Thursday, May 14, 2015

Home Prices: "RED ALERT 2" MUST READ. Worse than 2008?

"...Real Estate is a highly “illiquid” asset class ‘most of the time’.  It always has been and always will be.  However, some times, such as now — and from 2003 to 2007 as a prime example — when liquidity is flowing like water, Real Estate’s illiquidity is masked.  Speculators can do no wrong.  Simply having access to short-term or mortgage capital to purchase Real Estate guaranties a double-digit return.  

This continues until one day, suddenly, it doesn’t.  When capital markets tighten up a bit, or a lot, due to one reason, another, or another, the snap-back to the true, historical illiquid nature of the Real Estate sector happens suddenly and is amplified at first. This creates a snowball effect from which both house supply and illiquidity surge at the same time.

Price then becomes the liquidity fulcrum and will drop, relentlessly ripping speculators faces off, until capital begins to view the asset class as a relative value once again.

In periods of mania, most don’t recognize when Real Estate has once again lost its levitation juice and keep buying even as liquidity conditions turn downright bearish. Some buy all the way down comparing the lower prices with peak, liquidity bubble prices a couple of quarters back thinking they are getting a “great deal”.   Quickly, they are underwater, or sinking rehab capital into a depreciating asset.

Then, what seems like “all of a sudden”, a wave of fear engulfs the sector.  Supply ratchets higher, as pricing power continues to weaken.  Before most realize what’s happening, “month’s supply” of houses is ‘through the roof’, Realtors are telling sellers that their ‘expectations are a bit high’, and Real Estate’s true color — illiquidity — has taken control of the entire sector stranding owners and speculators from their invested capital.  This is event horizon.

These “correction” cycles can be tame, moderate, or extreme like from 2003 to 2007.  In my opinion the severity of the correction is directly related to the amount energy that preceded it, meaning given the “all-in” global Central Bank monetary and Gov’t debt policies of the past 6-years, the next “correction” has the potential to make 2007 to 2010 look moderate..."

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