Real Estate Update
House prices have slipped below the low they hit after their first terrible downturn in 2007-2008. So it looks like those who claimed we were headed for a "double-dip" in real estate - at least in residential real estate - were right.
Back in December 2010, I commented on Moody's economist Mark Zandi's view that real estate was going to head up. I disagreed. It's not so important that I was right and Zandi was wrong. But the two factors that informed my opinion are important.
The first factor wasn't mentioned in my comments. It's simply that economists like Zandi - in my experience - tend to be overly-optimistic. I'm not sure why Zandi, who works for Moody's, would be overly-optimistic about real estate, but in my mind he clearly was. Maybe what he was doing was projecting an optimistic view of the near-term future of housing because he's generally optimistic about the economy as a whole. I don't know. But his reasons for thinking that housing was heading up were strained, in my opinion.
I think most of the economists hired by Wall Street firms, or companies that service Wall Street firms, tend to paint a rosey picture all the time is because Wall Street firms - and therefore companies that service them, like Moody's - make more money when people feel good about the economy. When people don't feel good, they pull back and save money. When they feel good, they spend their money. One of the things they spend it on are the investment products that Wall Street creates. They do that because they figure they'll make more money than if they just keep their money in savings. When they don't feel good - optimistic that is - they just want to keep their money "safe" in something like a bank savings account.
The second factor I did mention in that December post. It was that when items correct, after a big run-up, they don't just settle back to where they were before they ran up, but they tend to "over-correct." In the case of housing, if prices were about where they were before the big run-up - as Zandi claimed - then I thought they simply hadn't declined enough. At least they hadn't declined "enough" based on past experience.
If I was right about this then - and now - then what we can expect going forward is a continuing drop in the price of residential real estate. That would include one-family homes as well as multi-family units. There is the possibility that prices don't drop too far down, but just stay flat, too. If they do that, then I would think they would stay flat for quite a while - that is for years. How many years? I don't know for sure, but a guess would be 5 - 10 years. Maybe more. When the Florida real estate bubble burst in the 1920's, homes in Florida - after an initial big decline - stayed flat until the 1950's. Now that's a long time! I'm not saying U.S. residential real estate will stay flat for the next three decades, but you really can't just count that out as a possibility.
Back in December 2010, I commented on Moody's economist Mark Zandi's view that real estate was going to head up. I disagreed. It's not so important that I was right and Zandi was wrong. But the two factors that informed my opinion are important.
The first factor wasn't mentioned in my comments. It's simply that economists like Zandi - in my experience - tend to be overly-optimistic. I'm not sure why Zandi, who works for Moody's, would be overly-optimistic about real estate, but in my mind he clearly was. Maybe what he was doing was projecting an optimistic view of the near-term future of housing because he's generally optimistic about the economy as a whole. I don't know. But his reasons for thinking that housing was heading up were strained, in my opinion.
I think most of the economists hired by Wall Street firms, or companies that service Wall Street firms, tend to paint a rosey picture all the time is because Wall Street firms - and therefore companies that service them, like Moody's - make more money when people feel good about the economy. When people don't feel good, they pull back and save money. When they feel good, they spend their money. One of the things they spend it on are the investment products that Wall Street creates. They do that because they figure they'll make more money than if they just keep their money in savings. When they don't feel good - optimistic that is - they just want to keep their money "safe" in something like a bank savings account.
The second factor I did mention in that December post. It was that when items correct, after a big run-up, they don't just settle back to where they were before they ran up, but they tend to "over-correct." In the case of housing, if prices were about where they were before the big run-up - as Zandi claimed - then I thought they simply hadn't declined enough. At least they hadn't declined "enough" based on past experience.
If I was right about this then - and now - then what we can expect going forward is a continuing drop in the price of residential real estate. That would include one-family homes as well as multi-family units. There is the possibility that prices don't drop too far down, but just stay flat, too. If they do that, then I would think they would stay flat for quite a while - that is for years. How many years? I don't know for sure, but a guess would be 5 - 10 years. Maybe more. When the Florida real estate bubble burst in the 1920's, homes in Florida - after an initial big decline - stayed flat until the 1950's. Now that's a long time! I'm not saying U.S. residential real estate will stay flat for the next three decades, but you really can't just count that out as a possibility.
Comments