Real Estate is Over

I’ve been a subscriber to Mike Gasior’s newsletter for a while. Typically I avoid reading “financial newsletter” type emails and while I’m hesitant to get so off topic in relations to digital technology, I thought some of Mike’s comments this month were insightful with regards to real estate and might help some folks from making some pretty serious financial mistakes.

Dan Gillmor recently has been warning people about the excessive run up in real estate prices and I kind of feel the same way.

Stop by Mike’s site and subscribe to his newsletter — and consider yourself warned on the real estate thing… again.

From Mike’s March newsletter:


“While I am almost always loath to make anything other than macro predictions about most aspects of the economy at large, or particular asset classes, all I can tell you is I feel amazingly comfortable in telling you that the boom in residential real estate values is over. With a fair degree of confidence I predict that we have seen the top of U.S. housing values and that prices will begin a long a cyclical decline. I have not felt similar confidence since 1999 when I wrote in this letter that I believed that the NASDAQ had peaked on the day it crossed through 5,000.

What makes me so extremely confident is the message that is being sent by the Federal Reserve, in what I find to be surprisingly blunt language, is that among the reasons for steady rate increases by the Fed they cite the “pricing power” being exhibited by home builders. The Federal Reserve is keenly aware of the price bubble they created in real estate due to the reductions in rates that was absolutely necessary back in 2001 and 2002 to avoid a quite serious recession at that time. Now I believe they have decided to end it and you can be sure the Fed will win this battle because they ALWAYS do. Should the housing market somehow show any resiliency through the rate increases we’ve already seen and the promised ones coming in the future (and I don’t believe that it will be resilient at all) the Fed will most certainly continue on course until the real estate market’s back is broken. This I can guarantee you.

How much the overall value of residential real estate will decline is dependent upon the region the property is located in as well as changes in the economy that are difficult to precisely predict at this point. Based on some cursory research and modeling I have performed in the past few days I will share my viewpoint on the real estate market at various mortgage interest rate levels:

30-YEAR FIXED RATE REACHES 6.00% – At this rate level, inventories of housing will begin to expand rapidly. There will be a rush of sellers trying hard to get out of their current homes and the recent rash of speculators in many markets will exasperate the situation. With so many people rushing the doors at once, a sudden glut of “For Sale” signs immediately emboldens buyers who have been waiting for things to turn their way. Based on my statistics, for every 100 homebuyers that could have qualified for a mortgage at 5.25%, that buying pool is immediately shrunk to 85 buyers with the 30-year rate at 6.00%. Real estate values will need to decline by 5% to get the pool back to 100.

30-YEAR FIXED RATE REACHES 6.50% – Based on my statistics, the pool of buyers that can now qualify for a mortgage at 6.50% has shrunk again to 68 buyers. Real estate prices will need to decline almost 12% from current levels for the pool to return to 100 potential buyers who could have afforded the home with a 5.25% mortgage.

30-YEAR FIXED RATE REACHES 7.00% – Now the pool of buyers has slid below fifty to 46 potential buyers with the mortgage rate at 7.00%. Suddenly housing values need to decline almost 22% from current levels to get the pool of potential buyers back to 100.

30 YEAR FIXED RATE REACHES 7.50% – This is the level where a “doomsday”
scenario for real estate begins in many regions of the country that have experienced the largest increases in the previous 5 years. Our fictitious pool of 100 buyers who could have afforded housing with a 5.25% mortgage has now been reduced to 28 people. At this point, values would have to decline by almost 35% from current levels to get our buying pool back to 100.

30-YEAR FIXED RATE RISES ABOVE 8.00% – At this point the market will need to give back nearly all the gains enjoyed between 1999 and 2005 in order to stabilize the marketplace. The decline that would result would be more severe that the one experienced in the Northeast and Southern California between 1989 and 1994 when homes depreciated between 20% to 25% in those markets and condo prices dropped between 40% and 60%. No region of the U.S. would be immune although each area could look to 1999 market values for an idea where their respective bottom might be.”

Mike has more to say but I’d point you to his website for the complete article. The March newsletter isn’t up there yet but I’d suspect you’ll find it there shortly.