Real Estate Deflation in the Greater Depression

By Delwyn Lounsbury - THE DEFLATION GURU

Real estate deflation in the Greater Depression continues.

“Home values have fallen 26 percent since their peak in June 2006, worse than the 25.9 percent decline seen during the Depression years between 1928 and 1933," Zillow reported.

The median price is down 5.22% to $156,100.  One in Four homeowners undewater. 11,100,000 owe more than the home is worth.  Some homes in Stockton, California are down 70%.  Modesto, California had 1 in 36 homes in foreclosure.  18% or 6.3 million homes are for sale, a 2 year supply and half the sales are REO or short sales and 33% are all cash purchases.

Commercial Property Price Index by Moody's is at an 8 year low.
 
The drop is due to the ending of federal tax credits, tight credit for higher-end buyers and concerns over the deflation economy and job security said a report released by MDA DataQuick.

Real estate deflation will be the most damaging asset to the average American due to the widespread ownership of real property in the coming GREATER DEPRESSION. A sick housing sector means fewer jobs for construction workers, realtors and others tied directly to the industry. In addition, homeowners "under water" - who owe on the home more than they could sell it for - are not likely to spend any money fixing them up or even buying furniture. Almost 70 percent of Nevada homeowners are in this boat. In Arizona the number is half and in California it is 33 percent. Foreclosures spiked in August of 2010 with Nevada again leading with one in every 84 households receiving a foreclosure notice.

Here is the latest sad real estate deflation economy statistics as of September 26, 2010:

1.   More than 1 million Americans will lose their homes this
     year.

2.   1.7 million homeowners got foreclosure warnings in first 6
     mos.

3.   7.3 million home loans are in some stage of delinquency.

4.   1 out of every 17 received a foreclosure notice in Nevada.
     Arizona, Florida, California, (UT, GA, MI, ID, Il, CO) were
     next.

5.   64 percent of Nevada property sales were foreclosures.

6.   New York had the biggest REO (bank owned) discount - 52%
     over properties not in foreclosure - KY, IL, OH & CA were 
     35%.

7.   Foreclosure sales increased 2,500% from 2005 to 2009.

8.   It takes about 15 months for a home go through the process.

9.   28 million homes in America are "under water" - their value
     is less than the loan.

10.  Existing home sales dropped 27% in June of 2010 the largest
     drop ever. This is more evidence of real estate deflation.

11.  Foreclosures increased 25% in June of 2010 to a record
     95,304.

12.  Unemployment increases in 27 states - 9% official rate.    
     One can probably double that to 18% to 20% for the real
     rate.

12.  Existing home sales in California dropped to 6,698 an
     eighteen year low not seen since 1992.

As the unemployment rate remains high, mortgage-assistance programs fail, and the economy stalls. Many variable rate loans sold with low "teaser" rates are to be reset. Most commercial loans are often sold with a short due date and many of them will have to be refinanced. The properties and/or the owners may not qualify for a new refinance when the loans become due putting new pressure on commercial property prices.

You can expect a 90 - 99% real estate deflation in prices at the 2016-2018 low.

I bought my first real estate, 60 acres for $100 an acre, while still in high school. This was with money my two other bothers and I made by selling 4-H cattle at the local county fair. We then ran 15 black angus cows and a bull on the land and paid for it with their offspring in 5 years.

I went to an agricultural college, but changed to a business major half way through. While in college I passed the California Real Estate salesman license exam. In 1968, at the age of 19 home sales was my summer break profession/job. I sold 10 houses in 2 months that first summer and bought a house, a 1962 Chrysler imperial car with creamy ivory colored leather seats and paid for the rest of my college. Now you can see why I changed majors. The summer before I worked like a dog at a cattle feedlot for $1.46 an hour, 10 hours a day. I have been an award-winning agent in good standing here in the San Francisco Bay Area of California ever since (license CA DRE # 00330978).

I work for Coldwell Banker real estate the largest real estate brokerage worldwide.

Don't be afraid to own a house. Just as long as you can get it free and clear or as long as you can afford the payments. You have to live somewhere. You have to have a roof over your head. You would have to pay rent anyway. Most landlords don't allow dogs and cats either. Do they? The best strategy right now is to own real estate outright or have a high loan balance and little cash invested.

