Home Prices Do Fall - A Look At The Collapse Of The 1980s Real Estate Bubble
It's been a while since I did an original piece. Going through some articles today, I decided everyone needed to relive the collapse of the 1980's real estate bubble. For those that don't know, the NY Metro area saw spectacular gains in real estate during the 80's. It, like all bubbles that came before it, collapsed just as spectacularly.
Please, take the time to read the following link:
Home Prices Do Fall - A Look At The Collapse Of The 1980's Real Estate Bubble
When you are done, ask yourself, "Is it really different this time?"
Caveat Emptor!
Grim
Please, take the time to read the following link:
Home Prices Do Fall - A Look At The Collapse Of The 1980's Real Estate Bubble
When you are done, ask yourself, "Is it really different this time?"
Caveat Emptor!
Grim
37 Comments:
Please pass the link around.
jb
Great stuff, thanks for the effort.
Same s**t, different day.
Thanks for the info. I will definitely post this.
Times change people don't. New fools born daily.
James,
Great job of recounting the 80s bust with simple cut-to-the chase stats. So where are we now in this cycle? 1989? Remarkable that it took until 2002 to recover from the 80s peak in adjusted dollars.
Hi Grim,
Great stuff! I had a similar series about Vancouver available here.
Just as in your series, so many of the articles could have been written in the past 3 years.
I think Wal-Mart won't have trouble finding greeters.
There will be a lot of the baby boomers who had it made, but decided to get in on the real estate action, and soon they will need a job to supplement the shortfall on their rental income to cover the mortgage on the "investment property"
Man are baby boomers stupid!
It must be from all the "grass" they smoked. How else could it be explained? The greedy fools bought into the real estate bubble twice, followed by a tech bubble, and then another real estate bubble?
Memories..... This is how I made money in the real estate market: picking up all the discounted condos in Hudson county between '90-'91. Most of those purchased were 50-55% off their peak asking price.
Here comes an opportunity for the next generation. I expect that a medium to mild recession in the next three years will seal the lid on the coffin. Be prepared, and save for that rainy day.
Thanks for the memories. I can recall reading some of these articles.
In fact it was living through that period with upside down friends and co-workers while working at a job where I was (among other things) foreclosing on residential mortgagors.
The lesson I came away with is that no matter how strong the trend (up or down), it almost certainly reverses without you even noticing until you see it in the rear-view.
This was true of the go-go-greed-is-good 1980s, gloom of the early 1990s, and the dot-com mania.
It's hard not to see another RE mean-reversion as inevitable.
I love this quote:
Buyers Now Looking Just for a Home
By THOMAS J. LUECK
Published: September 9, 1990
http://query.nytimes.com/gst/fullpage.html?res=9C0CEFDC153DF93AA3575AC0A966958260&sec=&pagewanted=1
Across the region, where a three-year slump has left thousands of houses and cooperative and condominium apartments languishing on the market, experts say the approach of buyers has changed radically from the go-go years of the 80's. Instead of expecting to sell at a profit after two or three years - as many homeowners did - buyers now expect to remain in their homes for five to 10 years or more.
grim
i send you a collection of reports on LA bubble of the 90s.
check your gmail
I believe people would benefit immensly
The perfect storm is setting up.
Got greedy realtors and the industry continuing to manipulate info to keep sentiment positive. It is not working anymore.
Sentiment is shifting, easy loans are starting to dry up and house prices are heading down.
This will make the 91-93 period look like a wonderful dream. Nightmare scenario to those in over their heads.
I remember the 80's bubble in the Princeton corridor up to the Brunswicks. Condo flipping was very in and when it was over it was like musical chairs where the last one holding the condo did not get the chair. So many people got burned.
That is why this time I knew to hold out. But this time around it just would not stop.
My recollection was that condos became very hard to get rid of for many years. Houses just moved slowly. If the last time is anindication of how these cycles work. It will be a decade before there is another boom market.
Grim:
Not much to add. I'm sure the servers and your e-mail box are spouting steam!
I printed out the list - 36 pages.
Brewed a pot of coffee this morning and settled in.
