All you have to do is look back to the early `90s. In the early part of the decade, prospects for real estate investments were looking about as good as they are today. After Japanese investors paid extravagant prices for Hawaiian hotels and Los Angeles office properties sent the real estate market climbing, the `80s real estate boom was topped off when a Japanese consortium purchased the iconic Pebble Beach golf course for $500 million.
Real estate prices in the U.S. were getting outrageous. Once the U.S. economy tumbled into recession, the real estate market was the first to take the hit. From the early '90s real estate debacle came a new class of real estate investors, Real Estate Opportunity Funds [REOFs].
While real estate prices were plummeting in the early `90s, savvy investors and investment houses started opening up new businesses to buy up real estate and acting as a buyer of last resort. Here's a chart listing a few REOFs:
That's more than $57 billion in assets held by just five REOFs. There are dozens more. Also, big investment, financial and banking institutions have their own REOFs. Goldman Sachs, Morgan Stanley, Blackstone Capital, GE Capital, and Credit Suisse all have REOF segments just waiting to pounce on any significant weakness in the real estate market.
Many of these companies saw the millions in profits made during the last real estate downturn and appear poised to not miss out on another opportunity. Sure there are going to be a few losers in the real estate game, but there's also going to be a great opportunity for savvy investors to get in while everyone else is selling.
But there's another area of concern as well. The examples above are just a few of the national real estate players. On the local level, I know there are thousands of individual investors and real estate speculators that have been piling up cash while waiting for housing prices to begin to fall. Once they start falling, these investors are going to have to outbid each other to get their hands on these depressed properties.
One final point is that houses have utility value. That's economic parlance for a tangible use. After all, you can live in a house. Other examples of items with utility value are a hammer (because it can hammer nails) and a washing machine (because it washes clothes). These items have value as tools to make your life easier.
Stocks have no utility value. They have economic value in that they can be exchanged for money as long as someone is willing to buy them and they represent ownership in a company, but they have no other use. This is how shares of stock can become totally worthless. I have some Enron shares that prove this concept true.
A house will never be given away for free. It has too much value as a home and as a shelter.
As a result of the utility value of real estate and houses, REOFs and thousands of individual investors waiting for a decline in housing prices, I can't foresee a 1929-style stock market crash hitting the housing market. Watching housing prices fall 50% or more in a few months or over a few years is simply not going to happen.
Granted, we may be in for a correction of 10-15% in housing and real estate prices over the next year or so, but there is too much capital waiting on the sidelines for housing prices to fall much further than that. Just look at the history of real estate: When housing prices fall, a lot of buyers come out of the woodwork to buy up the properties with depressed prices.
