Market Mad House

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

The Death Spiral

Why the Real Estate Market Scares Me

daniel , , , ,

Currently, the real estate market scares me to death. I think coronavirus’s effects on real estate could be far destructive than its impact on the stock market.

To explain, I think American stocks have a lot of real value, even though some Mr. Market grossly overprices some shares. I consider much of the value of American real estate; on the other hand, imaginary.

Yet, American real estate prices have risen to ridiculous levels. America’s median home price rose by 8% to $270,100 in February 2020, the National Association of Realtors (NAR) estimates. In fact, the NAR claims U.S. home sales rose at their fastest pace in 13 years, CNBC reports.

Thus, I think real estate was in a bubble when coronavirus struck. I predict COVID-19 could burst the bubble and send real estate prices tumbling.

Why You Need to Be Afraid of Real Estate

You need to fear real estate because vast numbers of ordinary people have invested money they cannot afford to lose in property that could crash fast.

For example, only 55% of Americans claimed to own stock in April 2019, Gallup estimates. However, the U.S. home ownership rate was 65.1% in 2019, Statista estimates.

Moreover, a home is the largest and most expensive purchase most Americans will make. Frighteningly, Statista tells us that up to 65.1% of the population could have much of their money tied up in an investment, a home, that could lose most of its value. Frighteningly, Americans finance most of those homes.

Here Comes Mortgage Crisis 2.0

Hence, we could face a real estate crash worse than the Mortgage Meltdown of 2007-2008. Once again, tens of millions of Americans could find themselves with underwater mortgages.

To clarify, a mortgage is “underwater” when the amount owed on it exceeds a home’s value. For example, you could have a $300,000 mortgage on a home worth $100,000. Thus, you owe $200,000 in debt you cannot pay off.

To compound the suffering, Atlantic staff writer Annie Lowrey is predicting unemployment rates of up to 20%. Such unemployment rates could rival those of the 1930s Great Depression. To quantify the highest U.S. unemployment rate recorded was 24.9% in 1933, The Balance reports.

U.S. jobless claims jumped to 2.25 million during the week of March 8-15, Business Insider reports. That broke a record set in 1982.

Thus, tens of millions of people cannot pay their mortgages when real estate prices are plummeting. Real estate prices will collapse because people will lack the money to buy property.

Commercial Real Estate Collapse

Coronavirus will wreak far greater havoc on commercial real estate, I predict. Notably, COVID-19 is already destroying commercial real estate investment trusts (REITS).

For instance, the share price of mall operator Simon Property Group Inc. (NYSE: SPG) fell by nearly $100 in less than a month. In detail, Mr. Market paid $140.78 for Simon on 24 February 2020. On 24 March 2020, Mr. Market paid $53.27 for a share of Simon. Additionally, Simon’s price fell to $44.92 on 18 March 2020.

Even harder hit was Seritage Growth Properties (NYSE: SRG). Seritage is the REIT that owns most of Sears and Kmart’s real estate holdings. Seritage’s share price fell from $37.23 on 24 February 2020 to $7.92 on 24 March 2020.

I think REIT prices show commercial real estate is collapsing. I predict residential property prices will follow. I predict many commercial property REITS will declare bankruptcy because of coronavirus.

What will happen to Real Estate?

I think American real estate was on the road to catastrophe before coronavirus. Thus, all COVID-19 is doing is hastening the inevitable.

Worse could be yet to come if coronavirus makes working at home the norm for many professionals. To explain, I think that could reduce demands for office space and further depress the commercial real estate market.

Meanwhile, large numbers of stores could out of business as frightened people buy everything online. Thus, America’s cities and suburbs could fill up with empty buildings.

The situation could be awful because it will cost billions of dollars to convert all of those empty stores and offices into other uses. In particular, they will have to demolish many empty stores and replace those buildings with new structures.

The Positive Side of a Real Estate Collapse

Conversely, there is a positive side to a real estate collapse.

Housing prices could collapse, allowing many poorer Americans to buy homes. In addition, many people could pay less for housing. This could increase many American’s incomes because they will have more cash in their pockets.

Additionally, developers or local governments could buy up empty office buildings or stores and convert them into housing. In particular, Governments could buy old shopping centers and replace them with social housing. In social housing, government owns apartments or other housing units and rents them to any citizen at a low price regardless of income.

A related benefit is that demolishing and replacing; or remodeling, all those buildings could create jobs. Remember, construction jobs pay well.

Moreover, many ordinary Americans with cash could become landlords by buying homes and renting them out to others. Thus, large numbers of people could make additional cash by becoming small-scale entrepreneurs.

Thus, a real estate collapse will not be a total catastrophe. However, real estate’s collapse will hurt many people. In conclusion, you need to stop worrying about stocks and get scared of real estate. It is the real estate collapse and not stocks that will devastate ordinary Americans.