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History Has a Lesson for Real Estate Investors Who Think the Bubble is Fully Deflated
The service that forecast the real estate implosion warns of other bubbles
By Bob Stokes
Mon, 16 Jul 2012 16:15:00 ET
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"Don't try to catch a falling knife" -- it's an old and wise proverb among traders.
 
The idea of it is that lower prices can go a lot lower. Prices have never stopped falling since the housing crisis began back in 2005-2006, so the old saying also applies to residential real estate.
 
Trying to catch a falling house can crush you.
 
Home prices have fallen 45% in many regions of the country – some areas even further.
 
Today's prices may appear to be a bargain, especially given the recent record low mortgage rates. On July 14, Mortgage Daily reported that the 30-year rate is 3.56% and the 15-year is 2.86%. The same report also observes:  
 
Plenty of consumers who would love to refinance can't qualify, sometimes because they owe more than their homes are worth. Others who might like to buy a house are not confident in their employment situation or comfortable that the housing market has stabilized. And still others wonder whether rates once thought impossibly low can't be beaten next week or next month...For weeks, rates have been hitting new lows -- and frequently applications have dropped at the same time.
 
This describes how the mix of trends become self-reinforcing, which accelerates the deflationary spiral.
 
A deflationary crash is characterized in part by a persistent, sustained, deep, general decline in people’s desire and ability to lend and borrow...A downward ‘spiral’ begins feeding on pessimism just as the previous boom fed on optimism.
The Elliott Wave Financial Forecast, August 2011
 
Back in 2005, when it seemed like home prices could go in only one direction (up), the Financial Forecast warned subscribers that a real estate crash was ahead. 
 
The chart below shows the original 2005 forecast from the Financial Forecast along with an updated forecast from the October 2007 Elliott Wave Theorist.   
 
 
 
When Prechter's best-selling Conquer the Crash published in 2002, the book described the turn south in real estate years in advance (pp. 338-339 of the second edition).
 
I am sometimes asked why I have such a 'crazy' outlook for real estate, calling for prices to fall as much as 90 percent. I will let a subscriber answer that question. He recently sent this email:
 
"For what it’s worth, I will recount what my father told me when real estate values were falling in the sun belt in the late 1980s. He was born in 1919 and never stopped talking about the Depression as it made such an impression on him. I asked him one day how far the price of farmland fell in the 1930s. He answered, 'Your Grandfather and I went to the auctions held on the county courthouse steps...and watched auctions for the best farms in this county that had been repossessed, and there were no bidders. You couldn’t borrow a dime to finance a purchase, and if you had money you wouldn’t part with it under any circumstances." 

See EWI's latest charts and read the most recent deflation commentary in EWI's flagship Financial Forecast Service. Learn about your 30-day risk-free trial by following this link.

It's been six years since the housing bust began, and real estate information source Zillow says 31.4% of American households owe more than their home is worth. This amounts to a $1.2 trillion hole as of Q1 of 2012. 

One housing market expert believes today's housing slump could last as long or longer than what occurred after the Great Depression, when home prices took nearly 20 years to recover.
 
Yale economist Robert Shiller floated the idea of a “lost generation” of homeowners...He thinks there is a chance that home prices in the suburbs may never rebound in our lifetimes.
Bloomberg Businessweek, July 16
 
Commercial real estate has also continued to suffer, and America's largest city symbolizes the nationwide decline.
 
NYC Office Leases Lowest Since 2009 on Wall Street Cuts
Bloomberg, March 23
 
Another real estate bubble may be ready to pop.
 
Canadian real estate prices resumed an uptrend after slumping around the time U.S. real estate started to decline.
 
The February 2011 Financial Forecast saw another bubble.
 
In October, [the Financial Forecast] pointed out a defiant final thrust to a new all-time high in Canadian real estate and said it’s “destined for reversal.” The chart [below] of Toronto home prices shows a downturn may be getting started.
 
 
 
Fast forward to this June 11, 2012, Reuters headline:
 
Toronto braces for a deflating condo bubble
 
The article reports:
 
With 325 condominium projects on the market and another 173 towers under construction, Toronto's skyline is spiking with condo units and cranes, with more new buildings underway than in any other city in North America.
 
The Financial Forecast sees more financial bubbles.
 
Other financial asset classes are now sending equally ominous signs of major trend turns.
 
Remember, real estate turned with lightning speed and accelerated downward. Yet the plunging prices were almost universally unexpected.
 
Now is the time to get informed from the forecasting service that correctly called one of the biggest real estate turns of all time. 

Tags: all the same market theory, commercial real estate, conquer the crash, consumer confidence, debt, deflation, economic depression, Elliott wave, financial forecast, foreclosures, great depression, history, home sales, housing prices, market forecasts, subprime lending
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