Mark These Words-The Biggest Bubble Is The Real Estate

A LIG type flat in Gurgaon sold a decade back for Rs 14 lakh, fetches a princely sum of Rs 80 lakh today and earns a rental income of Rs 3 lakh per annum. Take away the speculative rise in home prices and the yield on current investment works out to just 3.5%, third of the r%turn a fixed deposit receipt fetches in a nationalised bank. Residential apartments are selling for twice the amount they might actually be worth. Sooner or later a bank, a housing finance institution or a slew of borrowers`are going to go bust, and that bust will come with a crescending rise of commodity price and rising interest rates.

US Buyers purchased the fewest number of new homes last year on records going back 47 years.

Sales for all of 2010 totaled 321,000, a drop of 14.4 percent from the 375,000 homes sold in 2009, the Commerce Department said Wednesday. It was the fifth consecutive year that sales have declined after hitting record highs for the five previous years when the housing market was booming.

The year ended on a stronger note. Buyers purchased new homes at a seasonally adjusted annual rate of 329,000 units in December, a 17.5 percent increase from the November pace.

Still, economists say it could be years before sales rise to a healthy rate of 600,000 units a year.

Neither housing nor employment show any sign of recovery. Nearly 4 years after the collapse of Countrywide – the nation's biggest subprime lender – housing is still going down.

How far will it go? Gary Shilling says it will take another 20% drop in housing prices to bring them in line with their historical trend. Housing usually rises with the economy. Not more. Not less. To get back on track with the economy now, house prices have to go down.

What about over-shoot?

Yes, that's a risk too. Bubble markets don't tend to go back to "normal" levels right away. Instead, they tend to go below normal.

At first, homeowners think it is just a temporary break in an upward trend. They hold on...hoping to catch another move to the upside. Then, they gradually resign themselves to a long slump, but still believe that "you can't go wrong on real estate, not over the long term."

Then, housing prices continue to sink. More homeowners give up. Some sell. Some default. More foreclosures depress prices even further.

The peak in foreclosures is not expected until March of 2012. When it comes – five years after the crisis began – most homeowners will be ready to throw in the towel. "Housing may go up in the long run," they'll say to each other, "but this downturn could last longer than I do."

Prices are likely to drop below their historical trend. Homeowners will tell their children: "Don't bother to buy a house. Rent. Housing is a losing proposition. It never goes up."

Then, with housing prices perhaps 25% to 40% lower than they are today, the market will have found its bottom.