As Martin Armstrong has stated, real estate will decline to 1950’s inflation-adjusted prices by 2034. In other words, real estate will continue to go down from now until 2034, when it should hit a low and start to slowly come up again.
There are several reasons for this prediction. The first is Martin’s and the rest are groovygirl’s.
Real Estate values go up and down in long cycles.
In the United States around 1950, there began a long cycle in real estate. The uptrend began around 1950 and continued until 2007, where it hit a peak. It will decline until 2034. Then another long cycle will begin again. There are mini peaks and valleys within the long cycle, but this is the larger, over-all cycle. This cycle also includes commercial real estate, not just residential. The fact that this is a long cycle fools people into thinking housing prices always go up, because they have never been alive when housing prices were not going up.
The global banking system is broken by debt.
The long-term US housing market is driven not by cheap rates, contrary to what people think, although that can influence a few people. But the main influence is the ability to obtain a loan. US housing market is debt driven. If banks are not lending, which they aren’t, then the housing market must decline. When people can’t get large loans, housing prices drop to meet the loan amount that people can get (or amount of cash they can save). The media is not covering the story that banks are not leaning money for residential or commercial real estate purchases. So, unless you have tried to get a loan, you may not be aware of this issue. The banks are holding cash because they are insolvent from too many loans and securities going bad from the crash of 2008.
The banking industry is directly related to the real estate industry. If no one can get a loan, no one can buy a house and no one can sell a house. Period.
It is a cycle: real estate prices decline a little, banks’ balance sheets decline, so they stop lending. Housing declines further from lack of bank loans available, the cycle spirals downward. In order for both industries to “get well”, bad bank debt must be written off, not bailed out. The political will is not there for this to happen until after a really big global debt crisis. It is coming.
This process was sped up in 2007-2008 when people defaulted on loan payments and caused a cash flow problem, not just a balance sheet problem for banks and investors.
A Generational cycle.
The majority of baby boomers have their wealth in their homes. They plan to live in their homes, and then sell them to pay for long-term elderly care or regular living expenses. When a third if the population does this in the same period of time (from now until 2030), it affects the price of housing. Too many sellers, thinking they can get a high price for their house, and too few buyers that can’t even get a loan. Housing market is stagnate and then drops as desperate boomers sell for any price for cash to live. In that situation, boomers with a paid off mortgage and buyers with cash are in the best position.
In addition, the younger generation will start to wonder why the boomers put all their years of savings into a house that when sold, stole part or all of their equity. They will see this and vow not to make the same mistake. This attitude will continue well past 2034, as the cycle resets, when young people should be buying houses at the low of the new cycle to sell at the next high.
Unemployment.
Even if the banks were lending, unemployment is really around 22%. Banks do not lend money to unemployed people. Unemployment must decline before banks will lend. The economy is not getting better, it is getting worse, and unemployment will continue to get worse as well. So, no loans.
90% mortgages.
A short-term problem is the housing boom in 2003 and 2005. Many people bought houses at the height of the market (highest price) with 10% cash down and a 90% mortgage. Even a small decrease in the value of their home and they are upside down on their house. They stop making payments. There is an estimation that there are one to two million homes that should be in foreclosure that are not, because if the banks took the loss, they would be officially bankrupt. And if those houses flooded the market, it would cause a decline in prices. The decline in prices will still happen, it will just take longer if the empty houses are left off the market.
With this in mind, all the sales from around 2000 to 2010 have the potential of home owners just walking away once they realize that we are in a 26 year decline in real estate prices (which began in 2007) and they will never have equity, only debt, in their home. Some people are finding this out now, because they are unemployed or have higher monthly payments due to adjustable rate mortgages readjusting. But soon, regular homeowners will realize they paid way too much for their house and wonder why they are paying the bank money every month on a losing investment (no matter how low the payment). At this time, it is about the same amount as paying rent as long as you don’t do a major maintenance to your house. That will change before 2034.
Even when banks begin lending again, it will not be 90% loans. It will be 70% or 60% or 50%. People will need years to save up for a 50% down payment on a house. Until the economy gets better, a 50% down payment is completely unattainable.
But groovygirl, some houses are selling, some people are getting loans. Yes, that is true, but it is only those loans backed by the government and it is a fraction of what it was.
All these factors working together and feeding off each other will keep the real estate market in a long decline and no hope for a uptrend in the near future. Your house is not an investment any more. Groovygirl is not saying to never buy a house. She is pointing out these things because the housing market has changed for the long-term. Use these changes to your advantage in any future purchases of real estate.
muses of the moment 