This post is written as part of AOL Money & Finance's Best & Worst of 2006. Vote for it as the Money Story of the Year or check out the other nominees in the category.
The softening real estate market reminds me of the difference between a recession and a depression. If your neighbor loses a job, it's a recession; if you lose your job, it's a depression. Regarding real estate, if your neighbor's house goes into foreclosure it's a real estate recession; if your house goes into foreclosure it's a real estate depression.
Last week I saw strange people hanging out in front of the house across the street from mine. One of them told me he was an auctioneer; another said she was a real estate agent and the house was in foreclosure. Since we are not in danger of foreclosing on our house, by my previous definition, we are in a real estate recession.
The softening real estate market is a money story of the year because it's slowing down the economy. A leading home builder said we were in the worst housing market in 40 years. In October home prices fell nationally at a 3.5% annual rate -- the biggest year-over-year price decline on record. And homeowners used their homes as a source of cash -- withdrawing $800 billion in home equity in 2005. Therefore, a reversal in home prices could boost foreclosures, reduce consumer spending, and crimp consumer confidence. Moreover, every dollar spent on buying a new house is worth another $7 to $8 to the overall economy, from spatulas to fertilizer. So a decline in home building could lead to job losses in construction and its related industries.
I view the softening real estate market as a real estate recession -- if I can keep paying my mortgage, perhaps it won't become a depression. Regardless, it looks like things will be getting worse before they get better. I lived through a real estate slump in the late 1980s -- during which time my house lost about 15% of its value. This slump looks a lot worse to me.
Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College.
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Reader Comments (Page 1 of 1)
12-22-2006 @ 5:04PM
Linda Pliagas said...
It's upsetting that unkowledgable "real estate investors" assume they can rake in the big bucks by purchasing just about any property on the market and then selling it after a short time. That is mere speculation and very dangerous. However, no disrespect, but I disagree with the negative tone of your post. I am a real estate agent in California, but my primary source of income is real estate investing. I own apartment buildings in five states, I started five years ago by pulling out a conservative amount of money from my primary residence. To this day, I continue to profit very well from real estate, as do my other investor colleagues. In fact, my broker just sold a home with mutilple offers OVER ASKING PRICE. Yes, even in California, it can still happen! The market is also robust in a few pockets scattered throughout the country. If an investor does their homework diligently, and they proceed to invest with caution, (which means they prepare to hold and maintain the property long-term), then real estate can be a prosperous investment.
12-28-2006 @ 2:28PM
Maureen said...
This "softening" real estate market is not that alarming -- while he says it's the biggest decline on record, he fails to say that in the past 10 years, it was the biggest, most meteoric RISE in housing prices ever!! Homes that sold in '99 or 2000 for $350k shot up to $700k within months! That phase simply was ABNORMAL and couldn't continue on that insane path forever... This softer market is simply righting itself from the bloated unrealistic skyrocketing over-inflated prices they had become... Now, things are a bit more "normal" -- it's not a recession or a depression, it's a right-sizing that has long been overdue... And much needed, and much welcomed... And businesses will NOT suffer, because now, more people will be buying all kinds of homes, and needing all the same things as before, even more, since fifty (50) year-old homes still cost more than a half-million dollars ($500k) and will need tons of work done to them...