Thursday, July 26, 2007

No Quick Recovery for Real Estate

I think there is no sane being in the U.S. that still thinks real-estate is a risk free investment. The real estate market is very obviously down. However, many people still think that this crisis is just going to disappear in short order and with very little impact on the U.S. economy as a whole.

Well, I've got new for you. The real estate bear market is going to be with us for a while. Here are a few recent comments on the topic:

- Country Wide CEO was quoted as saying that the housing market is not likely to recover before 2009.

- Economists from the prestigious Anderson Forecast are saying that "recovery in the housing market will resemble an “L” as opposed to a “V,” with the imploded sub-prime mortgage market representing a second leg down in housing activity.” Meaning: prices are not going to recover anytime soon.

- In his recent podcast, Bill Gross of PIMCO is warning that the "sub prime crisis" is not isolated, and that he expects the wider U.S. economy to take a hit.

- A couple of days ago while driving I heard a news story on NPR where they spoke of how badly the California real estate market is doing. California apparently has 6 of the 10 metro areas with the highest rate of foreclosures nationwide. Now get this, on the Peninsula (the area between San Francisco and San Jose) where I live, prices are not even coming down yet.

There is a lot worse still in store for the real estate market. I think many people, home owners and builders alike, are still in denial about the situation. The real estate market is not going to magically shake off its hangover. This is going to take years to wear off. If people are now talking about 2009 as the target date for recovery to begin, I think prices will not really pick up until late in 2009 at the earliest.

Here is a related example from just a few years ago. At the height of the dotcom bubble, office space in the Bay Area was virtually impossible to obtain. I once visited the offices of a 50 person company which was located, in its entirety, in a warehouse. When the bubble burst, office space quickly became abundant. For years, huge numbers of office buildings stood empty. My favorite empty building was the old headquarters of now defunct Excite@Home. This huge and empty campus stands just off the 101 freeway linking San Francisco with the South Bay. Every evening, while driving down the freeway, I could see the sun setting through the windows of these empty buildings. Those buildings stood empty for years. They are only now being occupied.

My point is this: after a crazy bubble comes an extended period of bust. The bust tends to be longer and harder than people think. I am guessing that this will be true for the residential real estate market as well. We'll be lucky if this real estate down market does not drag the economy into recession as well.

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