Sunday, December 31, 2006

Year in Review: Ok, was 2006 a Replay of 1926 or 1929?

1929 is, of course, famous for the big stock market crash that is pointed to as heralding in the Great Depression.

(Whether it was the crash, the credit contraction, the protectionist measures that followed, or a combination that made it so deep and brutal isn't completely relevant for purposes of this discussion)

A lesser known, but geographically brutal crash happened in Florida Real Estate in 1926. By the turn of the year, they were already running out of greater fools. But that fall's hurricane season was a doosy. Here is a small snippet from this link

"After the Florida hurricane, real-estate speculation lost most of its interest for the ordinary man and woman. Few of them were much concerned, except as householders or as spectators, with the building of suburban developments or of forty-story experiments in modernist architecture. Yet the national speculative fever which had turned their eyes and their cash to the Florida Gold Coast in 1925 was not chilled; it was merely checked.

Florida house-lots were a bad bet? Very well, then, said a public still enthralled by the radiant possibilities of Coolidge Prosperity: what else was there to bet on? Before long a new wave of popular speculation was accumulating momentum. Not in real-estate this time; in something quite different. The focus of speculative infection shifted from Flagler Street, Miami, to Broad and Wall Streets, New York. The Big Bull Market was getting under way. "

While the link provided provides a mindbending look at the 20's with all of its similarities to the world we are living in now, I suspect there is a difference.

I believe the Florida Real Estate bubble of 1926 is analogous to the dot-com stock craze. And, the US (global) RE bubble underway right now, is analogous to the 1929 "black tuesday" crash.

Hey, it is "different this time"! The order is reversed! Stock bubble, *then* Real Estate bubble :)
While the dot-com crash and the Florida Real Estate bubble were devastating to those involved, the broader public, not involved in the industry, diversified, or with time before retirement to recoup losses, didn't feel the pain as directly or deeply as the Great Depression.

Today, the sheer number of specu-vestors (both aware and otherwise of what they are doing) and the amounts of leverage and suspect credit being employed are analagous to the 1929 stock market "crash". The difference of course, is that in 1929, stockholders with too much margin were liquidated out of their accounts "automagically" by their brokers as their equity became too low to justify their holdings, creating a self-reinforcing vicious cycle down.

Since margin calls happen within a matter of days it all happened within a few weeks of the first signs of "cracks" in the liquidity of the general market.

But what about residential real estate?

The foreclosure, short sale, auction, or REO sale takes *considerably* longer. In fact, if a borrower continues to make payments on his or her loan, a bank cannot go after a technically "underwater" borrower to make a payment to bring up their equity coverage....

However, what we've seen in the past, is that although there are some that will ride out the cycle and continue to pay down on a loan that is more expensive than the underlying asset, there are a large number that won't.

A large number of specu-vestors will continue to "feed their alligators" (debt burden). However, as transactions become more scarce, it will effect a large portion of the economy that relies on new building and real estate transactions to live. Cracks in the employment picture should create the first "rush to the exits" in 2007 -- especially as inventory balloons.

However, compared to a stock market crash it will be like watching a "slow moving train wreck". It will take months and YEARS to play out. Like I've said before on this blog, if you are tempted to step in and buy something with all these bargains around next year:

Don't catch falling chainsaws....
while they are running....
in the dark...
between your legs!

wait for median incomes to median home prices to get to 2.5ish
wait for rent vs. own to be a breakeven proposition assuming NO APPRECIATION
and, even after that, consider what might happen to property taxes if governments start hurting for revenue while a bunch of boomers start retiring and demanding services that local municipalities can't afford.

The reality is, that even if you buy your home in cash and self-insure, u still don't really own it if someone can tax u at any rate they deem politically expedient at the given time.

ciao for now,

1 comment:

Anonymous said...

Whats going on with R/E prices in Montevideo?