I enjoyed the part about the auctions in Secaucus.
You keep upping the bar on all of us.
I will do my best to spread it around....
chicago
Good job. I just posted about it over at my blog.
After reading this I emailed a realtor I work with. He never BSed me and when I go to the open houses and I get fed a bunch of bull it drives me bananas. Folks, do fall for the trap. Talk to a few realtors before you pick.
And yes I am passing this to those that tell me "it only goes up"
CDF
Here is my favorite:
In This Buyers' Market The Buyers Are Edgy
By NICK RAVO
Published: December 15, 1991
http://query.nytimes.com/gst/fullpage.html?res=9D0CE1DC103DF936A25751C1A967958260
Indeed, these are tense times for home buyers, brokers, builders and sellers. Sale prices in the Northeast, in defiance of the old "it-can-only-go-up" axiom, have been falling for two years, making many shoppers and new home owners wonder about the real worth of real estate.
Hello Grim:
I came across someone's opinion who disagree about the RE Bubble bursting???
Real Estate Talks Forum Index -> New Jersey Real Estate
"The real estate market is forcasted to appreciate til 2010, so the best time to invest is now. Appreciation will range from 10% to at least 30% a year. This goes for all real estate in the tri-state area."...SpawnMoney
What does forecasted mean? Did he/she provide their basis for the forecast, or just some numbers?
Someone saying that real estate will continue to appreciate from 10-30% a year is a scam artist trying to sell you something..
.. or a desparate debtor trying to rationalize his own mistakes.
grim
I have to agree with grim.
If population is decreasing, the interest rates are increasing, and there is a large number of speculative owners that is highly unlikely.
A friend has rental properties, has been doing it for years, and he is starting to unload the properties. Rents are not keeping up with the cost of ownership in some cases.
I believe, barring events overseas that impact the economy, that interest rates will be the driver.
Even folks at the open houses say that is a factor on prices.
Therefore, I believe that person must have a vested interest the other way.
Great work, Grim.
Very sobering and fascinating. Thanks for the piece!
Now that I am convinced that RE is not a money maker in the coming years, I would like to invest my money in other areas. How about the stock market? How has the stock market performed in the past when when RE slowed down? What sectors do the best? There has to be a way to make money other than RE in the coming years.
Anonymous said...
Now that I am convinced that RE is not a money maker in the coming years, I would like to invest my money in other areas. How about the stock market? How has the stock market performed in the past when when RE slowed down? What sectors do the best? There has to be a way to make money other than RE in the coming years.
9:33 AM
Music to my ears!!!!!!!!!!!!!!!!!
:) ;)
In all seriousness, you shouldn't approach investing as - where do I invest?
You should be diversified, then once you are sufficiently diversified, you can choose to overweight/underweight in certain areas.
Boring yes, but boring is good.
Where would I underweight right now? Consumer cyclicals with exposure only to the U.S.
Just remember, there is no sure thing. A lot of hedge funds and big money managers got killed in 2005 betting that the US$ would fall off of a table. What happened??? THE REVERSE! The dollar rallied like crazy.
If you read reviews of mutual funds, the big dogs of 2005 were international bond funds.
OK - back to bubble popping
chicago
I can't think of any direct correlation of RE prices and the general stock market. Since RE price trends are much slower, equity indexes and go up and down while RE remains on one leg of its cycle.
Chicagofinance has the right idea: diverification is the key. Market gurus are forever saying that a particular asset class or market will go up or down. But like weathermen, they are predicting the future based on probabilities, random events, and a few unknowables.
Even with RE, it will likely go down. Doesn't mean it's a sure thing, however.
Nothing is a sure thing, but when you run the numbers for housing it does not compute. Every angle you look at it renting is by far the cheapest alternative. Prices of houses need to revert back to the mean or annual 5% appreciation line and we are above this by about 30-35% right now.
You pay these prices tyou deserve the consequences of 0% appreciation or potential losses over probably a decade.
transmission:
excellent point
look at the timeline implicit in grim's 1980s document
now extrapolate using 2000-01 as the starting point
the question?
what will substitute for the 1987 & 1990 stock market crashes, and will there be another Wall Street shakeout?
early contenders?
