes back down again.

If you’re looking for a bargain, I’d estimate that the best situations would be for those looking to find a place to stay. For those who are looking for an investment speculation, it's another story.

For those looking for a relatively permanent residence, the next couple of years may present some bargains – but I'd consider putting down at least 20%, and making sure mortgage rates are low - like at or below 5% for a 30-year fixed rate mortgage. This way if the price continues down from where you bought, you won’t sink into negative territory on your home equity.

As for investment speculation, we think it’s quite speculative, to say the least. Buying property in the U.S. (and many other places around the world) is simply not the best allocation of your scarce resources at this time.

To put it simply, real estate doesn't go up automatically every year. Why you thought this before, I can't say. But I hope you do see it was a mistake. And I hope you understand that real estate may not be the best investment now or for a while - maybe a long while.