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When Will the U.S. Housing Market Bust End?

Housing-Market / US Housing Oct 19, 2010 - 06:38 AM GMT

By: DailyWealth

Housing-Market

Ten thousand a month... That's how many foreclosures Palm Beach, Florida-based GMAC-employee Jeremy Stephan was required to sign off on. His signature confirmed the paperwork was all in order, kicking off the foreclosure process.

Think about that... That's 2,500 foreclosures a week... 500 a day...


That's more than one signature a minute – non-stop – for an eight-hour workday. Could he really have even looked at the paperwork?

News stories like Jeremy's are what kicked off the latest foreclosure mess. Major banks have halted their foreclosure proceedings in most states.

This won't be the last story in the mortgage mess. So when will the housing bust end? When will housing recover? Understanding the opportunities we have in real estate today means understanding how to answer these questions.

First, you should know fallout from the housing bubble will go on for much longer than you think. That's how it goes with bubbles and busts...

Bubbles soar higher than anyone can imagine... and then the busts go on longer than anyone can imagine. The sequence of a bust, as we've written before, is "first the guillotine, then the sandpaper."

First, prices collapse. This is the guillotine stage. Then, prices stagnate for many years. This is the sandpaper stage.

In the Nasdaq bust of 2000, for example, the Nasdaq fell hard from its peak of over 5,000 in the guillotine stage. It has been in the sandpaper stage at around 2,000 ever since.

Japan's real estate bust of the early 1990s is another example. The "sandpaper" stage in Japanese residential real estate has lasted nearly 20 years now.

In the U.S. housing market, the guillotine stage is over. The market has fallen from ridiculously overpriced to now reasonably priced. But, like in Japan, the unwinding of the bad debts in housing will hang over the market for years and years.

(You can even make the case that it's worse in America than it was in Japan. There was no Fannie Mae or Freddie Mac in Japan... there was no mortgage "securitization" market. Banks in Japan had to hold on to bad mortgages. No government entity bought them, like it did in the U.S.)

So when will the housing bust end, and when will housing recover?

Those are two separate questions... The guillotine stage of the bust is over. That's what gets all the headlines. The sandpaper stage is the hard part. And with the overhang of foreclosures and no end in sight, the sandpaper stage will go on for a very long time. Using Japan as an example, it could last a decade, or more.

But I still believe we have opportunities in real estate... The opportunity is buying "distressed" properties that are being liquidated at very low values and then selling them closer to market price.

My rule of thumb is to buy at 40 cents on the dollar and sell at 80 cents. I will admit I haven't bought that much... I've shown up at property auctions. Most of the time, the first bids alone are above what I was willing to pay. But the opportunities ARE out there.

It is what it is. You can still make money in this environment. But you simply can't count on any price appreciation... If the investment works WITHOUT considering price appreciation, that's good. Any price appreciation would be icing on the cake.

The sandpaper stage of the housing bust could take a decade or more to get through. Invest accordingly...

Good investing,

Steve

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2010 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

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