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From
Buyincomeproperties.com Real Estate Education
A 1993 Wall Street research report takes a strikingly dim view of the outlook for the nation's housing markets and warns that a crack in the housing and real estate pillar of individual investment portfolios could throw the United States into a second Great Depression. Authors believe "excess capacity and record debt levels" associated with "the most outrageous financial mania in all history" will produce deflation in the United States (and possibly worldwide), and that such deflation will spell trouble for real estate. Their argument centers on the gap between residential rents and valuations and surmises that real estate price trends can be analyzed with the same metrics in particular the price/earnings ratio that stock analysts apply to equities. "...the price of real estate can't be justified by the amount of rents received. We look at this in the same way as the P/E of a common stock. If the price of the company's stock is way out of line with earnings, that stock will eventually decline," the authors wrote. The gap between the cost of renting a home and the cost of owning a home "can only be filled by rentals rising or home prices falling. With vacancies increasing in every area of real estate, we doubt that the gap will be filled by rents increasing. There is no other solution to this problem except for housing prices to fall, and that won't be a pretty picture since it seems that every homeowner in America has been borrowing money on the equity of their homes," authors argued. The authors supported their argument by pointing to selected markets in the Midwest where home prices have softened and delinquencies and foreclosures, in the authors' estimation, are "rampant." "Just last month the U.S. hit a near record delinquency rate and a record foreclosure rate, with almost all coming from the areas of soft home prices. If home prices that have been skyrocketing start to fall we could have a snowball effect, and delinquencies and foreclosures could really get out of hand," the authors warned. The 12-page paper begins with a recap of the stock market mania of the 1990s, when "every man, woman and child in America wanted to own a piece of Cisco, Dell, Microsoft, Intel, JDS 3 Uniphase, etc." The authors cited business-to-business Internet stocks I Two Technologies, Ariba, Commerce One, CMGI, Internet Capital Group and Priceline as the "most egregious examples of greed." CMGI and Internet Capital Group once traded at $163 and $212 a share, respectively, but are now penny stocks, according to the report. The authors suggested this stock market "mania" left behind a debt load when "stocks crumbled (and) individual investors were left holding the bag." They believe that debt load is problematic for real estate. "Is it possible that this mania could end without the debt contracting or the individual investors disgorging themselves of the stocks and stock mutual funds they rushed in to buy at any cost? We don't think so!" the authors exclaimed. Real estate is "the most vulnerable segment for an implosion of the debt bubble" because it is the main asset class being used as collateral for lenders to make new loans, according to the authors. They cited loans to undeveloped countries, farmers, the energy sector and rust belt manufacturers along with investment in junk bonds and corporate leveraged buyouts as historical examples to support their argument.
The authors' dire conclusions are that investors are too dependent on housing, that if housing weakens the nation could be headed toward another major economic depression and that if that happens, lending institutions would be at fault.
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