Don't think real estate will ramp back up in value any time soon. This is the big real estate deflation bust liquidating the crazy credit expansion bubble we experienced. All prices will go down so everything is relative. A house free and clear worth $500,000 in 2006 will become a house free and clear in 2016 worth $50,000. Remarkably, that $50,000 will probably buy the same goods and services as $500,000 did back in 2005. You see, it's just a numbers game.  Although, if you had sold the $500,000 and PRESERVED YOUR CAPITAL and waited 10 years you could be BUYING 10 HOUSES at the 2016 - 2018 bottom. FREE AND CLEAR!

So, the house (three bedroom, two bath, 2 car garage with 1,250 square feet of living space on a 6,000 square foot lot) I sold for $20,000 in 1968 became the bubble inflated $500,000 property in 2006. It was financed with a nothing down "liar loan" in which a person with good credit was allowed to state (not prove) his income. I am here to tell you once again that we have had our runaway inflation. That house is now $250,000 and heading for $50,000 and maybe even back to that $20,000 number in year 2016 - 2018 or so - a drop of 90% plus. We will have a very large pernicious real estate deflation. It will wipe out trillions of dollars in value worldwide.

The greater fool theory is selling to a bigger fool at ever higher prices. We all have been players in the game. Now, even rent prices will fall. Banks, insurance companies and REIT's (real estate investment trusts traded as stocks) will all crash. Some will become penny or dollar stocks. Short them and you can also buy long term put options - LEAPS are puts and calls with longer than usual expiration times frames.

There are several exchange traded funds (ETF's) short a basket of real estate stocks if the basket of stocks in these funds drop again, the share price could go back to their highs or even higher in the washout Robert Prechter is predicting.

You can short REIT's (Real Estate Investment Trusts that trade like stocks). You can also buy long term put options on these also. Put options are bets that the price of the securities the option is tied to will go down. If the price goes up or does not move at all you would lose your entire amount of money put up if you run out of time. If the price of the stock or ETF goes down you win big time as each option is for 100 shares. You have to have a qualified brokerage account that is a somewhat harder to get than a straight stock buying brokerage account to buy and sell options.

If you want to keep your real estate this is also a way to hedge your holdings. Go short REIT's. <a href="http://www.deflationeconomy.com/robert-prechter.html">Robert Prechter</a> says they will go to penny stock status into 2016.

It is credit inflation that ends badly. Real estate was the big credit inflation bubble recipient of Government Sponsored Enterprise (GSE) loan facilitating and repurchasing. Fannie Mae and Freddie Mac had crazy lending practices and unsafe guidelines. Their managers knew the federal government wouldn't let them fail. They went bankrupt and have been since been taken over by the federal government. This big bureaucratic bailout will cost us trillions of dollars as the real estate deflation continues and wipes out all the money spent by government bailouts.

Congress and the politicians decided that everyone should own a house and gave the GSE's free rein to lower down payments. Home loans were made to almost anyone that could "fog a mirror." To me all inflation is a rip off. Wealth is transferred from those that were frugal and saved to those who had enough money to buy assets like real estate and stocks that benefited. Money earning interest couldn't keep up. This is a cheat, a lie and it is bad Karma. It means real estate deflation will affect all of us in one way or another and the main perpetrator of the bad Karma, the government will be the object of the people’s wrath.

Because it is so widely owned and financed real estate deflation will be one of the biggest losers in the GREATER DEPRESSION. Get out now and buy back at pennies on the dollar later. That's what I am doing. Rents will also be going down for years. Don't sign any long term leases.

Also, if you try and sell on a lease option to a buyer you had better expect them not to exercise the option and complete the purchase. Why should they when the price has dropped dramatically. They will want to renegotiate the whole transaction. You can count on it.

The deflation economics cycle started with the 2000 dot com stock mania bubble climax peak may not end until 2016 to 2018. At that time most of your assets may have lost 90% in price and unemployment could be 30%.  Even the price of gold may drop in half.  Real estate deflation started around 2006.  CASH IS KING in deflation.  Japan has seen deflation for 20 years and now the rest of the world is catching the epidemic.  You cannot stop the pendulum from swinging.  Deflation will continue until the inflation is wrung out of the system in the Greater Depression.  Cash Is King in a real estate deflation. You had best get free and clear in this real estate deflation or else get out.

Copyright 2011 by Delwyn Lounsbury - THE DEFLATION GURU
Use of this article allowed with attribution back to: http://www.deflationeconomy.com