These two topics are written about ad nauseam all over the mainstream media and the internet. Everyone has an opinion. I do too. Perhaps the one thing we all have in common is a cracked crystal ball. Calling my take on the timing of corrections and recoveries an opinion might be too much. My take isn’t so much a strongly held opinion as it is a sense of what might be a potential outcome based upon previous experience. (Of course, that’s opposed to future experience, right?)
Corrections and their recoveries have come and gone for reasons many times totally unrelated to the previous cycle. This isn’t meant to be an economic treatise, as I’m not even close to being an economist. The following is merely one guy’s opinion — and a pretty weak one at that.
Just an aside, but, the term correction fascinates me. The immediate visual popping into my head is one of the Liquid Paper we used back in the day to correct typing mistakes.
There was an historical run-up in prices back in 1976-1979. The correction began in the fall of ’79. It lasted roughly four very long years. I remember closing an apartment sale in December of ’83 (7 units) and was beside myself with glee when the adjustable rate loan started under 12%! I distinctly remember telling my client the interest rate would fall slowly over time, as it was attached to the COFI (cost of funds index). It did exactly that.
The cause for that boom real estate market? In short, and again, in my opinion, it was a direct result of the monetary policy urging of the inflation of our money supply. It was as if there was a machine somewhere spitting out hundred dollar bills like M & M’s. As soon as the Fed, with Paul Volker as chairman, threw the money printing machines away, interest rates and inflation both subsided — with a vengeance.
I remember FHA rates over 16%. Also, inflation over 20%. Prime rate was in the same range. Anyone who lived it will tell you it was a very ugly combination.
From late 1985 through the end of 1989 we saw another boom lasting around four years or so. The main reason was the tremendous power exhibited by the income tax cuts finally making themselves felt — along with the incredible turbo-charging affect of investors’ ability to take advantage of depreciation. The normal, (at the time) 30 year depreciation schedule for residential investment property was reduced to 15 years. When combined with all the new jobs that also resulted from the tax cuts, the economy as a whole took off. The 15 year depreciation schedule caused millions of investors and agents/brokers alike to lose significant weight due to all the dancing in the streets.
Along came deregulation of the savings and loan industry, (a huge mistake he said, using 20/20 hindsight) and with it, the S & L crisis. And a crisis it was, no doubt about it — senate hearings and all. Licensed since Nixon’s first months in office, this was the worst correction, downturn, whatever you want to call it, I’ve ever seen first hand. Most of the trash talk today by the doom-and-gloomers, though hyperbolic in many cases, still doesn’t match the reality of the early to mid 90′s. I’ll speak of San Diego here. Vacancy rates in the 20′s. Rental rates falling 15-30% depending upon location. It was as close to blood in the streets as I’ve ever seen in person.
San Diego was hit the worst, at least from where I was sitting. We simultaneously lost major employers (plural), almost overnight. That and the S & L crisis was a cruel and devastating one-two punch. What a nightmare.
Once the foreclosures were pretty much sold off, and the market more or less caught its collective breath, things began to return to normal. The sun was allowed to shine again — no more financial eclipse. The actual process took about five years, though you could credibly argue longer. It wasn’t until late ’95, spring ’96 that normalcy seemed to be a realistic description of the local market here.
We just saw the end of the latest boom market towards the end of 2005. Low interest rates, liberal, um, underwriting, combined with huge Wall Street cooperation (buying many of the questionable loans) made for the perfect recipe for a real estate boom, didn’t it?
Then along came income tax and capital gains tax cuts.
Again, much like the mid-late 80′s, job creation shot up. California lost jobs due to many businesses throwing in the towel because of the high taxes constantly being aimed their way. State political leaders at the time didn’t realize their favorite Golden Goose, business, could just as easily fly to another state and lay golden eggs without the permission of the political hacks in charge. It was the direct cause of the governor losing his job.
This most recent boom was so powerful it wasn’t even slowed a bit by the recession of 2001. Economists were talking about the weak recovery. That talk stopped soon after with the long term positive affects of cuts in both income and capital gains taxes. Job creation took off, as history shows. Real estate never paused. It turned out to be the longest uninterrupted rising real estate market I’ve ever personally seen — from Nixon to today.
Now most of us are wondering when this market correction will emerge into normalcy — use your own definition for normal.
1976 — 1984 — 1988 — 1996 — 2000 — 2004.
What do all those years have in common? They’re presidential election years of course. They represent almost 30 years of our most recent history. In all those years, only 1980 and 1992 weren’t good years for real estate or the economy in general. 1980 saw us in the aftermath of the longest running money-printing spree in modern memory. (up to that time) 1992 was smack-dab in the middle of the S & L crisis.
One could argue, both exceptions, ’80 and ’92, were the result of catastrophes that hadn’t happened since the end of World War II, and haven’t happened since. In other words, unique events when looked in the historical window of 1946-2007.
Even if you give no value to that idea, (it’s surely not supported in any way by close study) 75% of the years in which presidential elections were held — the economy did from Good+ to Smokin’ Hot.
’76 — ’84 — ’96? All three years actually were the first full calendar years of their period to offer empirical evidence of economic recovery.
When do we get to recover from our current real estate morass?
My thinking is by summer of 2008. Would I bet more than $5 on being right? No way. Nor would I bet more than three people. I refer you to the cracked crystal ball in the corner. Besides, this opinion, and the so-called evidence behind it, has more leaks in it than a coffee filter.
At best what we see is even shaky as a loose correlation. Still, it’s there and it’s history — 75% of the time for the last eight presidential election years.
But if in 2009 we’re reading in the mainstream media, (you know, the Johnny come lastly guys) and they’re pointing to sometime in ’08 when we were officially in real estate recovery — remember you heard it here.
By the way, in a recent Bawldy award post, Mac Whitmore predicted the bond market yields would not rocket up as many had gleefully been predicting. When he wrote that, the 10 year bond was well over 5%. It’s now at 4.788%.
Seems Max might have seen something others missed. One in a row for the good guys.
Finally, it makes sense to put the current real estate correction in historical perspective.
I’ve lived through several of them, and the two worst, were what followed the October ’79 crash, and the S & L crisis in the 90′s. Today’s ‘ordeal’? No disrespect intended for those who have suffered, sometimes in life changing ways, but this correction is mild in comparison. In fact, I’ll go a step further.
Compared to those two downturns, this correction is like a six-year-old’s birthday party running out of cake and ice cream. Those who went through earlier bad times know exactly what I’m talking about. Those who are experiencing their first correction?
Ask somebody born before 1960.