"The worst thing about real estate is its lack of liquidity during a bear market." -- Robert Prechter, Conquer the Crash
Raise your hand if you have an adult child living with you . . . or your elderly parents . . . or your grandchildren. How does it feel to be part of the new wave of extended families living in one home? With the current low interest rates, buy to let mortgages have become much more affordable now and the strong rental market has made this type of investment very attractive compared to more conventional types of investments.
The Washington Post on August 18 reports that the "recession pushed more people in the Washington area into living with relatives and friends, according to new census figures," leading to a 33% rise over the past 10 years in extended-family housing in the D.C. metro area.
Reasons abound for more crowded houses across the nation, including divorce, bankruptcy, illness and unemployment. The Washington Post article points out two other reasons: immigrants who live together in family groups and baby boomers who take care of their parents.
But Elliott Wave International sees an underlying reason that has more to do with the bear market environment. Practically everyone who has bought a home knows what a bear market in real estate looks like, particularly if their mortgage is underwater or the bank has foreclosed on their house. Robert Prechter describes the steps toward more crowded living situations in Conquer the Crash, Chapter 16, "Should You Invest in Real Estate?" which was originally published in 2002.
The worst thing about real estate is its lack of liquidity during a bear market. At least in the stock market, when your stock is down 60% and you realize you've made a horrendous mistake, you can call your broker and get out (unless you're a mutual fund, insurance company or other institution with millions of shares, in which case, you're stuck). With real estate, you can't pick up the phone and sell. You need to find a buyer for your house in order to sell it. In a depression, buyers just go away. Mom and Pop move in with the kids, or the kids move in with Mom and Pop. People start living in their offices or moving their offices into their living quarters. Businesses close down. In time, there is a massive glut of real estate.
We are now all living with this massive glut of real estate that Prechter describes, which keeps housing prices low. But now either no one wants to buy or they can't afford to buy.
Add to that the latest statistics on new home sales and a few other areas, such as consumer sentiment and auto sales, and you can see that the economic downturn has returned. Here's a chart with part of the commentary from the August 2011 issue of The Elliott Wave Financial Forecast:
It's the Stupid Economy
As stocks and commodities topped out in April and early May, The Elliott Wave Financial Forecast made the case for a coincident downturn in the economy:
Contraction dead ahead. It should last longer and dig deeper than the “Great Recession” of 2007-2009. -- May 2011, Elliott Wave Financial Forecast
At this point, “unexpectedly” steep declines are accumulating in one economic time series after another. Consider the four key measures shown on this chart.... As one stock index and asset class after another ended its respective bull market, these fundamental reflections of a reversal in social mood also tipped to the downside. Now, after a relatively weak rally from the late 2008/early 2009 lows, each measure is rolling over and beginning a renewed decline from much lower levels.
The bottom two lines on the chart show two more economic engines: sales of new homes and cars. Neither one managed to make a serious run for its former bull market highs. Both measures appear to have rolled over after weak countertrend bounces.
On top of the downtrodden real estate market, financial markets have recently turned volatile and bearish. To read the most trenchant information on how to prepare for this kind of environment, now would be a great time to order a copy of Prechter's Conquer the Crash. Better yet, you can get it free with a subscription to EWI's Financial Forecast Service -- which includes Bob Prechter's Elliott Wave Theorist. (The new, video Theorist has just been published -- Ed.)