Asset Deflation 6: The Death of Real Estate

March 27, 2007

Asset Deflation 6: The Death of Real Estate
by Steve Moyer

“I had a stick of CareFree gum, but it didn’t work. I felt pretty good while I was blowing that bubble, but as soon as the gum lost its flavor, I was back to pondering my mortality.” ~ Mitch Hedberg

I sell investment real estate in the San Francisco Bay Area. Have been for 25 years. It’s a nice business. I’ve enjoyed it, and I value my clients.

My pappy’s a realtor. My grandpappy was a realtor. My uncle’s a realtor; so is my brother. Heck, some of my best friends are realtors (and it takes a big man to admit that).

That’s why it pains me to give you the bad news, to wit: Real estate in America is officially dead. But only for a generation or so.

In other words, it is time to sell all of your real estate, save for possibly your home. If you don’t, you will likely regret it. You will gradually watch all of your equity disappear into thin air. And then, unless you have little debt against it, you will likely lose your property to foreclosure. It’s as simple as that.

The far better strategy is to sell now, even if you are disappointed with the selling price, take your equity (less any capital gains taxes you must pay) and put it into safe, interest-bearing cash-equivalents for a while. Do not put it into the stock market. Do not fiddle with bonds. Don’t buy gold (for now, anyway). Stay away from the other metals. Just sit there. Don’t be cute. Stop annoying your brother. And try not to be smug. Exercise that virtue known to Job as patience.

Eventually you will be able to buy all the real estate you want, probably including the stuff I’m happy to sell for you now, for literally nickels on the dollar.

I have talked Asset Deflation enough that I’m a light shade of blue in the face, but allow me once again to introduce myself: My name is Steve Moyer and I will be the host of Safehaven’s upcoming new series, “CSI America: What the Hell Happened to Real Estate?!” which will be dominating the headlines for the next decade or two.

In case you haven’t noticed, or choose to stick your head in the sand, or don’t know much about investment manias and credit bubbles, or think that real estate values “always go up in the long run,” or believe that just because Ben Bernanke’s Fed has a printing press, they can compel ordinary Americans to borrow increasingly reckless amounts of money, allow me to be the one to pour a big bucket of ice water over your head. The fact is, we have officially entered the frightening, post-NASDAQ-bubble, post-subsequent-real estate-double-bubble, credit-contracting, asset-deflationary portion of the 75 year cycle. So buckle-up for Mr. Toad’s Wild Ride, people, because there is no looking back at this point. Mark my words, it’s going to be nauseating.

If you were able to see LVI Services Inc. implode the venerable old Stardust Hotel in Las Vegas a week ago, well, that was a fitting representation of what the coming real estate market will look like in the United States. The big difference is that the Stardust implosion happened on purpose; the real estate version will be a little less swift, a lot more decisive and considerably more painful for most Americans.

If you’re a financial news junkie like I am, you’re reading numerous stories on a daily basis of men and women across America walking away from their homes (and, in some cases, dozens of families moving out of entire neighborhoods). Shinola has begun to hit the real estate fan, beginning with the houses purchased at artificially-high prices, no money down and idiot loans during the housing bubble’s terminal, methamphetamine-driven “last run up” in 2005 and 2006.

Foreclosures are up 79% in California; in Florida they’ve nearly doubled compared to the same period last year. Nevada’s foreclosure rate is up 77%. Colorado, Georgia and Michigan report the same tales of woe. Ohio’s Cuyohoga County, where folks have abandoned neighborhoods and thieves steal cabinets and copper pipe from vacated homes, has seen its foreclosure rate increase sixfold since 1995. 2,100,000 households in America were said to be in default as of year-end, 2006. Teaser loan payments are rising, home values are falling, and “greater fools” are no longer stepping into the breech to save anyone’s financial day.

We’re still in the early stages of Foreclosure Mania and nowhere near the point of full recognition, but even at this point, lenders and homebuilders have begun walking away from their obligations just as quickly as those poor, unsuspecting subprime and zero-equity borrowers.

The first-wave victims of the housing bubble implosion are tapped out and must begin their lives anew with statistically no savings. I suppose that means they will no longer be buying flat-screen TV’s, new trucks or trinkets from the “Things You Don’t Need On Any Basis” store for a while. And you know those Mercedes-driving, $700 purse-toting realtors, loan brokers, appraisers and title company folks? They’ll be hunkering down for the foreseeable future, too. How about the subprime, predatory and other assorted, irresponsible lenders and mortgage “securities” dealers? I imagine they’ve stopped buying original Monets and Picassos at this point but, hey, I’m just guessin’.

All together now – can you say, “drag on the economy?” All of this – and it’s really just beginning – is only going to make matters even worse.

Eventually, everyone will come to the realization that 1) just like when the NASDAQ bubble burst back in 2000, real estate values are going down, down, down, then 2) that this time it’s not a “normal real estate cycle” but instead a relentless, post-bubble and post-bubble-bubble real estate deflation that we expect will have no historical rival.

