Real Estate: Not As Bad As You Think, Just Dead Money For Years

We’re entering uncharted territory...

The real estate bubble is bursting, of course. It’s all you see on the news, and all you read about in the financial papers. The reality is, most of us haven’t lived through a bona fide real estate bubble in our lifetimes. So what the heck should we do?

Everyone I talk to, it seems, is worried. I live on the East Coast of Florida, where everyone, it seems, is in real estate in some way or another (that should be a warning sign itself!).

One friend is a developer, and a big homebuilder just walked away from many millions of dollars with him. They decided not to build homes on the land he permitted. Another friend is a realtor. He’s frustrated that nothing is happening, even though “nothing is wrong with the economy at all,” he says. I saw another friend at lunch yesterday, and he’s a mortgage broker. He’s now changing jobs.

While everyone seems worried about what will happen, my advice is, DON’T WORRY...

While we haven’t lived through real estate bubbles recently, we have lived through a few other investment bubbles in recent years.

Today let’s take a quick look at the recent investment bubbles, and see how bubbles tend to play out as they burst. I expect the current real estate bubble will play out just the same as other bursting bubbles.

Before we get started, I know some will say there is no bubble in housing. Please share the following chart with them. And let them know the chart looks similar in many major metropolitan areas...

Getting back to our message today, we have two recent examples of bursting investment bubbles to draw from... the Asian crisis in the late 1990s, and the Nasdaq bust that started in 2000. Here’s the way it goes...

At first, people don’t believe the boom is over. Investors “buy the dips.” But after six months or so, when it’s clear this latest dip was no minor dip, the financial press kicks into overdrive... At this point, every story, it seems, is about “the bursting of the bubble,” or “when prices will rise again.” This is where we are now with real estate.

The media frenzy hangs around for a long while – maybe a year, or more. It lasts as long as folks are willing to read about it and hope their investments go back up.

The bear market continues. The investments stay down.

People tire of reading about it. Instead of checking the price of Lucent every day, people don’t even want to open their brokerage statements. So the media stops writing about it.

Unfortunately, at this point, the grinding begins. Once the press quiets, you can usually expect a long period of unexciting market action - maybe sideways trading or a slow drift lower – until all the bulls are finally wrung out of the market. Even if the bottom is hit early on, prices will generally stay low for a few years, because investors – once burned – don’t rush into that asset with the same excitement again.

The Asian crisis started in 1997-98. The bear market bobbed along at the bottom until 2003, when it started to finally rise. The Nasdaq peaked in March 2000 at over 5,000. It bottomed in 2002, but it’s bobbed along in the 2,000 range for five years.

The Nasdaq bubble was so spectacular, it’ll take a long time for people’s attention to wane. Drug stocks and biotechs are another good example... from 1998 to 2000, drug stocks and biotech stocks were extremely popular. “You couldn’t go wrong in them,” was the story... “The revolution in computing power was going to improve our lives even quicker.”

The story is the same, but the prices of these stocks have done nothing in eight years. The stories have gradually disappeared from the press... Now we can buy that story, at an extraordinary price. [See last week's issue ofDailyWealth]

Based on the bursting of past investment bubbles, when it comes to real estate, we definitely have a few years to go of sub par returns.

Invest accordingly.

Good investing,

Steve