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When the Housing Bust Will EndBy
Tuesday, October 19, 2010
Ten thousand a month...
That's how many foreclosures Palm Beach, Florida-based GMAC-employee Jeremy Stephan was required to sign off on. His signature confirmed the paperwork was all in order, kicking off the foreclosure process.
Think about that... That's 2,500 foreclosures a week... 500 a day...
That's more than one signature a minute – non-stop – for an eight-hour workday. Could he really have even looked at the paperwork?
News stories like Jeremy's are what kicked off the latest foreclosure mess. Major banks have halted their foreclosure proceedings in most states.
This won't be the last story in the mortgage mess. So when will the housing bust end? When will housing recover? Understanding the opportunities we have in real estate today means understanding how to answer these questions.
First, you should know fallout from the housing bubble will go on for much longer than you think. That's how it goes with bubbles and busts...
Bubbles soar higher than anyone can imagine... and then the busts go on longer than anyone can imagine. The sequence of a bust, as we've written before, is "first the guillotine, then the sandpaper."
First, prices collapse. This is the guillotine stage. Then, prices stagnate for many years. This is the sandpaper stage.
In the Nasdaq bust of 2000, for example, the Nasdaq fell hard from its peak of over 5,000 in the guillotine stage. It has been in the sandpaper stage at around 2,000 ever since.
Japan's real estate bust of the early 1990s is another example. The "sandpaper" stage in Japanese residential real estate has lasted nearly 20 years now.
In the U.S. housing market, the guillotine stage is over. The market has fallen from ridiculously overpriced to now reasonably priced. But, like in Japan, the unwinding of the bad debts in housing will hang over the market for years and years.
(You can even make the case that it's worse in America than it was in Japan. There was no Fannie Mae or Freddie Mac in Japan... there was no mortgage "securitization" market. Banks in Japan had to hold on to bad mortgages. No government entity bought them, like it did in the U.S.)
So when will the housing bust end, and when will housing recover?
Those are two separate questions... The guillotine stage of the bust is over. That's what gets all the headlines. The sandpaper stage is the hard part. And with the overhang of foreclosures and no end in sight, the sandpaper stage will go on for a very long time. Using Japan as an example, it could last a decade, or more.
But I still believe we have opportunities in real estate... The opportunity is buying "distressed" properties that are being liquidated at very low values and then selling them closer to market price.
My rule of thumb is to buy at 40 cents on the dollar and sell at 80 cents. I will admit I haven't bought that much... I've shown up at property auctions. Most of the time, the first bids alone are above what I was willing to pay. But the opportunities ARE out there.
It is what it is. You can still make money in this environment. But you simply can't count on any price appreciation... If the investment works WITHOUT considering price appreciation, that's good. Any price appreciation would be icing on the cake.
The sandpaper stage of the housing bust could take a decade or more to get through. Invest accordingly...
Good investing,
Further Reading:
Since the guillotine stage, Steve has been monitoring his local real estate market for can't-miss opportunities – and sharing the best strategies with DailyWealth readers. Catch up on Steve's story, and pick up his best real estate tips, below:
Market NotesA HUGE MOVE FOR OUR "BIG TECH BOTTOM" IDEA The market loves our "big tech bottom" idea...
About two months ago, we began highlighting how dominant tech companies like Intel, Microsoft, and Google are cheap and out of favor with growth-focused fund managers. But these companies are almost monopolies on computer and Internet usage... They sport thick profit margins, excellent credit ratings, and huge cash hoards.
We noted how these factors allowed big tech stocks to put in tradable bottoms in August and September. And last week, the market voted for our idea with gusto.
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