Depression, Deflation & Short Sales

Mid-Day Market News & Commentary by Chris McLaughlin, December 8, 2008
http://www.shortsalesriches.com/welcome.html

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The financial markets were in better shape this morning as investors were optimistic that the enormous infrastructure spending plan proposed by President Elect Barack Obama over the weekend will help the economy.  The investment is the largest since the 1950s, when the interstate highway system was built.   And investors appeared to be pleased with a possible $15 billion bailout for the Big 3 automakers.

At 11:20 AM, the Dow Jones Industrial Average was up 303.22 to 8,939.03 and the Nasdaq was up 49.57 to 1,558.

Today’s Commentary: Depression, Deflation & Short Sales

The media is beginning to compare the current economic downturn with the Great Depression; whether or not you believe the comparison is warranted or not any prudent short sale investor would be wise to evaluate the wisdom of buying real estate in a deflationary economic situation. After all, if history repeats itself we may see housing starts drop by up to 80 percent as they did during the Great Depression.

Today, we will take a few minutes to examine both the similarities and outcome of real estate during and after the Great Depression…then make up your mind whether or not Short Sale investments make sense. The first thing to remember is that the Great Depression actually took place over several years; the stock market hit its peak in 1929 then continued to drop until 1932…a total of three years. During that three year period of time, housing starts dropped by 80 percent. Likewise, housing starts hit their recent peak in 2006 and have dropped by nearly 70 percent as of this writing at the end of 2008. Notice, during the Great Depression actual sales prices of homes continued to rise even as housing starts declined; likewise, the same pattern is demonstrated in recent trends as housing prices reached their peak between 2006-2007…nearly a year after housing starts began to decline.

The next similarity concerns speculation; immediately preceding and during the 20’s massive speculation took place in the real estate market especially in areas such as Florida which resulted in the skewing of data for other parts of the nation. Today a similar pattern can be discerned as speculation in California, Florida, Nevada and Arizona lead the way in both price appreciation and more recently; foreclosure filings. In fact, these four states alone represent over 50 percent of all foreclosure filings nationwide.

Despite the financial pain resulting from price declines and plummeting housing starts, savvy short sale investors would do well to notice that during this same period of time, the wealthiest 1 percent continued to purchase land, farms, homes and other assets so that by the end of the Great Depression they owned a full 40 percent of the nation’s wealth. Many of the same states impacted the most by falling prices and speculation became the new growth areas during the decades after the Great Depression; California and Florida experienced immense population explosions which made many wealthy.

Finally, it should be noted that those who invested in stocks during the same period of time had to wait until 1954 before the stock market reached its former high (not adjusted for inflation!) whereas farming, natural resources and real estate recovered long before that period. Bank loans all but evaporated creating a situation where real estate was only available for purchase by those who could pay cash or other high net worth individuals able to obtain loans in a restrictive market. Meanwhile, the average citizen attempting to work for a living found high rates of unemployment (by some estimates 20 percent or greater), an actual decline in wages and increased productivity quota of over 40 percent.

In a nutshell…

1.     Those that depended solely upon a job for their income faced falling wages, high unemployment and back-breaking production quotas.

2.     High net worth and/or wealthy individuals that purchased stocks had to wait nearly 25 years for their investments to reach former highs.

3.     Those able and willing to purchase real estate lead the recovery with renewed wealth.

Your Personal Plan of Action

1.     Take the Big Picture Approach. More than one investor has been led astray by taking a narrow perspective that blinds them to the full possibility and potential of real estate.

2.     Don’t Ignore your Instincts. It takes courage to act when others are fearful but that is exactly what creates opportunities. Whether you believe the market is rational or motivated by fear and greed the basics of supply and demand hold true. Those who own what others want and need will benefit; during tough economic times, everyone goes back to the basics. Sales of big LCD TV’s or the latest iPhone might suffer but food, safety and shelter never go out of style.

More on Tuesday!

See you at the top!

Chris McLaughlin
http://www.shortsalesriches.com/blog

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