No Crystal Ball About the Future of Real Estate

I recently shared Frank McKinney’s opinion that the real estate market is likely to turn around in late 2008 or in 2009… Now I read an article by David Butler, who is published regularly on www.creonline.com, and figured it is only fair to give airtime to a contrary opinion (see “Dead-cat Bounce” below). The truth – none of us has a crystal ball about what will happen to real estate in the short term, and we all have to act prudently, and do the best we can with the circumstances that surround us. Ten to twenty years out, real estate prices will almost certainly be much higher than they are today, but not everyone that owns real estate can wait that long for a comeback… Personally, I think there is a lot of opportunity in the current real estate market, and I am rehabbing two houses right now that I hope to flip, but, until I have completed those flips and have profits in hand, I wouldn't be fair for me to tell you “yes, it still works today.” Also, I bought both properties at prices where I can keep them as rentals if necessary. I will let you know how my flips work out. Also, my single family rentals still cash flow, and I am keeping them, and I expect them to get better in the next few years because the rental market is getting stronger right now, plus I expect to see Florida property taxes dropping significantly in the next couple of years (as recent lower property values get factored in by the property appraiser’s office). On to the part of David’s article that predicts a gloomy future for real estate values (go to www.creonline.com to see the article in its entirety).


CRE Online > How-To Articles > A "Dead-Cat Bounce" in the Rocky Real Estate Market

A "Dead-Cat Bounce" in the Rocky Real Estate Market
by David P. Butler
[June 2008]
The phrase "Dead-Cat Bounce" is finance industry term derived from the notion that "even a dead cat will bounce at least once if it falls from a great enough height," and describes a pattern wherein a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise--before resuming its downward movement. The connotation is that the rise is not an indication of improving fundamentals of the stock. A "bounce" is often the result of speculation. Traders buy into what they hope is the bottom of the market, expecting a "bounce" and making a quick profit. Thus, the very act of anticipating a bounce can create and magnify it. There is evidence of a "Dead-Cat Bounce" happening in the current real estate markets in several parts of the country. Investors are rushing headlong into some of the worst markets (Stockton, CA is one such example) and actually bidding up prices against retail buyers for REO listings--on homes listed at prices still higher than the affordability levels for the areas where they are located! Many investors have been brainwashed by Wall Street and the media to think that "buying low" is always a winning approach. But "buying low" all by itself, is a very speculative strategy--and more so in times like these. The biggest challenge is that turnarounds are often difficult to spot because deflation in the housing markets typically runs about 18 quarters (4.5 years), and false bottoms in housing sales and starts are common. It is imperative to stay focused on ways to navigate the foreclosure and pre-foreclosure markets right now because the real opportunity will only come in 2009-2011, depending on the region. So--buying for value is the optimal strategy.
Housing market declines are steep and accelerating
The current recession will most likely turn out to be the worst in decades. There are many more problems ahead. My forecast for the next 5 to 7 years includes the following economic scenarios.
Deleveraging (the process of taking leverage out of the financial system) is the dominant theme in the markets in 2008 and going forward for at least a year, as the capital markets recoil from the massive losses in structured finance and the housing bubble. This process will transform the banking industry, putting an increasing drag on economic growth and corporate profits.
Due to the weakness in the economy, the next trend in the housing correction will be a crisis in prime mortgages, and...
A likelihood of a meltdown in the $40 trillion global credit CDO market for the same reasons that crashed real estate securitizations, as a massive credit card crunch is looming right around the corner;
Many more hedge fund blowups, corporate bankruptcies, bank failures;
The inherent rise or interest rates that has to come with bank deleveraging--only now in its early stages. After 2010, you should expect inflation and interest rates to really begin soaring, which will put an increasing drag on economic growth and corporate profits.
From their peak in 2006, home prices will ultimately decline to pre-1999 levels between now and 2012. Commercial real estate market will also suffer.
The rental market is set to heat up, and will provide good investment opportunities for patient and prudent investors.