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The Worst Bear Market Ever For Real Estate?

Friday, September 7, 2007 | Teeka Tiwari

Rating:
As far as real estate meltdowns go, this one certainly “feels” pretty mild to me.  I say “feels” in quotation marks because I am not a real estate guy.  I don’t have my finger on the pulse of commercial and residential real estate the way I do on stocks and commodities.

But I do remember the last big real estate bust we experienced here in America. 

It started in the late 1980s and reached its crescendo in 1991.  Now I wasn’t a real estate investor back then, either, but I sure “felt” that real estate crash.

People owed so much more on their mortgages than they were worth that they simply walked away from their homes and let them go into foreclosure.  The banks, specifically the Savings and Loans, were decimated by defaults to the tune of one trillion dollars.  In fact, by any measure of financial soundness you want to use, virtually the entire US banking system was bankrupt!

Commercial real estate was also absolutely slaughtered.  Commercial rents dropped by 50% or more in major cities including New York, a traditionally strong market regardless of national trends.  Major real estate developers were crushed.  Forget Donald Trump.  The Reichmann brothers (they controlled Olympia and York) the world's largest holder of commercial real estate with a portfolio of some 20 billion dollars (back then, that was a lot of money!) went belly up.

The pervading sense of national dread was palpable. 

I remember, smart people were actually asking if New York City would survive the real estate meltdown; would New York still be relevant, they would ask.  In fact, in all my years of observing markets and human behavior, I have never seen a time when people were more depressed about their future than in 1991.

So this is the yardstick I use to measure our current real estate dilemma.  As such, I do not see anywhere near the emotional devastation prevalent in 1991 here today in 2007.  The subprime credit woes seem to have hit the investment banks and finance companies the hardest.  It appears that the real devastation has taken place in the mortgage-backed securities (bond) market.  In fact, commercial real estate still appears to be fairly robust, and housing prices, while down, do not appear to have cratered.

The fact is, though, I’m an amateur when it comes to real estate, but I know that many of you who read this report are not.  Many of you are real estate investors, developers, builders and contractors.  You are in a much better position than I am to gauge the real market strength.  So I want you to tell me, how are things out there, really?

How is commercial real estate really holding up?

How are residential real estate prices holding up?

What are your observations of this real estate bear market?

Is this the time to buy, sell or hold real estate, and why?

I’m not the expert on this subject, and I really want your help and your perspective.  Your observations will not only help me but the thousands of other readers that are asking the exact same questions.

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Teeka Tiwari
Chief Investment Officer
ETF Master Trader


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41 Comments

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  1. Becky (1 year ago) Is this Spam?

    I would like to learn more about private lenders to private partys in real estate.Becky

  2. Christopher (1 year ago) Is this Spam?

    In the Real-estate market it is a hold time because to many houses are out for sale and if you are into investing it is the perfect time to buy because you can work the seller down below apraisial so in a few years when things recover and the market starts booming again you can make up your loss in the interest rates that you have to pay now.

  3. Joseph (1 year ago) Is this Spam?

    Good article.As with any downturn--it is only felt by those who have to sell into a bad market.After 3 years on the market our property sold for $485k--a month later the buyer put it to auction and the top bid was $234,400.Needless to say he held on.

  4. Paul (1 year ago) Is this Spam?

    Subprime and speculator foreclosures have not peaked yet. We are nearing the bottom, but, despite my own plight we may still go lower. This winter will be a good time to buy I think.

    I am personally selling second home type lots 40% lower then two years ago and still can't find buyers. For me this is much worse then 1991.

  5. Larry (1 year ago) Is this Spam?

    Do we buy real estate now? Without a question-YES! We Americans often think we are the only folks on the planet. Lets look at what is going on in US real estate from a Europeans perspective. In 2003/4 a 400,000USD home in Orlando would cost the European 363,600 Euros. Today the same 400,000USD Orlando house costs 294,000Euros or a 19% savings. The same thing has happened with the Canadian Looney, from .75 to .90. The foreign buyers are also aware of the coming baby boomers both American and European who will be knocking at our realtors doors in the next six months. The real estate market stopped inflating in mid 2005. 24 months have passed. The media is hammering the message that the sky is falling and economic ruin is upon us.Now is the time we should be buying the low hanging fruit. 24 months from now the real estate tree will be picked clean half way.

  6. Steve W (1 year ago) Is this Spam?

    In Nashville, TN., where I have been a realtor for 45 years, the commercial and residential markets are holding up very well.



    Home prices are actually rising. Home sales are off slightly.



    Commercial real estate is robust.



    Apartment vacancy is minimal.

  7. Leslie (1 year ago) Is this Spam?

    We deal a lot more in real estate than in securities. I feel that commercial is a bit toppy at this point, cap rates are lower than we would like....just sold a shopping center at a profit...won't buy anything new till we see how things shake out..



    Residential real estate is slow because buyers need to sell what they have before they can make a commitment and they are scared of getting caught with 2 mortgage payments....I think the severity is a matter of location. Here in Asheville, things are slow, but prices are fairly stable...in southwest Florida, I hear that buyers are coming in, but they are bargain hunting.

  8. DAVID (1 year ago) Is this Spam?

    Great article. It is particularly reasurring when

    a financial expert admits he/she doesn't know about a segment of the market. That person gains my respect and as such I consider his future advice as valid and not conjecture. Now I'm ready to subscribe to your service whenever you have an

    opening. Dave

  9. Peter (1 year ago) Is this Spam?

    I live in the tideater region of Va and it seems that houses are selling just fine in this area. The signs go up and after a while the SOLD goes on and the sign goes away. Just an observation.

  10. Pasquale (1 year ago) Is this Spam?

    I think you are very accurate in that I don't think anybody knows the extent of the damage in real estate this time. For the most part I think it is not as devastating as is reported. Foreclosures make good headlines but so far the number of foreclosures is not catastrophic and even the number most often mentioned of 2 million foreclosures is not a catastrophic number. The latest number I've seen of homes not in foreclosure is 97-98%. How high would it have to go to have a major effect on the economy? I don't think anybody knows. Personally I do not believe it is a serious crisis yet and ultimately people need places to live and most families would rather live in a house than an apartment, so eventually the inventory will dwindle and even if housing prices drop 10-15% more over the next few years it should level off as prices make homeownership within the reach of more and more families. Most people will survive and eventually the effects of the housing downturn will be mitigated and the economy will move forward and correct the housing problem. I have no idea how long it will take, but in the end everything will be okay again and soon after another financial crisis will form like a storm out over the ocean and head towards land and eventually hit and another crisis will be born. C'est la vie & que sera sera and we will all survive and hopefully be smarter for the experience, but I doubt it, lol.....

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