Gloomy housing market forecasts aren't all bad

You could spend a significant amount of your time each day reading various economic forecasts. It seems that everyone has an opinion. While many of them say that we are headed for - or perhaps already in the midst of - a recession, the reasons for it, the severity of the decline and the length of time until a recovery is seen are items of major debate.

In looking at various economic forecasts, I am naturally drawn to those that deal with real estate markets. Having a vested interest in the health of real estate and realizing that the state of the housing market is such a signficant factor in the economy, I am looking for prognostications that talk specifically about this area.

While the increasing number of personal bankruptcies, a growing concern with foreclosure levels and the subprime lending credit crunch have consistently been in the news, a number of other concerns still exist that have many wondering how long it will take for housing to recover.

I recently read a report from Professor Robert Shiller of Yale University that had some very interesting ideas. He believes that, over the past decade, two million excess homes have been built. The combination of low interest rates, rising real estate prices and weak lending guidelines has resulted in irrational speculation in housing product. This in turn has led to builders increasing the product on the market and repeated cycles of overbuilding. The fallout resulting from this glut of real estate is a loss of one trillion dollars in the housing market. Professor Shiller believes that we could still see a loss as much as three times that amount before we hit bottom. What does his forecast mean in terms of percentages? An expectated 20% to 25% further decline in home prices.

There are reports that supported Prof. Shiller's expectation. Comparative, statistical evidence indicates a 24% drop in home prices is required to bring housing prices back in line with building costs, a 27% decline to bring home prices back in balance with rents. Of course, you could argue that building costs or rents are artificially low and could increase to balance some of this necessary balancing decline in real estate prices out. However, current real estate prices are still estimated to be 50% higher than the historical average price per square foot when adjusted for inflation.

Many are calling the headline bad news for '08 to be the counterparty risk in the credit default swap market - similar in scope to the story that subprime was in 2007. Some believe that continuing losses at banks will force the need to raise capital. This further instability in the credit markets will cause further tightening of lending standards - traditionally the blamed culprit. Forecasts call for the next twelve to eighteen months of significant declines in credit availability. Since credit availability is key to real estate market recovery, many see this as concern that the economy will be slower than expected in its recovery.

So where is the silver lining in an economy of tough real estate markets, uncertain political climate, increasing oil prices and a decreasing stock market? Tough times bring about significant opportunity. Many investors were extremely savvy with their investments of RTC-owned property in the early 1990's. I know many stories of investors buying something on the cheap when no one else was buying and looking like a genuis a few years later. These opportunities tend to resurface when times are difficult. It is the smart investor that remains calm and looks for opportunities among the bad news.