Real estate has definitely not bottomed in the U.S., and probably not anywhere else either. You have to take a long-term view of this. At this point in time I am completely uninterested in speculating in U.S. real estate – and I don’t foresee being interested for at least five years. I reserve the right to change my mind, but I think it’ll be at least five years. Words: 1340
In further edited excerpts from the original article* Doug Casey (www.internationalspeculator.com) goes on to say:
Through most of U.S. history, residential real estate was not viewed as an investment. You didn’t buy a house to make yourself wealthy selling it to someone else. It was viewed as an expensive consumer good that depreciated – you bought or built a house to live in it, just as you bought clothes to wear or a horse to ride. It was just a part of life – a necessity, a convenience, but an expense.
Then, especially just after World War II, the government started to institutionalize mortgages, which is to say, add huge leverage to the housing market. That’s what has transformed houses into speculative vehicles. That trend has been building momentum over the decades, as more and more debt was centered on real estate. Mortgages turned into commodities futures contracts. It was a huge change from the days where you knew your banker, he knew you, and he was lending his own money.
The result has been a huge amount of overbuilding, in residential, office and retail commercial real estate. It’s going to take years and years to work this off. In addition, the entire psychology of the market has changed.
I don’t believe this recession is going to end the way all the other post-WWII recessions have – with a new and bigger boom. This is a major, secular turning point. It’s not just another cyclical low to use to load up for the next run up.
Economic Depression is Coming
I think the economic depression we’re embarking on now – a depression being a period of time in which the average person’s standard of living drops significantly – will be much worse than the one in the 1930s. We can look at how bad things got then, as a minimum guideline for when to start looking for a bottom.
Lower Residential Real Estate Prices
Residential property fell 90% over a period of about five to ten years back in the late 1920s in some areas. There’s no reason that couldn’t happen today, especially in overbuilt markets like Florida, California, etc., but it could easily be much worse because in those days, most people paid cash, to start with. If you had a mortgage, you usually put at least 20% down, and the length of the mortgage was generally five years. Today, with even prime mortgages having much less money down, lasting 30 years, and floating rates, there’s much more leverage.
Higher Real Estate Taxes
There’s also another reason. The bottom back in the 1930s was famous for people being able to buy properties for just back taxes. Today, you can buy square miles of some cities, like Detroit, for back taxes alone – but nobody’s doing it. No one sees the $500 minimum bid as worth it, partly because the properties are likely to simply remain tax liabilities well into the future.
I’ve got to say that this is the big elephant in the room that no one is talking about. To me, more important than the overbuilding, more important than the amount of mortgage debt, is that real estate taxes are completely out of control in the U.S. Nobody talks about this, for some reason, but the fact is that in many parts of the U.S., you’ll pay 2% of the assessed value of your house to the government, just to live in it.
There are people across the U.S. paying $10,000, $20,000, and even $50,000 a year in taxes on what are actually quite normal houses. This is cash money that has to be coughed up, whether you have a job or not. And a lot of people are still going to be losing their jobs in the years ahead. We aren’t anywhere near the bottom of the employment situation.
I think there are going to be large numbers of places – and I mean all over, not just places like Detroit and Flint, Michigan – where you’re going to be able to buy whole tracts of McMansions for past taxes but you’ll think twice before doing it, because those taxes are going to continue. In fact, they’ll get worse. With government revenue from other sources falling through the floor, they’ll squeeze wherever they can, and your house is an easy target.
Higher Interest Rates
In fact, the situation will get even uglier. Interest rates are being suppressed to insanely low levels by the government in a truly stupid and doomed effort to stimulate the economy into renewing unsustainable patterns of production and consumption. Eventually interest rates are going much higher – because they must – to ten or fifteen percent, or more, as they did in the early 1980s. That’s going to put the final nail in the coffin of U.S. real estate.
Higher Utility Bills
There’s more. People are more likely to throw in the towel when they see what happens to their utility bills in the coming years. Water, garbage, but especially electricity, gas and heating oil is going way up. That means more cash money that needs to be paid whether you have a job or not.
Higher Transportation Costs
It gets even worse. Most of the overbuilding is way out in the suburbs in bedroom communities. People moved out of downtown areas because they became expensive, and transportation was cheap. Many people are not going to be able to afford to drive their gas guzzlers 100 miles per day, round trip, to a job that won’t have any prospects for a pay raise, since most people will be thankful just to have a job at all.
I think we’ll find significant tracts of suburbs that will be literally abandoned in the not-too-distant future. All that construction was a misallocation of capital, making the country poorer, even while – paradoxically – people thought it was a sign of wealth.
Commercial Real Estate?
So, no, U.S. real estate hasn’t bottomed yet at all and it’s not just going to be in residential real estate, which is where the little guy is going to get killed but also in commercial real estate. This is very ugly, and it’s just getting started.
Even when it does bottom, not everything selling cheap will be worth buying because you might have to wait generations before there’s demand for them again – and you’d need to spend money maintaining them the whole time. U.S. real estate will suffer from years of deferred maintenance by the time the final bottom comes.
A big part of the problem in the West is that we’ve been consuming more than we’ve been producing. That means that all these stores catering to unsustainable patterns of consumption and production are not going to have customers. They’re going to go out of business. Their buildings will be empty. Now, at some point, there will be a bottom, when buying such commercial property will make sense, but I can’t tell you when that will be. We’ll have to keep tabs on the situation and look for a confluence of a number of factors, including interest rates, taxes, demographics, energy prices, and politics.
At this point in time I am completely uninterested in speculating in U.S. real estate – and I don’t foresee being interested for at least five years. I reserve the right to change my mind, but I think it’ll be at least five years.