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No Parachute: Real Estate Markets Still In Freefall

Many people want to believe (hope?) that we are experiencing a rebound in housing. In my opinion, this thinking is premature by at least 3 to 4 years, perhaps even a decade or more.

Below is a link to a chart from the www.ritholtz.com blog (an excellent blog that should be on your financial reading list) that helps substantiate my thinking.

Click the link to see a large version of the chart which was constructed by a Ritholtz reader, Steve Barry, using long-term Case-Schiller real estate data:

http://www.ritholtz.com/blog/wp-content/uploads/2009/06/case-shiller-updated.png

Remember, all markets tend to “over-correct” and swing well beyond the mean to extremes in both directions. My interpretation of this chart shows the long-term mean in the area of 110.

Given the severity of the current recession/depression, I think we’re most likely to overshoot to the 90 area. Though we’re likely to see some bumps along the way (believe it or not, we’re actually in one right now), that would imply that we still have quite a ways to go on the downside before an ultimate bottom can be reached in housing. Commercial real estate is following a similar, albeit delayed, trajectory.

This persistent, slow-motion collapse can’t help but continue having an overwhelming impact on jobs, credit, governments, the global economy, and, of course, the financial markets.

At the risk of stating the obvious, the weight of the evidence continues to confirm that we’re experiencing a long-wave, once-in-a-generation deflation (massive systemic credit shrinkage). These are NOT to be confused with “normal” business cycles. Think hurricane versus rainshower.

In general, despite frantic efforts to appear otherwise, governments have proven repeatedly to be impotent in the face of deflation – which is why they fear it like the black plague and attempt to inflate like madmen to forestall it. It never works.

As an immutable and powerful force of nature, deflation must work itself out on its own terms to correct the institutionalized excesses, malinvestment, and malfeasance that have been compounding exponentially throughout the previous decades. Just as it’s futile to attempt to turn the ocean tide, you can’t turn back the long-wave cycle.

View debt deflation as a natural, curative cleansing process and invest accordingly.

Above all, stay safe.

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