The US housing market part 3: That’s not a crash

That’s not a knife. THIS is a knife…

I would never suggest that the US housing market is not in a bad way. People are hurting, there is negative equity and prices still haven’t stabilised. The leveraged nature of the asset class magnifies the pain and it flows onto other sectors due to people feeling poorer as their house goes down in value.

That said, does it really stack up as a crash when we compare it to some other crashes over time? Firstly, let’s review the housing the ‘Housing Crash of 2007’. Bad news yes, particularly if you’re a new buyer…

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1929 is the benchmark for crashes and I hear this housing ‘crash’ mentioned in the same breath far too regularly. That’s not a crash, THIS is a crash:

DJIA 1920 1940  annotated

Source: http://stockcharts.com/freecharts/historical/djia19201940.html (annotated)

Yes, it’s bad. And when we look at some of the submarkets like Nevada, it’s certainly a crash, but not everywhere. Some states have barely noticed.

In 1929 values of many companies went to zero. Stockholders were left with nothing. In this ‘crash’ investors still have land and a house that can earn rent. Home owners still have a roof over their head. To me (and may real estate investors and home owners), THAT is the value of real estate. It’s real, it’s tangible and along with food, water and clothing, provides one of the necessities of life. There will always be some intrinsic value in a home (we’ll tackle the $1 Detroit houses in a future post!)

Considering the role of housing in sparking the current crisis (securitisation of sub-prime mortgages, predatory lending, etc.), I think it’s a testament to the asset class that despite being probably the most maligned sector in the world right now, it’s down -5% over 12 months, -17% over 5 years and positive over 7 years (an average property cycle btw). Compare that to 1929.

That’s not a knife. THIS is a knife.

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