Financial Tsunami: USA Real
Estate is Not to Blame
Real Estate Analysis Limited
the current global financial crisis to sub-prime mortgages
in a way to the real estate market in the USA. No doubt there had been huge
speculations in some cities or states resulting in skyrocketing home prices
and it was only a matter of time before such markets suffered a correction.
if it were not for the fact that mortgages were imprudently approved,
and if it were not for the fact that somehow someone securitized and
packaged such doubtful mortgages, along with other doubtful financial
instruments, into CDO and the like, the crisis might not have become of such
immense scale and speed.
real estate market is not really the one to blame. Why?
This is because overall the market has not really gone mad. In selected
markets such as those in California or Florida, it is a definitely yes.
Across the entire country, it is a no. Here are some figures and
= the USA data comes from the website of the Center for Real Estate at the
Massachusetts Institute of Technology
the Hong Kong data comes from the Ratings and Valuation Departmental website
of the Hong Kong government.
to 2008, the overall USA real estate market has risen less than 100%
= and this
applies to the residential apartment sector (peaking at 94%), the industrial
sector (92%), the office sector (77%), and the retail sector (95%). In
roughly the same period from 2002 to 2007, the Dow Jones Industrial Average
rose from a low of around 7,400 in 2002 to a high of around 14,000 in 2007
i.e. roughly the same as that of real estate. Do note we are talking about
the residential (rental) apartment sector here, not the home buying one.
that the overall USA real estate market has not been ¡¥performing¡¦ immensely
better than other assets and IF the stock market was any reflection of
economy activity, the real estate market as a whole was only playing along,
would a crazed real estate market look like?
= Try Hong Kong from 1990 to 1997. Within that period, the residential
sector had gone up 300% (i.e. compared to the 1990 price level, the 1997
price level was 4 times as high), the office sector 150% (2.50 times), and
the retail sector 250% (3.50 times), with only the industrial sector having
an increase less than that of the USA seen recently. Naturally the
comparisons here are not perfect as there are differences in market
structures, timings, and product types.
real estate market overall has relatively modest increases.
overall market price levels in the various sectors are now within their
¡¥standard deviation¡¦ spectrum and have passed their peaks
= this in itself does not imply there will be no more downward adjustments,
just that the chances for a unimaginable shock could be much reduced. Here
are the charts on the 4 market sectors of residential apartment, industrial,
office, and retail.
concerns only the period from 2001 after the high tech bubble burst and when
interest rates dropped significantly and if earlier statistics were to be
included, the various averages and standard deviations would likely be
different. Note also the debate on using standard deviations and linear
markets are to head south further, how much?
= this is a million dollar question (take your pick of currency), and your
humble author has no answer. But he could share his guess. Look at the
market is ¡¥lucky¡¦,
then we may view the average price index level as the next line of defense.
If the market is to be ¡¥unlucky¡¦, then we may use the lower standard
deviation price index level as a second line of defense. The 1st
line means a further drop of around 18%, while the 2nd line
implies a further overall drop of around 36%.
drop less than 18% or more than 36%?
the chances always exist but your humble author thinks in this way; any drop
less than an overall 18% requires us to be ¡¥luckier¡¦, or some more economic
packages which will really work (cross your fingers), and any drop more than
36% requires very bad luck, or the assumption that the US dollar will stand
firm and not change no matter what.
which is likelier,
end or the 36% end? Your humble author bets on the latter.
there no price increase options?
Hmm¡Kare you kidding?
map: courtesy of homesurfer.com; 2) Read past article ¡¥Which one to sell,
buy, or wait?¡¨ at
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