When I started in the financial planning industry in 1979, I met Andy Burleigh, may he rest in peace, who had a haunting bumper sticker that I will always remember. It reads: "Experience is like a comb nature gives you once you've become bald." It seems nature has quite the sense of humor providing a comb after we don't need one anymore. As a human, it seems to me that many of us do not learn from history because we are too busy repeating it. When possible I would rather learn from my history as well as from other people's experiences, particularly the painful ones, rather than blindly go down the same painful paths. Sometimes those paths are not only painful, but ones from which one can never recover. For a visual description of this information, watch the video below:
Never is a long time
Like economists, financial advisors are often guilty of telling you the pros and cons without revealing what they genuinely believe. On the one hand for these reasons you can expect things to get better. On the other hand we say, there are good reasons for things to get worse. Securities professionals are particularly guilty of saying it always makes sense to look at a 70 year track record. Let me be clear about the state of real estate today. If you think the equity in your real estate holdings might be useful to increase your income within the next ten years or so, there may be no better time than now to release that equity today. I mean 2014. Do not think about it. Buy pansies for the front porch, call your realtor, and list that property this weekend. I well remember prices in my Westlake Village neighborhood drop over 50% from the early 2006 peak to the low in 2011. No one wants to try to catch a falling axe. When the pendulum swings to new lose the declines in real estate values can be vicious.
While realtors tell us local inventory is low and that prices will likely rise again this year, Nobel laureate economist Robert Shiller of Yale University said earlier this year on CNBC:
“There are pitfalls ahead, I think, though, that at this point they [home prices] are going up pretty fast. My instinct is that this momentum will dissipate, but we won’t see a reversal this year. I think it will still be up. Home prices will likely rise early in the year at a fairly good pace. But I think they may weaken. There are a lot of signs showing that the housing market is weakening. The home market now resembles the boom period of early 2006. Nobody was paying attention as much, but everything started to turn down.”
Group thinking is flawed thinking
Gallup recently conducted a poll on what Americans think is the number one place for long term investments. Now you know that when everyone has figured out where the best place to put money is, that is often a sure sign to invest elsewhere, because most people are just wrong about such things. Many invest in the things we think we know something about. We often make decisions based on our history. Our investing historically may be akin to driving home looking in your rear view mirror instead of the windshield. You'll do just fine until you hit a curve. The real estate common logic says, since they aren't making any more land, prices must go up. That is the first flaw. There is no adjustment for a slowing economy or contracting demographic buying patterns. Many people would like to believe the next real estate boom is just around the corner. We think, let's wait to sell next year because we will get more money than we can now. That thinking is not just flawed, it is greed.
We like to believe this logic because real estate prices have gone up for most of our lifetimes. Two trends produce this illusion. First there are the veterans in the Bob Hope generation returning home from World War II. Thanks to "pent up demand", the ability to afford homes and mortgages, along with the largest growth of the middle class in history, home buying accelerated. The massive baby boom generated followed, which put unprecedented upward demand against limited supply, especially in coastal areas. These factors resulted in home price increases ballooning into what history may show to be the greatest bubble in modern history. To get the best clear and simple perspective I have seen, just look at the chart below from Robert Shiller, one of the most respected economists who studies real estate trends:
Shiller went to great lengths to adjust home prices in the US for both the size of the home and the quality of the features. He produced a great and realistic analysis. Harry Dent says, "We can see that the only major real estate bubble in our 120 year history was from 2000 to 2005. The insight in this chart is clear. Home prices do not appreciate with the economy or even long-term shortages or land (as there is always somewhere else to build). Instead they appreciate with inflation or replacement costs.
People dying outpace people buying
Let me be clear. We can see what baby boomers have done for diapers, hoola-hoops, Monopoly, Mustangs, and real estate. Now let's look forward. When we adjust for people dying (on average age 79) as compared to peak buyers (age 41 and 42) the net demand for real estate may have peaked in 2006 and bouncing back some in 2013. Real estate prices may decline from here and stay relatively flat for decades to come. While buyers may be happy sometime soon, sellers may want to see opportunity in putting paint on that pig and sell it. Start this year. When they fall, axes are not fun to catch.