In SF Today – The View Isn’t Any Prettier From Here

Waiting in the airport to head off to San Francisco from Boston, I heard a quick blurb on the TV that the market was swooning. No surprise there. As earnings season kicks in and companies reports prove that the perennial “second half recovery” will not happen, markets will sell off. The fun started with GE as they ‘surprised’ everyone with poor numbers.

What many people do not understand is, how much the financial markets, job markets, and the real estate market are intertwined. As Bill Fleckenstein points out today in his blog, housing WAS the economy for most of the 2000’s. As real estate suffers, job losses will increase and the stock market will drop.

Being in San Francisco, one of the most expensive cities to buy real estate in, we may see the edge of this whole financial jenga game cut most deeply. My personal prediction for real estate prices, after studying price history in the last correction (1989-1997), is 25-30% or more. For example, peak to trough median housing prices in Somerville, MA (where I lived as a child) fell over 34%and took another 5 years after the trough to recoup their previous high (source: That correction was caused by classic economic reasons (builders overbuilt in anticipation of increasing demand which eventually ran out). This time, we had over building, but demand was artificially spiked by new mortgage products and easy money.

This downdraft could exceed the price declines resulting from the previous correction which in my opinion was more natural in it’s causes. I could equate the real estate bubble with GM’s offer of “employee pricing” a few years ago. What GM did was cause buyers to buy new cars earlier than they would naturally, and basically “stealing demand” from future years. Housing was the same way. By offering 1% down mortgages and low rates, we allowed buyers, who would have normally had to wait a few years to get a down payment, the ability to buy now – effectively stealing future housing demand by pushing up future purchases to the current year. Once you do that, there is a big spike in prices, but then soon no one is left to buy and the vacuum creates huge downdrafts in prices in the ensuing years.

A lot more pain could be on the way, and few people realize how far the tentacles of economic poison can stretch. if your net worth is tied into the 25 year bubble (basically asset inflation due to constantly lowering rates), you may want to consider ways to protect yourself. Good luck out there.

Chris Grande