My Investing Notebook :: Useful notes on investing. ::

The Panic of 1893 was a real estate bubble-induced depression thatscared people away from building houses for a long time. Housing pricesand real estate values in general declined for the next 27 years afterthe 1893 Panic. Think about that. For twenty seven years, not until1919 or 1920, could you buy a new home with the expectation it wouldincrease in value. In other words, housing was a commodity, speculativeat best, certainly not an investment.

I see talking heads on TV nearly every week, self-professed realestate experts, who say the real estate contraction is almost over.Housing values have declined over 25% since 2006. That percentage isgreater than the percentage that real estate values declined in the1930’s during the Great Depression. So their argument is that realestate prices have already declined as much as they did during theworst economic period in American history. If you listen to theexperts, mortgage rates are low, home prices are low, so there is nobetter time to buy a house than right now. But, as Paul Harvey wouldsay, here’s the rest of the story…

There were very few new home owners in 1929 when the stock marketcollapsed ushering in the Great Depression. Why? Because the value ofindividually owned homes had only recently, the last 9-10 years or so,started to rise. It wasn’t until after World War I ended that new homesbegan to be built again and housing prices began to increase in value.Most people either lived in or near the cities and rented apartments,or they lived on rural farms as hired hands or tenant farmers or sharecroppers. Not only did very few people buy new houses at that time,there aren’t even any government statistics available on home buildingor home ownership from that time period. Therefore, when the stockmarket collapsed in 1929, housing prices were already near theirall-time lows having barely recovered from the Panic of 1893, as youcan see in the link below which is Case/Shiller Housing Index datadating back to the Panic of 1893.

The main thing to notice in this chart is how housing priceshyper-inflated beginning around 1998. The home prices in 2000 servewell as a baseline for a historical median. You can see that homeprices have pretty much hovered around that relative median value sincethe 1800’s. But in 1998 home prices took off like a rocket ship as theFederal Reserve began to lower interest rates creating the largesteasy-money housing bubble in recorded history.

Housing prices have only fallen about halfway down from their 2006highs to the historic median price I alluded to above. Empirically,this would mean housing prices still need to fall another 50% just toget back to a stable median price. But this is obviously the biggesthousing bubble in the history of America. It would not be surprising ifhousing prices fell to levels comparable to the crash after the Panicof 1893. Should that happen, housing prices could easily decline toless than 75% of their 2006 peak values.

Bottom line, it simply would not be wise to invest in housing untilwe have a much better idea how this recession is going to play itselfout. The data doesn’t lie, particularly Case/Schiller data. Justbecause a house is down 30% in the last two years does not make it abargain. There is no reason it can’t lose another 30% or more in thenext two years. So just be careful.

Reference
Five reasons why buying a house is a right move – the comments are the real value here