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Question:

Is the Real Estate Boom about to bust?

The market seems to be cooling down. I read an article in the economist about a year ago that predicted something like this would happen. Do you think that Real Estate is just cooling down or could it be much worse? Give your opinion and some insights.

Answer:

Depends on your point of view or how much real estate values affect you. The sad fact is , in many states people would not be able to swing the mortgage on the house they currently own if they were to buy it again. How can they expect the young , with the outsourcing of jobs and the mediocre economy to support this housing inflation. Most of this hyper- pricing was brought on by speculation just as with stocks in the late nineties and upper end real estate on the west coast in the early nineties. Money chasing dwindling avenues of investment after the 7 trillion dollar equity collapse.Sure hope you didn't take out a home equity loan.
Real Estate is a pretty broad term, in terms of geography, industry, etc, etc In short, I would expect a slowdown, but not a sudden drop in most areas. Indeed, some areas have already experienced relatively rapid slowdowns during the 1st and 2nd qtrs of 2006 (South Florida, for example) - check out the pieces written in the palm beach post. Some homebuilders' stocks also appear extremely risky. Many carry 1-2X their market value in debt alone, a large load for a companies reporting sales slowdowns and declining inventory turnover. You would hope a company would use debt to finance future growth, not future sales declines. Homebuilder bankruptcies are probably not out of the question. Other areas appear ok. Commercial real estate in dallas and houston, for example, seems to be experiencing a boom. many think rising energy prices have helped the economies to such an extent that a sudden fall in commercial real estate prices is unlikely. However, in the 1980's, this is just the scenario that caused a recession in Texas. In answer to you second question, real estate prices are not enough to crash the entire market. Companies go bankrupt all the time, so a few homebuilder bankruptcies won't be anything that shocks the markets. Most homebuilders' market caps are not significant enough to affect overall indices - certainly not the clout of yahoo and amazon in 1999. And most investors already value homebuilder stocks as bankruptcy candidates - many trade below book value, which is a sign that investors fear the worst already.
It is going to come apart and will help cause a depression over next bunch of years. at some point soon, everyone that wants a house will have one. then what? Supply overhang will dictate price and trying to sell then will take a long time and lots of price dropping.
I think its going to get worse.

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