Real Estate: About to Get Worse

It’s looking like 1990 all over again…

1990 was the last time homes were unaffordable. The confidence of homebuilders was at a record low (and about to go lower). And the U.S. economy was starting to cool…

Home prices fell hard. Nationwide, new home prices fell from around $200,000 in 1990 to around $175,000 by 1992 (in inflation-adjusted terms).

By 1993, home prices were affordable once again. Home buyers slowly crept back into the market. Prices crept higher, and they didn’t surpass the 1990 highs for over a decade (in inflation-adjusted terms).

Over a dozen years have passed since new home prices bottomed back then… enough time for people to forget real estate is not always a sure thing. Just ask the Japanese how bad it can get… they just lived through 16 straight years of falling home prices.

For the first time since 1990, homes are once again unaffordable, as the chart below shows.

The homebuilders have been particularly accurate in gauging the market in the past…

Builders were particularly optimistic in 1999, and home prices rose in the following years. Builders maintained their enthusiasm, and prices continued to rise through 2005. Now the homebuilders are hanging their heads. It signals trouble.

Let me step back here for a minute and give you some background… Just because we’re negative on real estate now, don’t think we’re always this way. We simply watch the numbers, like the ones shown above, and draw our conclusions.

In late 2001, the numbers were good… builders were optimistic and housing was affordable. Based on these factors (and many more), I wrote that real estate was cheap in my True Wealth newsletter, and I recommended loading up on real estate plays. Subscribers made triple-digit returns on stocks like homebuilders and REITs.

Back then, the average family could afford the average home. Now they can’t. Back then, builders were optimistic. Now, builders are pessimistic… and have become more pessimistic for seven months in a row, a sign of a weak market.

We’re setting up for a repeat of 1990. Back then, new home prices nationwide fell by double-digits, percentage-wise, over two or three years. Speculators got crushed.

Again, the last time around, prices peaked around 1990. It took a decade for new home prices to get back to 1990 levels (in inflation-adjusted terms).

We could see the same today… a fall in prices for a couple years… and then a slow rise again, as people who got burned are slower to touch the fire.

So if you’re looking to buy real estate, but don’t have the money now… there’s no hurry. If we see a repeat of 1990, you may be able to buy cheaper two years from now.

And if you’re overextended in real estate, but you’re holding out for your price, you’re doing the wrong thing. Get out now. The cost of carrying that real estate will eat you alive.

If you’re overextended in real estate, think about this: What if real estate prices fall for two or three years instead of rising as you hope? Then you’ll lose even more money. You’ll have wasted three years paying interest, and then you’ll take a loss on the property.

It’s better to take a small loss now than wait and potentially take a bigger loss in a few years, while paying interest along the way.

DailyWealth isn’t meant to be a pessimistic letter. I was wildly optimistic on real estate just five years ago. We are neither pessimists nor optimists. We’re realists, looking for opportunity, wherever on the globe it might be.

Right now, the great opportunity is gone in U.S. real estate.

It will likely be this way for a couple of years. Invest accordingly.

Good investing,

Steve