Money in a Time of Crisis (Part 5): Real Estate

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Property prices fell 36%, when adjusted for inflation, between the U.S. real estate peak in 2006 and the year 2012. Since then, real estate prices have been steadily rising and are once more near their pre-recession highs. Low mortgage rates helped to make 2016 a great year for real estate investors, with home values, prices, and sales showing some of their strongest numbers since the economic downturn. This has made real estate an attractive opportunity for investors.

 

Despite recent real estate activitymortgage home ownership rates remain the lowest in 20 years, and the average age of homeowners is 10 years higher than in 1994. However, this has encouraged many investors who believe that a wave of Millennials are poised to purchase homes. Some experts are even predicting 6 to 6.5 million home sales in 2017 along with 160,000 new homes being built each year up to 2024.

 

In contrast, Bank of America Corporation analyst Chris Flanagan predicted in 2015 that U.S. home prices would experience three consecutive years of modest decline beginning in 2017. He wrote, “We do not see income growing fast enough to keep up with the past few years of rapid increases in home prices”

 

Likewise, real estate analyst Mark Hanson notes that housing prices are the same to 20% higher than they were during the 2006 real estate bubble, but median incomes are down 5% to 10%. He believes the housing market is being propped up by unorthodox capital at a time when average families are not buying because of high prices. Believing that U.S. housing prices are inflated 25% to 60% higher than the market can support, Hanson anticipates a sudden resetting of market prices to 20% or 40% lower than they are today.

 

Likewise, founder of Dent Research and former financial consultant Harry Dent believes a massive real estate market correction is imminent. He writes:

[T]he best way to gauge your downside risk is to look up the value of your property in January 2000. … When the bubble bursts, this is the point to which your property is likely to fall—or perhaps even 10% to 20% lower. … As a rule, bubbles always retreat from their peaks to where they began, or even a bit lower … To just erase the bubble that started in January 2000, home prices would have to fall 56% from their top in early 2006. That’s 49% from the recent highs in early 2016.

 

The United States is not the only real estate market exhibiting warning signs. The Telegraphreports, “Property prices have climbed to dangerous levels in several advanced economies, raising the risk of massive price falls if markets overheat, according to the Organization for Economic Co-operation and Development (OECD).”

 

Countries around the world, such as Canada and Sweden, have commercial and residential prices that are “not consistent with a stable real estate market.” Real estate in Mumbai, India has experienced a 500% appreciation since the year 2000, and prices in Shanghai, China have surged 587% over the same time period. In fact, the real estate bubble in China is the largest of any major country in modern history, boasting the most overvalued prices in the world. Real estate prices compared to personal income are 37 times higher in Hong Kong, 33 times higher in Beijing, 27 times higher in Shanghai, and 25 times higher in Guangzhou.

 

China’s real estate bubble is driven by the over-investment of a government promoting urbanization and high savings rates by the Chinese people who love real estate and tend to shun stocks and bonds. China has built entire cities that are uninhabited, and as much as 24% of condos and houses in Chinese cities remain vacant.Not only has China over-produced commercial and residential buildings, but China’s demographic trends have peaked. An aging population and a declining workforce is not likely to provide the demand needed to meet China’s real estate supply. Foreseeing an inevitable bursting of the bubble, over half of China’s millionaires are considering emigrating to protect their wealth.

 

Given the inflation of global real estate markets and the potential of catastrophic losses in a market correction, real estate cannot be the refuge that we seek.

 

What perspective does the Bible give? What is THE refuge that we seek?

 

To be continued . . .

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David Warn

Dave Warn is the founder and director of Forerunners of America, a ministry dedicated to help people discern the hour, respond in faith, and help bring in the greatest spiritual harvest our nation has experienced in generations.
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