Keep a Close Eye on the Housing Market

The economy is inexorably entwined with shifts in the housing market--so pay attention.
4 min read
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Q: Why is it important for all entrepreneurs to understand the housing market?

A: More than any other time in history, the housing industry has been at the epicenter of the economic boom--and then the bust--of the last decade. Home equity was the engine of consumer spending during the good times and became the main source of fear in the bad times.

Because so many "experts" are not experts at all. In fact, the people who normally analyze the housing market in the media are so woefully out of touch, they almost always get it wrong. I'm not exaggerating. Every week brings a new housing statistic and a new low-water-mark of inaccurate analysis by the pundits.

This mass misunderstanding of the housing market caused a near collapse of the financial markets and necessitated an unprecedented government bailout. Don't believe me? Let me explain.

When the housing market was swinging, a man named Dr. Robert Shiller predicted the housing bubble that would soon burst. He became very popular, and his index, the Case-Shiller Index, became the standard by which media pundits analyzed the housing market.

In 2003, you could have asked every trader of mortgage-backed securities on Wall Street this question and gotten the same answer:

Q: Is the housing market cyclical?

A: Yes, of course the housing market is cyclical.

Then, when the cycle did the inevitable (turned around), all heck broke loose.

In 2006, home prices peaked and then began to decline. Dr. Shiller and his following proclaimed the bubble was bursting, and we were treated to a relentless media drumbeat of the housing "meltdown," "free fall," "collapse" or "blood bath" (take your pick).

Q: Was it a correction or a collapse?

A: It doesn't matter. The Housing Meltdown was born and quickly became the prevailing storyline in every newspaper and newscast in the nation. Then things got really serious. Asset managers on Wall Street came to the conclusion that the housing market was melting down and feared the billions they had invested in mortgage-backed securities would be a total loss.

The stampede began. The value of a MBS went down to practically nothing. The balance sheets of the world's major banks started to evaporate as the traders who couldn't get enough of these securitized housing instruments during the boom became convinced that they were toxic. Accounting regulations required the institutions to mark down the value of their assets based on this evaporation of value, and the banking crisis hit us like a ton of bricks.

We all know what happened next: TARP, the second Great Depression, a credit crisis and the greatest disappearance of wealth in our history.

Hysteria has consequences. Surely the market for MBS melted down, but did the housing market, too? Since 1995 (the beginning of the current housing cycle), the median price of a home in America increased from $117,000 to $221,900, a 90 percent increase. Since the "bust," it has come down to $177,900, a 22 percent decline from the peak. We have a few more percentage points left to drop, but it's clear now that the market is recovering. Not exactly a meltdown.

One day we're going to look back and wonder how companies like Bear Stearns and Lehman Brothers could go down on such pure hysteria, but they did.

The "experts" could not distinguish between a meltdown (free fall, collapse, blood bath) and a predictable correction.

Their mistake--our problem.

On the other hand, there are a few of us out there who knew what was happening all along and positioned ourselves to capitalize on this mass hysteria, and the opportunity has not passed yet.

The housing cycle is about to reset again in 2011. Real wealth is created in real estate when smart investors take positions at this point in the cycle and then wait for the next boom in 10 years. Now is the time to pull your cash together, get your financing lined up and be ready for the ultimate buying opportunity that is at hand.

Banks are preparing to foreclose on a few million properties over the next two years. Banks will be dumping these properties, which means they'll be priced very aggressively to sell quickly. While I don't wish the pain of a foreclosure on anyone, this situation exists by no fault of mine or yours. Someone has to capitalize on those properties; maybe it should be you.

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