The Housing Bubble Has Fully Corrected

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The Housing Bubble Has Fully Corrected

For any type of investment, prices are determined by a complex mix of factors. In the case of the housing market, the primary factors are underlying fundamentals, investors’ access to capital, and investor psychology.

The real-estate investment bubble inflated out of proportion to the actual values of homes, in synch with a euphoric investing mood that reassured home buyers and real estate speculators that prices would keep going up, and then up even more.

To make matters worse, the Federal Reserve Bank’s short-sighted interest rate cuts lowered mortgage rates to record lows. This made even the most overpriced homes seem affordable, even as evidence piled up that the bubble was not sustainable.

When the house of cards collapsed, just as the Trends editors forecast it would, housing prices, access to capital, and investor confidence all plummeted. However, we are now at the precise point when housing is becoming a sound investment again, for three reasons:

  1. The underlying fundamentals show that prices are finally returning to the level at which homes can be bought at a good value.
  2. Investor psychology has not yet caught up to this new reality. Put simply, most people still haven’t overcome the trauma of seeing their property values collapse as though their homes were built on quicksand.
  3. Even though credit remains tight, there’s a benefit to the scarcity of this resource: The competition for choice properties is virtually non-existent.

The combination of these three factors means that there are plenty of bargains for people who are both ready and able to buy, and yet relatively few people are willing to take advantage of the opportunity. Supply is up, demand is low, and it’s a perfect buyer’s market.

Let’s take a quick look at these three factors, and then we’ll discuss how you can profit from this opportunity.

We know from past experience that every major economic bubble has to correct back to the long-term trend line and often pass through it before a recovery occurs. That’s exactly what’s happened in the case of the housing bubble.

Since the peak of the housing bubble in June 2006, prices have been steadily falling.1 From June 2007 to December 2008, the national average home price declined by a 13.8 percent average annual rate. Since then, the average price has been slipping by an average of 4.4 percent per year. As a result, housing prices are now at levels not seen since October 2002.

However, when we take inflation into account, the freefall in prices is even more dramatic. According to data compiled by Mike Shedlock of Sitka Pacific Capital Management, “real,” or inflation-adjusted, housing prices have plunged to a level that was first reached in March 1998 — when investors were pouring their money into dot-com stocks rather than “spec” houses and condos...

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