 | Investment U E-Letter: Issue # 515
Thursday, March 2, 2006 2006 Housing Market Bubble: Today's Selloff In Real Estate…and How Many Years Before the Next Bull Market
by Mark Skousen, Chairman, Investment U
One of the first letters I wrote as the new chairman of Investment U was to warn you of the coming housing market bubble. Nearly six months ago, I said, "Real estate is cyclical, and we've had a wonderful ride… With higher prices, more owners are selling, and that's putting a damper on prices."
I concluded, "However, it's going to be a slowdown, not a collapse."
I urged subscribers in my investment newsletter to sell their mortgage real estate investment trusts (REITs) before they collapsed. Afterwards, some mortgage REITs fell as much as 50%. (But note, many of the equity REITs have maintained their value.)
So far, I've been right. The evidence grows every day that the "hot" real estate housing market has cooled considerably in 2006, and prices in many areas are actually falling, especially a) condos, and b) high-end luxury houses. Even for modest homes for middle-class investors, prices have flattened, and are on the market for longer periods. The following chart confirms my forecast: 
In red-hot Florida, sales of new expensive homes have practically dried up. Last week, a front-page article in a Sarasota newspaper reported that sales by a prominent builder of new homes fell 80% in 2006. And the overbuilt condo craze has clearly topped out in South Florida.
What is the reason behind this slowdown, and how long will it take before the real estate housing market is a good investment again?
Two Misconceptions about the U.S. Housing Market and Real Estate Bubble
Let's dismiss the misconceptions…
- First, real estate has not declined due to rising mortgage rates. In fact, 30-year mortgage rates are still under 6%, and agents are still offering great deals on adjustable-rate mortgages and refinancing.
- Second, there has not been a "collapse" in real estate housing prices, as some doomsayers have predicted. The problem is declining sales, not declining prices. And in some parts of the country, average real estate prices may continue to rise (such as in the West and Midwest).
The housing market has slowed for one simple reason: Prices are simply too high for most investors to find any value in the housing market. I talked at length with John Schaub, my favorite real estate guru and longtime friend. "There is no question that most housing markets are at the top of a bull market run," he said. "Most markets will not crash. Some will correct. All will produce terrific buying opportunities as the amateurs are flushed out of the market."
He said that today, with the average price doubling in the past four years, most owners have concluded correctly that the cash flow on rental properties is too low. If the cash flow is 3%, they can sell out and earn 4-5% just by investing in safe money market funds or bank CDs. Why take the risk and management troubles of investing in income housing properties?
Furthermore, renters are no longer willing to pay the extra premium to buy when they can rent so cheaply. Why buy a home with monthly mortgage/tax payments of $5,000 a month when they can rent for $2,000 a month?
In sum, the risk-reward relationship favors selling for owners and renting for investors. The result? Prices must come down, rents must go up.
How long will the bear market in real estate last? John Schaub tells me that a slump always takes longer than a year. It usually lasts two to three years before the market recovers. He warns that the Fed could tighten credit over the next year. He doesn't see a recovery for another two years. Conclusions on the Housing Market in 2006
My view is that real estate is still a good long-term investment because of the following: - Superior tax advantages
- Unstable geo-politics
- U.S. real estate is a bargain for foreigners who find the dollar cheap. America is for sale, and that includes the housing market. The next year or two will be a great time to pick up some real estate.
Can you make money in real estate now? Sure. The often-mentioned housing market bubble/real estate bubble hasn't hit everywhere. But you must be patient and take the time to uncover real bargains, below the current market price. This does not mean you have to buy a foreclosure, which is not necessarily a bargain. Also, take take a look at Steve Sjuggerud's Investment U article on the purported real estate bubble, in which Steve reviews new home prices nationwide…plus how the Fed could be a big threat to the housing market in 2006. Good investing,
Mark Today's IU Crib Sheet - A great source for bargain hunting is found in John Schaub's new book, Building Wealth One House at a Time. He specializes in finding one bargain single-family house a year, renting it to reliable long-term tenants, and holding for a decade or longer. He's become a multi-millionaire using this strategy, and is one of the few real estate gurus who has avoided financial problems. His book will show you how to do it on a part-time basis. John also offers some excellent real estate courses. He will be one of the speakers at Investment U, March 16-18, but since Investment U is sold out this year, consider attending John's advanced real estate course April 21-23 in Las Vegas. For more information, call his office at 800.237.9222, or go to www.JohnSchaub.com.
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