Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Commentary

Collapse of U.S. Real Estate Prices Predicted

Median home prices in some parts of the United States will fall by more than 30% between 2019 and 2022 due to income inequality.

Average home prices in Denver and Colorado’s Northern Front Range will be 21% lower in third quarter of 2022 than in 2019, real estate software and analytics firm Location Inc. predicted. The forecast was made by the latest version of the firm’s Scout Vision Enterprise Platform.

If Scout Vision is correct a major collapse in real estate prices and the end of the real estate bubble is just two years away. The analytics tool predicted that home prices will continue to rise in Denver, Boulder, Greeley and Fort Collins until third quarter 2019 then start falling, The Denver Post reported.

Disturbingly that might be just the beginning of a long term decline because Scout Vision’s forecast does not extend beyond 2022. That might indicate a long term decline in real estate values like the one Japan experienced over the last three decades.

Some Properties will lose a Third of their Value in Five Years 

Disturbingly some properties will lose a third of their value over the next few years in Scout Vision’s projection. A house on the 4700 block of Argonne Street in Green Valley, a working class Denver neighborhood, will lose nearly one third of its value by 2022.

Homes in the notoriously overpriced college town of Boulder will lose 17% of their value over the next five years. The price of a house in the 4200 block of Wyandot Street in Denver’s Sunnyside neighborhood will fall by 15.6% in five years.

Some Homes will Lose 68.5% of their Value by 2022

The price drops in North Central Colorado will be nothing compared to the carnage in some other areas of the country. The Scout Vision Top 5 for 5 Quarter Report predicted that some homes will lose 68.5% of their value by first quarter 2022.

Here is Scout Vision’s forecast for the areas with the greatest losses in property values:

  1. Bismarck, North Dakota – the average home in this metro area will see a 37% drop in value by first quarter 2022. Homes in the lowest price neighborhood will lose 68.5% of their value.

  1. Casper, Wyoming – the average home in the region will lose 34.6% of its value over the next five years. Home prices in some Casper neighborhoods will drop by 45.2%.

  1. Beckley, West Virginia – the average residence in the area will lose 34.3% of its value by 2022. The cheapest homes in the area will lose 46.3% of their value.

  1. Watertown/Fort Drum, New York – a typical home in the area will lose 24.7% of its value over the next five years. Houses in a few neighborhoods will lose 32.6% of their value.

  1. Monroe, Louisiana – homes throughout the metro will lose 24.1% of their value in five years. Properties in some low-income neighborhoods will see a 50.8% drop in value.


Income Inequality is about to Burst the Real Estate Bubbles

The reason real estate prices will fall is a simple one; people simply will not be able to afford the high prices. That will lead to an ugly market correction because the present real estate boom is built on very shaky ground.

“If demand is pushing home prices up but wages aren’t increasing, it gets to be tenuous,” Location Inc. CEO Andrew Schiller told The Denver Post. “It will come crashing back.”

The greatest home value appreciation in the United States will be in two of America’s most affordable metro areas; Yuma, Arizona, and Laredo, Texas, Scout Vision predicted. Homes in Yuma will appreciate by 38.1% by 2022. Laredo should see a 34.7% increase in residential property values over the next five years.

It takes the average person three years of work to pay off a home in Yuma, Schiller noted. The average house in Laredo costs around $120,900 according to Zillow. The average home price in Yuma is $139,600.

Scout Vision is able to make such pinpoint forecasts about real estate prices because it analyzes 10 times as much spatial data per zip code as competing processes, a Location Inc. press release stated. It also analyzes by property rather than zip code which provides more detailed reports for investors.

Catastrophe for the Middle Class

If Scout Vision’s forecast is correct, the American middle class is facing a catastrophe because the value of its primary investment; a home, is about to fall by 20%.

Some households are about to lose as much of 70% of the investment they made in made in their homes and it could not come at a worse time. The average American family has just $5,000 saved for retirement and nearly half of US households have no money saved for retirement, the Economic Policy Institute reported.

Many of those people, including the 74.9 million baby boomers about to retire were undoubtedly planning to rely upon their home value to finance retirement. Now that’s about to disappear which means some of them will end up with nothing but Social Security.

A related problem will be vast amounts of underwater properties where the amount owed on the mortgage exceeds the home value. That might lead to a large volume of unsellable zombie real estate on the markets. Results will be more foreclosures and more people simply walking away from underwater homes because they cannot pay the mortgage.

Stay Away from Real Estate

Scout Vision’s forecasts indicate that all the millennials and Generation Xers who have been avoiding home ownership might be correct. They are avoiding massive losses and will soon be able to pick up some cheap property in a few years.

There will be some other effects of the real estate collapse. A major one will be on local governments; especially school districts, which rely heavily on property taxes to finance their operations. What happens when cities like Chicago, which uses property taxes to cover $1.7 billion a year in pension payments, see a major drop in property values? Something will have to give there or new means of finance will have to be found.

A beneficiary from falling property values will be the stock market because more investors will put their money into it. If the Scout Vision forecasts come true stock prices are likely to keep rising over the next few years, which will make income inequality worse because most Americans own no stock.

There is own lesson we can learn; America needs to start addressing income inequality because it is slowly undermining our economy. The pending collapse in real estate shows that our present economy is not sustainable without a major boost in middle and working class incomes.