“Is a Real Estate Crash the Next 
Great Calamity Waiting to Happen?” 

Here’s how to read the market’s ‘warning signs’ of a possible 
real estate crash . . . before it strikes! 

            Have you ever noticed that trends that can’t go up forever . . . don’t? 

Looking back at the steep climb the stock market took in the 1990’s, the lesson we all learned – or should have learned – is that markets can get ridiculously overpriced and then come crashing down. 

            Real estate is no exception to this rule, and real estate crashes happen as well.  Housing markets that make spectacular climbs have also been known to make spectacular falls. 

            “But for the past 40 years,” you may argue, “isn’t it true that U.S. home prices have gone up every year, rising by at least one or two percentage points greater than the rate of inflation?  And because inflation always goes up, doesn’t this mean that there has never been one single year in which national home prices have ever gone down?” 

            Yes, you are 100 percent correct.  Everything you say is true.  

But that’s only part of the picture.  This is because there is no such thing as one “U.S. housing market.”  Instead, there are 100’s of “micro-markets” in the United States, all of which may not be rising.  You’ll find that have real estate markets have experienced gut-wrenching drops, especially if prices have spiked upward to extremely expensive levels.

             When these busts strike, it can take years – sometimes even a decade – before people who bought a home near the top of the market get back to breakeven. 

From Boom to Gloom: 
Los Angeles and Houston Case Studies 

            Take Los Angeles, for example.  Fueled by an expanding economy in the 1980’s that caused housing prices to rise by 77 percent in five years, military cutbacks in the early 1990’s hit the area hard.  

            Los Angeles home prices fell by over 20 percent of their value between 1989 and 1996.  The median priced home fell from $230,000 to $175,000.  For the homeowners who held on, it took nine years before prices returned to their 1989 levels. 

            Houston, Texas went bust in the mid-1980’s.  When the booming oil market collapsed in 1982, so did the economy and so did real estate prices.  Home prices fell from $98,000 in 1982 to $61,800 in 1988. 

             “Prices fell so much that people owed more on their mortgages than their homes worth,” said David Weil, an economics professor at Brown University.  “They’d drive to the bank and drop off their keys to their homes and just leave.” 

To find work in other cities, the mass exodus out of Houston became national news. People wanting to move had to wait 30 to 60 days to rent a U-Hail.  It seemed that everyone’s favorite expression became: “Would the last person out of Houston please shut off the lights.” 

More Real Estate Horror Stories:
Hartford and Honolulu 

But Los Angeles and Houston are not the only cities that have gone through tough real estate times in the last 20 years.  Home prices in Hartford, Connecticut have also fallen victim to a bad job market.  From 1984 to 1988, homes prices went from $87,400 to $167,600.  This was a 92 percent rise.  

            But when the major insurance companies headquartered in Hartford started moving out or laying off workers, home prices fell.  It wasn’t until 2001 that homebuyers who bought in 1988 would have recouped their investment. 

            Honolulu, Hawaii was another hot market that turned ice cold.  In 1995, homes in this city carried an average price tag of $360,000, the highest in the United States.  Property values had risen an incredible 122 percent in 10 years. 

            Then prices started to drop, which was fueled by several factors.  First, the massive run-up in housing prices got way ahead of population and income growth, which were only increasing by a 1% and 2% annual rate. Second, the Japanese economy went into a severe decline, bringing the once seemingly endless flow of investment money into Hawaiian real estate down to a trickle. 

            By 1999, the convergence of these two negative factors pushed Honolulu’s average home price down to $290,000, according to the National Association of Realtors.  This was 19 percent drop from its 1995 peak, and it wasn’t until 2003 until prices recovered and returned to breakeven. 

Today’s Outlook 

History proves that there is no moat built around any real estate market.  When a local economy slides, jobs are lost.  When jobs leave, people leave, and home sales go down … which takes real estate prices down.   

Real estate prices can also drop after a period of excessive speculation.  Bubbles occur when the price of homes accelerates beyond its underlying value.  This happens when the gap between housing prices and what people can afford (or what a home can be rented for) reach distances that are too far apart.    

Sure, real estate prices are likely go back up in the long run.  Even so, there’s a problem.  Today’s homeowners – and especially those who bought near the peak of a manic boom – are more highly leveraged than ever before in history.  This means that when prices start to drop, they may not be around for the long run.  Their debts will bury them. 

Highly leveraged homeowners – and investors with negative cash flows – may be forced to sell into a market that has a dwindling number of buyers.  Depending on how over-inflated the market became before property values topped out, price discounts that owners may have thought unimaginable a year or two earlier can now the norm. 

          Market downturns, however, don’t strike overnight.  They take time to develop, usually 3 to 6 months.  This means if you are alert – and watch for signs that the number of sellers are starting to outweigh the buyers – you’ll know that trouble may be brewing and its time to make adjustments. 

To anticipate impending reversals, there are five “early warning signs” that are thoroughly detailed and described in my book Timing the Real Estate Market.  One you start to get negative readings in certain key indicators, market research proves that you would be wise to heed their warning. 

           The price of the book is $24.95.  Click here to order. 

           The secret of surviving real estate downturns is to be a spectator, not a participant.  You want to be out of the market waiting to buy low … not in the market waiting to recoup losses.  Find out how to do this.  Order Timing the Real Estate Market now.