Market Mad House

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

Market Insanity

Reasons to be Afraid of Real Estate

There are many good reasons for everybody to be afraid of real estate in the next decade. In fact, the risks to the real estate market threaten the entire economy and most other investments.

A few of the best reasons you should be afraid of real estate include:

1.    Lower economic activity because of ridiculously high housing costs

For example, the average apartment in San Francisco rented for $3,772 a month in January 2019, Rent Jungle estimates

Under those circumstances, many renters have little or no money to buy things like cars and electronics. Thus, there will be less economic activity and fewer jobs.

Other effects include labor shortages; and fewer young people having children, which can reduce long-term economic growth. In detail, young people do not have kids because they cannot afford a house. If a young couple cannot buy a house they will buy all the furnishings, leading to even less economic growth.

2.    Zombie Properties and Mortgages

A zombie property sits empty because the rent or purchase price is so high nobody can afford it.

The amount of a zombie; or underwater mortgage, exceeds the value of the property. Thus, the owner cannot recover his or her investment by selling the property.

Not surprisingly, many zombie properties end up in foreclosure. In fact, zombie real estate was one of the biggest causes of the foreclosure crisis of 2008.

Moreover, many zombie properties end up abandoned which lowers property values. Long-term effects of zombie properties include less property tax revenues and increased government costs.

3.    The Retail Apocalypse

The mass closure of retail stores because of the boom in online retail is a growing threat to commercial real estate. For instance, 20% of the storefronts in Manhattan were empty in 2018, commercial realtors at Douglas Elliman calculate.

Correspondingly rents are falling in Manhattan and landlords are refusing to sign long-term leases, The Real Deal reports. New York City Mayor Bill de Blasio is so worried he is considering a vacancy tax to force landlords to rent.

Additionally, developers will soon dump vast amounts of new retail space on the market in cities; like New York, Los Angeles, and Denver, because of a recent building boom. Thus, a commercial real estate collapse is probably imminent.

4.    Aging Baby Boomers

American Baby Boomers; persons born between 1945 and 1964, will sell 26 million homes by 2030, The Bipartisan Policy Center predicts. This could crash the real estate market because there will be no buyers for many of those homes.\

Poverty will force many Baby Boomers to sell their homes, Market Mad House reports. To explain, the household of people aged 56 to 61 had just $17,000 saved for retirement in 2018.

Therefore, many of those people will quickly run out of money after they retire. Hence, they will have nothing but Social Security. However, the average Social Security payment was $1,350 a month; or $16,000 a year, in 2018.

Disturbingly, many of those boomers will end up underwater; or in foreclosure, because they have not paid off the mortgage. In fact, 58% of the youngest Boomers (those born between 1961 and 1965) were still making mortgage payments in 2018.

Moreover, nearly half (49.4%) of the oldest Boomers those born between 1945 and 1951 were still making mortgage payments in 2018, Market Mad House estimates. Obviously, many of those people cannot cover the mortgage and have to sell the house at some point. However, they may not find buyers because of high real estate prices.

5.    Climate Change

Global temperatures are now 1.5 degrees hotter than they were between 1951 and 1980, NASA and the National Oceanic and Atmospheric Administration (NOAA) estimate. In addition, 2018 was the 4th hottest year on record, The Guardian calculates.

Thus, Climate Change catastrophes like hurricanes, floods, and the Paradise fire will become more common. Such disasters will lower property values along the shores, on riverfronts, and in forested areas.

In addition, “Climate Change Gentrification” is already changing real estate values in cities like Miami and Miami Beach. To clarify, Climate Change Gentrification occurs when affluent people move inland to escape flooding at the shore, Market Mad House reports.

Furthermore, climate change could flood $23 billion worth of real estate in the United States by 2050, The Economist projects. A more likely scenario in the next decade is regional real estate crashes caused by climate change generated superstorms, floods, and fires.

Correspondingly, the Great Florida Land Bust of the 1920s was partially triggered by the Miami Hurricane of 1926. In detail, the Land Bust threw Florida into Depression before the rest of the country. Hence, Climate Change could cause real state busts and regional depressions.

Finally, these risks are just the tip of the iceberg. There are many other threats to real estate including; income inequality, the shortage of affordable housing, wage stagnation, student debt, inflation, deflation, the gig economy, gentrification, the housing crisis, the disappearance of traditional jobs, stagflation, technological unemployment, rising interest rates, tax increases, and government actions like rent control.

Given these circumstances, everybody must be afraid of real estate. Thus investing in something other than real estate will be a wise strategy in the next decade.

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