By Al Coryell
Host/Moderator

Real Estate Q: The recession is over, they tell me, and with home prices really, really low, should I go ahead and buy that house I have been ogling for two years?

So you think just because housing prices are at all time lows that they are a good bargain today? Interest rates are low, prices are low, inflation is just around the corner so … now is the perfect time to buy, right?

Wrong, wrong, wrong, my friend!  You need to know why…

If you are a charts and graphs kind of person, and even if you’re not, you should be able to recognize a housing bubble when you see one. See that huge red spike above starting in the 1990s that didn’t peak until 2006? Well, those are inflated housing prices that will have to come back down to pre-2000 levels (or probably further if you know pre-Great Depression history) before they stabilize. We’re not there yet. In fact, we are barely halfway there. We have nearly as far left to fall as we have already fallen.

But don’t take my word for it. Robert J. Shiller is the Stanley B. Resnor professor of economics at Yale University. This is his graph. He, along with colleague Karl Case, has produced innumerable historical indexes of land and property values by culling data from historical records in public archives. He keeps a running tabulation of historical housing price data updated on his Yale University website. You can find his Excel graph [here].

Shiller saw this coming, and he warned us, and we didn’t listen.

I’m afraid house prices are going to continue to collapse like a Madoff ponzi scheme. The economy isn’t going to come back any time soon. It’s going to get so frigid next year you had better bring your green shoots inside or they will get frost bitten. That’s also the opinion of Ivy Zelman, former Credit Suisse analyst now running her own research firm, Zelman and Associates. She spotted this thing happening back in 2004 and had her clients dump their builder stocks in 2006. What impresses me most is that, unlike a lot of her colleagues, she understands that all the foreclosures have to be processed out of the system before a recovery is possible. And there are a lot of foreclosures left to go. An Alt-A bubble and a 5 year ARM reset from 2006 still loom out there and nobody seems to want to talk about it. In this Fortune [magazine article] Zelman says it will be at least 2012 before that will happen. I believe it is going to be much longer than that but that is a conversation for another article.

In terms of the depth, however, I agree with Zelman’s analysis. As I indicate in the chart above, housing prices have barely fallen half way to the probable bottom. In the linked article above, Zelman says:

“There’s still a lot of false optimism. Some economists believe that we’re close to a bottom, but we’re just more than halfway there.”

I don’t have her data, just Shillers’s chart. But it seems much more likely to me that, given the economic collapse we are going to experience, housing prices should breach the Historical Median I have indicated and bottom somewhere near the Depression median before eventually rising again. Anyone looking to buy a house should be wary of a false bounce (or two) along the way. Notice what happened after the 1873 Panic (in green). Real estate fell out of favor for nearly 45 years, bouncing twice before finally bottoming in the early 20s after WWI. Don’t get caught buying on one of those bounces.

But all of this doesn’t mean that you don’t have some choices in the mean time. Depending on your market, you can rent some pretty nice setups for much less than you can buy. Here in Florida, I would rent the coolest condo that I could find, preferably on the beach, for the next five or ten years. Rents on the beach are cheap and getting cheaper because the owners are upside down on their mortgages and forced to rent to hold on to them. Just be ready to move at a moments notice incase your landlord goes belly up on his mortgage.

Bottom line, put your down payment back in your pocket. Click on Shiller’s website every three to six months and watch the graph line fall until it starts to rebound like I have shown above with the blue dotted line. Prices are falling too fast to stop at the 2000 price levels so exercise some patience until the line finally bottoms and turns back upward. Beware of a possible second bubble if it turns up too soon. Hope is a terrible thing. But once prices have fallen to somewhere between the historical median and the Great Depression median then pull your money out of your pocket and buy your dream home at a bargain basement price.

For years we have used our inflating housing prices as ATMs. We bought new cars, big screen TVs and took vacations on an ‘easy money’ credit line. Those days are gone. Before this collapse is over, there is going to be an aversion to real estate like nothing any of us have ever witnessed. For the next few years, speculators, like vultures, will help to clean up the dead carcasses of excess inventory left over from the foreclosure mess, and then they will disappear. Without an asset bubble to inflate home prices 10% a year they serve no purpose. You see, historically homes are a commodity, like wheat or corn or soy beans. They are not investments as we have been conditioned to believe for the last 25 years. Sadly, we are learning this fact the hard way.