That realization will pervade the consciousness of real estate buyers across the board, as they hear about ever-more distressed and foreclosed inventory competing with already-languishing housing stock. Buyers will conclude that, just like computers, “prices will be lower next year” and they will demand significantly discounted prices; sellers who resist selling now will find an even weaker market and a greater dearth of buyers with each passing year. Nightly news reports will further the psychology, and that dampening mind-set will spread to all real estate types: office and retail buildings, industrial and income property, single lots and land. The implosion of the real estate bubble will quickly translate to snap-the-pocketbook-shut consumer spending, declining rents, more bankruptcies, a moribund job market and fire-sale drops in real estate prices. Fannie Mae, Freddie Mac, bank and lending crises are sure to be sprinkled on top of that soggy cereal at some point, too.

Surviving lenders, under constant pressure due to rampant foreclosures, will make lending standards increasingly more stringent and loans more difficult to procure, meaning more equity will be required to buy property. But Americans have been living on borrowed money and have no such equity; they’ve been conditioned to borrow to buy things because they assumed that the value of their homes would continue to bail their finances out forever. Another segment of the buying marketplace will therefore be lopped off.

As time goes by, those in a position to buy will consider real estate not worth the headaches and a bad investment, to boot. It goes without saying that the real estate market’s take-down, concurrent with its attendant, severe and involuntary credit contraction, a stock market pratfall, not enough U.S. savings, the corresponding liquidity crunch and an inevitable value decline in all asset classes will mean that anyone left with 2005-2007 cash will come out the winner.

In my opinion, the ultimate affect of the real estate bubble – and its mostly unanticipated implosion – is that the entire asset class will fall out of favor for many years, possibly for a generation. Only a select few will benefit – those who had the foresight to sell now and squirrel away the money safely before the real anguish begins.

I applaud anyone who has stepped away from the mainstream long enough to consider my unprostituted takes. You are to be commended for at least listening to my point of view and for considering the idea of taking action before it’s too late. You have the chance to see the still-manageable snowball forming up near the top of a giant, powder-covered mountain. You’re one of the lucky ones who can step aside before a slushball bigger than the planet Mercury rolls down and flattens you (and all of your neighbors) like a gnat.

(Be on the lookout for my upcoming follow-up article on Safehaven, Asset Deflation: The New Rules of Real Estate. I expect to have it out in a week or two. It will give you a jump on the real estate game in the coming environment. As always, we welcome your feedback. Our last article produced our greatest response to date and I apologize if I did not have the chance to respond to every inquiry. From what I read in those emails, I have every confidence our readers will be able to survive the impending mess).

Steve Moyer,

Interesting article, but I detected a “chicken little” effect.
I tend to believe that the subprime market is not a majority of the loans out there, and as a result, there will be some settling going on across the board.
But I certainly don’t feel like its going to come crashing down…

Whenever I see articles and news stories using things like ___________up 77% etc. I get suspicious. If there ar 10 forclosures in a given area per year and 20 the next that’s 100% increase. Oh NO the sky is falling!

A more realistic figure would be - there where 20 forclosures per 10,000 homes compared to 10 last year. That’s a 100% increase but only a rate of 1 per thousand one year and 2 per 1000 the next. **Not as dramatic is it?


Exactly! The real estate market glass is about 85% full even with the sub prime issues. Karma? be positive, think positive, the market will be fine and so will most of us. Constant negative press along with daily postings from Joe, benefit know one and are certainly not helpful for a strong, healthy business environment.

Yes, I mostly agree but the article was so well written I felt compelled to post it. The way I see it is that shortly we will be at a crossroads where this so-called crisis either blows over or really becomes a contagion and begins to impinge itself on other parts of the larger economy.

The Fed has been very proactive in keeping the economy moving forward and there is no reason to believe that they won’t be able to weather this storm either. Still I would not be investing any new money into real estate or businesses dependent on the real estate market until the trend is positive.

This guy is just selling doom and gloom. Think about all those sheep who bought those really high priced houses a couple of years ago? Think about how many of them took out no interest loans. How many got sub-prime loans with 550 credit scores. The Real Estate and loan market brought this on themselves.

It’s just like the Savings and Loan ‘crisis’ years ago. S&Ls with way to much money on their hands, and the young turks who believed that they had come up with a whole new paridigm, started loaning out money hand over fist. An the Democratic congress was all to happy to loosen the rules. The result, the normal cycles that have been going on for decades caught up with them.

Now I hear all these “real estate investor” shows where the experts are advising the sheep to keep re-financing, never pay down the mortage and take extra money out for investment (more RE and stocks). It’s just a huge ponzie scheme.

And this guy, particularly. The SF real estate market has always been flaky. Very little new housing going up (because of “environmental concerns”) home prices just plain ludecrous and idiots jumping over each other to buy in to a sinking ship. You don’t buy on the high, you buy on the low.

And snatching up forclousers is also not a good thing, especialy when you are doing it with money you can’t afford to lose.

So, the natural consequences of the kind of scheme that this guy is running have come back to bite him on the butt, and he is complaining.

They should teach Economics 101 in High School.

Just my thoughts.

What a concept.

Teach “young skulls full of mush” something about how the real world works.
That no doubt would be considered subversive in today’s class room where the government schools are busy convincing them that our greatest threat is “global warming”.:frowning:

I think I’ll join Mike Nelson in Belize.;-):smiley: