By John Grace
Is now a good time to invest in real estate?
That’s the question my son, his beautiful girlfriend of five years, and their friends are asking these days.
My best answer about buying a house now is that it depends on how you want to play the game. Since it appears that the U.S. residential prices are poised for more than a 50% decline starting about now, according to Dent Research, if that possibility doesn’t bother you, buy away. If such a potential loss won’t help you have a nice day, you may prefer to keep your powder dry until 2024 or 2025, when it may be a better time to catch the next wave up.
This time is completely different than the past in three significant ways.
The median value of a home in the U.S. in 2000 was $119,600, according to the U.S. Census Bureau. From the same source, we can see that the average home price today is about $428,000. That’s over a three-fold increase, but the average household income is only up 1.6 times, according to Dent Research. If that isn’t a sign of a completely unsustainable situation, I don’t know what is.
It is difficult if not impossible, to see the future, but sometimes it makes sense to study the past. When bubbles appear, Dent Research asserts it is advisable to look into your rearview mirror as that may be the starting point of when the bubble was beginning to form.
The firm’s proprietary research submits that you may want to focus on what was the value of the potential home in 2012.
People who have been doubting that real estate can crash again/and or fall even worse than in the last crash in the U.S. should reconsider fast. Real estate is leading stocks, as it did in the 2008 financial crisis, and it will take longer to bottom. Last time, it was 2011 to early 2021 before most real estate bottomed in the U.S., almost three years after stocks did in early 2009.
The critical question you need to ask yourself is this: What was my home or office building worth at the bottom of the last crash around early 2012?
That is your possible downside, and it’s likely lower than you are thinking, with a less-robust recovery this time that is not likely to start as soon as you might think. If you don’t love it, leave it … and soon!
Now may indeed be a great time to sell, but not at all a good time to buy. We are in unprecedented territory. Globally, as of 2019, there are more people 65 and older than 5 and younger, according to the World Bank. The average age of going to heaven in America has dropped to 76.6 this year, according to the Centers for Disease Control and Prevention, and the average age of home selling is 78, according to Dent Research, all we hear about these days is the lack of inventory.
But it is irrefutable that Father Time and Mother Nature hold the trump cards. Simply put, people dying will outpace people buying homes. For those who say they’ve seen everything, not one of us has witnessed 24% of the population going to heaven over the next 20 years. With 76 million Baby Boomers passing on, and the number of homes remaining static, it is reasonable to this observer that prices are likely to decline significantly, along with rents.
And when we study what happened in New York after the Great Depression, we are astonished it took about 40 years for prices to fully recover after a 70% loss at a time when the average American adult lived to 57. This suggests to me that a lot of wealthy people died with regret, the only gift that keeps on giving.
The same scenario is playing out in Japan starting around 1990 to today, where home prices have yet to enjoy their highs of 32 years ago.
Thanks to rising debt and slowing demographics after the Federal Reserve stimulated progressively over the past 13 years, this time is different than any time you have witnessed. Only time will tell how much pain is necessary to cure the markets of their addiction to monetary easing.
The ball is in your court, however, as now may indeed be the best time to keep your powder dry to be able to blaze away at the proper time.
John Grace is a registered representative with LPL Financial. His On the Money column runs monthly in The Wave. The opinions expressed here for general information only and are not intended to provide specific advice or recommendations for any individual.