Back in the summer of 2005 I accurately predicated that the real estate market had reached its peak. My opinion was based on the fact that the largest growth in the purchase market was predicated on the fact that most people buying homes during that time were the least sophisticated buyers. The lending guidelines had become so lax, that honestly, people were getting loans that really had no business getting a mortgage. You don’t have to believe me, just look at the foreclosure notices in your local paper.
I parallel this time in real estate to the late 90’s of the stock market. Every wannabe Gordon Gecko with $10,000 was opening an ETRADE or online stock trading account in order to get rich. It didn’t matter what you bought during that time. People were making more money in one day trading stocks then they could normally could make in a given month. The same had become true with real estate. People were putting deposits on real estate and selling their right to buy the home at a profit!!! Money was being made simply because financing was so loose and speculation was at a frenzy – not because we had a sudden influx of millions of well financed individuals looking for a home. Simple supply vs. demand. The fundamentals of real estate and making money had become completely ignored or forgotten.
Here is one truth: Trees don’t grow to the sky.
I personally believe that we are very near the bottom. As this recent report from S&P/Case-Shiller Home Prices Indices shows (http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_Release_032544.pdf), we are well off those 2005 highs. I believe we have fundamentally found the bottom or the true valuation of real estate. These values are more inline with 2003 prices, which is where the market was in a perfect state of harmony. Also, note the DJIA chart which also shows the DOW in the 8,000 range during 2003, which coincidentally is where we are now.
Does this mean you should start buying up all the real estate and stocks you can afford? Of course not, but this does give you some proper base line of long term investing in both real estate and stocks. Of course this could all be thrown out of whack by excessive government spending!