Tuesday, November 6, 2007

Don't Worry, Be Happy

I got this comment yesterday and started to respond, when I thought it would be helpful to publish it as a post:

"We plan to hold until the prices rise again."

Your blog is very interesting. I think I found it from a post you made on patrick.net. It is interesting to see someone in the middle of the housing crisis, rather than on the sidelines. But comments like the one you made above make me think, "Do you not know where this market is headed?" The housing market is starting a huge multi-year collapse. This is only the beginning. Housing prices will fall for years. It might be 5-10 years before the prices are back where they were in 2005. Do you think this "housing crisis" stuff is just mainstream media hype, and it will blow over in a few months? I'm curious to understand your mindset.


Here is my response:


You've made an excellent point! I'm very humbled by the intelligence of my readers (I'll make an exception for Mr.Boom). You're right, I am flippant sometimes when it comes to the media. However, this is my point: Yes, there is a downturn in the real estate market. This is cyclical and expected. The media presents the information with "the sky is falling" mentality. If you recall, we heard that the market was bottoming (or topping, depending on how you look at it) out every quarter during the boon. Well, it finally happened when it was supposed to happen. The difference this time is the impact on the finance sector.

Didn't you see that coming? I did when my neighbors in Sabre Springs were borrowing 125% of the value of there home in HELOCs. We knew that five years later, they would be losing their houses because the market would be slowing down significantly. Unfortunately, first mortgages have had a worse impact on home ownership than expected. Frankly, it surprised me (and it shouldn't have) that soooo many people did not make provisions when they knew that their payments would be increasing. Our five-year rate is set to adjust in June, 2008, and I've been planning what we'd do for about 18 months now.

I do not think this is a matter of blowing over in a few months. History tells us that it will take longer. The most important aspect to remember is that housing has never completely collapsed--not in the sense of buying stock in a company that goes out of business. There is nothing you can do to "make" back your investment there. The asset is gone. In RE, though, history shows that, eventually, prices have always risen (even with the adjustment for inflation). If you peruse the U.S. Census Bureau site, you will see that, in the long run, single family homes always appreciate.

Here is an example of a page on that site. In this graph you can easily see the decades where RE appreciated quickly, then the plateaus. If you look at the 60 year history that the graph represents, you can see that RE has a proven performance of appreciation.

It may be 5-10 years before the prices are back. But they will be back and correct up even higher. It has always happened this way. Can you lose money in the short run? Of course! But if everyone were able to hold onto their investments, they would make money eventually (and there wouldn't be a downturn because the supply would be so small). Also, people alive today should remember that the market heats up and the market cools down, so maybe they will be prepared next time--especially the investors.

So, I'm sorry if it seems that I don't take the current market seriously. It's kind of like when my 6th or 7th child is sick. I worry a little, but because of my experiences with the other children, I know that they will probably be better soon. I just have to watch them for a while. The past in real estate tells me that the market will be well again at some point in the future, too.