Thursday, November 01, 2007


The following response is to reader emails.

Resort real estate prices peaked in 1985 and again in 2005. After the peak in 1985, investors still had the opportunity to sell at slightly higher nominal prices in 1987. The loss incurred by owners from 1985 to 1987 was an opportunity loss, they could have made great returns in stocks while they were stuck waiting for the "last bounce" in real estate prices.

Today, we are in a similar "in between time". The peak in resort prices was in the spring of 2005 but the declines since that time have been relatively small in most cases.

The fact is that there are major forces playing a game of tug of war in regard to housing.

On one side:

1) residential housing is over built, and
2) the supply of empty homes has never been greater, and
3) the news media is having a field day reporting various real estate "problems", and
4) a couple of million "owners" of homes have no equity, and
5) we are near the end of the 17 to 22 year (18.3 year average) real estate cycle, and
6) the final down turn in the real estate market is "kicked off" by simplification of the tax laws.

On the other side:

1) their are more people of prime age to purchase a second home than ever before, and
2) mortgage rates have fallen over the past several weeks and are back to levels seldom seen in my life time, and
3) income and wealth is soaring, and
4) despite the current high price of oil, the percentage of income needed for the necessities of food, clothing and fuel has fallen dramatically over the past 27 years and the sharp declines continue, and
5) as a result of open trade and technological innovation, the people of the world are enjoying an "unknown level of prosperity", and
6) tax compromise that would eliminate interest expense deductions could take another year or two to come to reality, and
7) the past three economic cycles have been stretched and there are signs that this one will be the longest on record, and
8) the real estate bounce after the peak in 1985 reached its secondary peak in August of 1987 but well after the "big economic turn", and
9) the big economic turn of this decade is still an ongoing event,
10) the bounce in real estate could be significant given that next year will be the "year of prosperity" as the country moves through the presidential election cycle.

After the 1985 peak, it took better than 5 years to reach the next trough. The peak of "walking away" from resort property did not occur until early in 1991. Adding 5 years to the 2005 peak gets us to 2010 but, again, this cycle appears to be on its way to the longest in history. The real estate cycle has been measured for hundreds of years as a 17 to 22 year cycle. Adding 22 years to 1991 would project 2013 as the year of the next trough. As you may recall, Harry Dent, who has written a number of books detailing the demographics of the real estate cycle, has already updated his "Next Great Bubble Boom" from the Greatest Boom in History : 2005 to 2009 to: the Greatest Boom in History: 2005 to 2021. Since that rewrite, the cycle has been slow to progress.

One can argue that the business cycle has been tamed. Those who made that argument in the late 1960's rue the day. The second recession of the 1970's, the 1973 recession was one of the worst. More financial institutions went out of business in 1973 than in any other year in history.

The bottom line is that investors should avoid buying resort property for at least 3 more years. My family sold a lot of property in 2004 and 2005 and we should have sold more. We are prepared to lower our offering prices at the beach aggressively if the coming year of prosperity does not flow over to beach home prices. We expect to be totally sold out before the presidential election.

The big crunch is in the last year of the real estate cycle. In 1990, the average return on equity in commercial real estate was negative 40%! The numbers for resort properties is not available but it was probably worse. Those who choose to speculate on the current downturn may do well to buy resort property today and to sell in in less than a year. I believe the risk is too great relative to the potential reward.

Thank you all for asking questions. I hope the above is the information and opinion that will help you.