Steadfast FinancesReversion to the Mean: Real Estate to Fall Another 20 Percent

Reversion to the Mean: Real Estate to Fall Another 20 Percent

Filed in Investing 101 , Real Estate 2 comments

Lots of people are making big bets, even betting with borrowed money at risk to their personal credit report (e.g. taking out a home loan on investment properties), on the long term direction of the real estate market. Real estate is always influenced by local trends, but on a macro scale, the pro-appreciation arguments are getting pretty thin considering we’re still on the down side of the real estate bubble and we’re no where near to reverting to the house appreciation historical mean.

As many non-mainstream financial analysts have said over and over, nothing has changed in the American economy, and in fact, the macro fundamentals have actually gotten worse where the only real beacon of positivity is the Federal Reserve printing borrowed money.

This thesis is further backed up by a 30 year long bond bull, one Gary Shilling, who believes the long bond could eventually hit the 3.0% mark (currently at 3.9%) and, very sensibly, believes national real estate values still has to fall an additional 20% decline over the next few years due to high unemployment, the backlog of unsold homes, and the difficulties surrounding the fraudclosure fiasco (e.g. fraudulent activities by the Too Big To Fail banks).

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Posted by CJ   @   25 October 2010 2 comments
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Oct 26, 2010
7:17 am
#1 ctreit :

I am with you. I think there is more downside in the real estate market. Don’t forget that a 20% drop only gets us back to the mean! Usually the market overshoots on the downside if it overshoots on the upside like it did for 10 years. But I am sure the government will step in. It will end up owning a lot of houses at “correct” market(?) prices, which Greenspan already saw as a possibility way back when.

Jul 28, 2011
6:51 pm
#2 vincent giorno :

We are already below the mean. Not knowing where shilller gets his data, I can tell you that based on a 5% average appreciation (historical one hundred year average) my property is at a negative 16% appreciation rate over the last eleven years. We are at a bottom and should actually see an increase in home prices back to the 5% percent average over time as employment picks up. Shiller’s case for another 20% fall would demand an even higher unemployment rate. I would love to know what shiller thinks the peak unemployment number will be.

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