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Yoshikami: Real Estate's Double Dip

Here comes the second dip down for real estate and how intense this drop is is going to largely determine whether we fall into a double dip recession.

This last real estate downturn moved prices down to levels many expected were not possible.

Well, get used to the unprecedented because we believe that prices will continue to drop to even lower levels. One needs only to look at the latest results from Kaufman and Broadand Pulteto realize that housing is still incredibly soft. Even retail sales numbers from Home Depot and Lowe's are still affected by the massive erosion in a real estate equity over the past several years.

Yes real state is still a weight around the economy's neck.

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The tax credit program that attempted to slow the decline of real estate prices was temporarily effective but merely put off the inevitable as prices ultimately move to their natural state given current economic conditions.

It's a pretty simple formula; if there's more supply than buyers, prices will fall.

And if there are less buyers because unemployment remains near 10%, the dampening effect on real estate prices will be huge. No matter what bureaucrats might think, the solution is not in giving away money or keeping rates low. These actions merely postpone the inevitable. Prices will drop until they are deemed to be affordable and reasonable.

Prices for real estate could easily drop another 10% which would put further pressure on the US economy. On the positive front, this is likely the last leg down for the real estate market. On a more sober note, it will likely take many years for the market to recover its losses and, in some locations, it may take a generation.

While some look at real estate as an investment, for most homeowners it's a place to live and in all likelihood most real estate transactions now will focus on the latter. Real estate investors have simply been burned too much.

Are there opportunities to invest in real estate properties?

Yes, but these investments are not for the light of heart as there is going to be a significant amount of time before these investments pay off. It's a time horizon issue as always when you make investments and real estate is back to being an investment with a long time horizon; so much for flipping properties to make a quick buck.

"These investments are not for the light of heart as there is going to be a significant amount of time before these investments pay off." -YCMNET Advisors, Inc, Michael Yoshikami

Lastly, when you invest in real estate remember that it is a leveraged investment that you buy on margin. And margin investments tends to have more risk with greater up and down fluctuation. Understand that before you buy that "guaranteed can't lose property" that looks just too good to be true.

In this last downturn real estate was the key cornerstone that crumbled and impacted the entire financial system. As the economy continues to deleverage, the importance of the real estate sector will continue to be great and watching this sector will give you a clear sign as to the direction of future economic activity. Besides being just an investment opportunity for you, look at real estate as an indication of how you might invest your portfolio strategy across different allocation categories. Watch this sector closely for indications on how you should invest your entire portfolio going forward.

The roller coaster ride for real estate is not over. Learn as you watch and incorporate that knowledge as you invest your hard-earned assets.


Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm ( www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com .