Musings on the Housing Market

I want to write a quick note about the housing market since there seems to be a general concern among my friends, family and acquaintances on the subject and have asked my opinion on the subject.

It is my strong belief that house prices, (at least in America) will, in real terms, go nowhere for the next decade or so. I would not be surprised if you didn't see real gains for two decades out. (what I mean by "real terms" is that way may see house prices increase, but these "gains" are phantom gains. Case in point, let's assume you have a house rise in value from a purchase price of $100,000 to $115,000. A 15% gain. But let's also assume that inflation was at 15% during the same time period. All-in-all, you have made no real gains in wealth. )

Now, to back up my reasoning for such things, I always use historical precedent because history has a tendency to repeat itself, with surprising similarity, frequency and cyclicality.

Back during the Great Depression, we experienced a depression effect on the economy that saw the general decline of business activity and the tightening up of credit. We've seen the pictures but I doubt that one in one hundred of anyone that's asked me about the subject has tried to understand what actually happened during the Great Depression. Well, as it relates to housing, it was a terrible place to be for a good decade. I highly recommend the following for a good read: Crash! The Housing Market Free Fall and Client #10 Contagion. Lessons From the Great Depression: Part VI. Dr. Housing Bubble Blog

Secondly I'd like to point out the how the housing bubble in Japan played out. At it's peak, it was purported that the tiny land on which the emperor's palace was worth more than all the real estate in California combined. Now, if that's not a bubble, then I don't know what is. As it stands, the real estate market in Japan is only now starting to recover, after 20 years. Japanese asset price bubble - Wikipedia, the free encyclopedia



What I expect going forward is a mix of inflation and depressed business activity. The stereo-typical "stagflation" scenario that plagued the 1970's, only on a much larger scale. I do not foresee any miracle cures for the economic woes that the US has dug itself into. We are in for some interesting times.

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