- hedge fund shakeout
- fixed income shakeout
next hot financial leaders
- IPO
- M&A
- International
Bad news for hedge funds, Lehman, Bear Stearns, conventional US banks.
Good news for GS, MS & Citigroup.
Some reader of the Ben Jones blog posted this great piece from the 1980s...
Ben Stein on the 80s RE bubble
"Maybe this boom will go on a little longer. Maybe, as some of my banker friends tell me, it has already started to totter. Who knows, exactly? But when buyers consider tying themselves in knots to get onto the housing merry-go-round, in the certain belief that they have a sure thing by the tail, they might remember the housing boom in L.A. and the shuttered condos in West Hollywood. The only thing certain about housing bubbles is that they never last. B"
Sounds VERY familiar I'd say.
This is a great paper. I hope you'll consider doing similar research for the west coast. Out here, everyone believe "our town is different" and "it can never happen here." I'm curious what San Francisco newspapers were saying in 1988-2004.
Great research! Wow!!
This should be required reading for all RE Agents!
Would love to see some similar research from West Coast - Northern CA / Southern CA
Diversification is only required when investors do not understand what they are doing
Impressive. Do you have anything to say about the Central and Southern Shore areas of NJ? Following the sale of my city condo, I'm considering purchasing a multi-family (2-4 unit) house as close to the ocean as possible, in the geographical range from Atlantic Highlands down to Deal. In Long Branch and Elberon, where it's still somewhat affordable, prices are overwhelmingly high (like elsewhere). How do you think this area will be affected by the bubble? It's a different market from Northern NJ.
That was one hell of a read. I learned alot. Its nice to see the history all laid out like that. If history repeats itself, this housing market is in for a world of hurt.
I was just driving around Jersey on Thur. Man, there were alot of "For Sale" signs everywhere. One on every block, at the same time, condos and townhouses were being built on any piece of land they could find.
Crazy...this ain't going to be pretty when this big ugly unravels.
RICH RULE - The media created fear of falling home prices is well constructed. Since the middle class woke up and started selling high, the rich investors could not make outlandish profits. SO-----------tell everyone the housing market is about to crash - prices drop, the investors again grab cheap properties and reap great greed! When are you guys going to wake up to this ridiculously contrived scheme to make the rich richer and the middle class poorer.
I bought my studio co-op in Forest Hills at the height of the bubble in 1987 for $80,000. One year later, it was worth about $50,000...I was upset, but only up to a point - I loved that studio - the layout and location in the building. If I had waited a year, the same unit would not have been available. I could have gotten a one bedroom
whoops! continued...
I could have gotten a one bedroom a year later for the same price - Except the maintenance would have been 50% more - Those were not affected by the bubble.
Four years later the market was at bottom, and I looked for studios in the city - Same problem - great values, but the maintenances were twice as much...
Not trying to offend anyone, but I wonder how many people that believe that there is a correction coming are just frustrated over being outpriced and have missed opportunities in recent years. I got my place in NYC 11 years ago and the price is now 4 times what it was back then. It is October 2006 and people are still talking about a "bubble" and "excess offer" meanwhile I'm in the market for a new place, but the inventory is still very small and I have not seen prices drop. Although I'm told there is room for negotiation, last week I did not even get to make an offer because the house I was interested in sold before I could even go see it. If you trace 2 parallel lines on that chart you will see that perhaps the last data point in 2005 shows only a 10-12% growth above the per-capita income. The worst possible deal in that chart was for someone buying in 1988 at the 330 level and selling at 240 -- a 27% loss. But if the guy held on another 6 years he would break even and on the 9th year he would have sold for 440 (33% more than what he/she paid for). OTOH the best deal in that chart is probably buying in 98 and selling 7 years later for a handsome 76% profit. The economy is strong, the country has sustained terrorist attacks and fought 2 wars and the country's locomotive shows no sign of slowing down -- who would ever think that was possible. Do prices go up and down? Sure they do. Will they come down from where they are? May be. Will they eventually climb up? Well, if history repeats itself then they sure will :-)
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