Many 'talking heads' in the real estate and financial media have been predicting a 'soft-landing?
for the housing market for months now.
Frankly, I think that the vast majority of these 'experts' haven't got a clue as to what is really driving

the present real estate market conditions. Many of the well meaning folks who report on real estate and housing aren't even old enough to have lived through a full market cycle as an adult.

Therefore they have little more than text book theory to go on when they are called upon to discuss the current state of the housing market. Other groups, who have a vested interest in making the housing market news as positive as possible, are simply spouting the usual propaganda about a short term downturn, with prices beginning to rise by the end of 2007.

I personally think we will not see the bottom of the present market for perhaps another year or two.
The fact is there are much bigger factors at work here. Factors that will contribute to what I predict will be the largest single real estate market slump in U.S. history. A slump that I believe has only just begun to be realized.

The following information will help you understand why I think that the next two years will see real estate values in many areas continue to lose ground, producing some of the best investing opportunities in residential housing ever?

In doing my research I've been reading some very interesting statistical data regarding housing and in particular some of the historical trends in housing markets.

Most interesting among these is a chart put together by Yale economist Robert J. Schiller, which is an index of American housing prices going back to the year 1890. It is based on sale prices of standard existing houses and excludes new construction so that it might more accurately track the value of housing as an investment over time.

The housing prices are adjusted for inflation, in what economists call 'constant dollars?, meaning that while prices are always rising, it is possible to adjust them to reflect a constant dollar value over time.
This gives a more accurate picture of true dollar value over a period of years.

One of the interesting things that I noticed was that a house in 1890 was more expensive than the same property in 1920. As new manufacturing techniques were developed in the early part of the 20th century the increasing inventory outstripped demand, leading to a major drop in housing prices.

Housing prices as adjusted for inflation were at their lowest point in the entire cycle in 1921. In fact, even during the worst of the Great Depression in 1932, housing prices did not fall below the 1921 levels.

So it's interesting to note that even the Great Depression did not cause the lowest housing values of the 20th-century. The apparent cause of the 1921 low point was increasing supply outstripping demand.
A situation similar to what we have today.

And even World War II did not cause housing values to erode. After a 1939 peak saw the highest prices in 20 years, World War II and Pearl Harbor only resulted in about a 10 to 12% drop in the value of existing homes. And that lasted only until 1943. From 1944 to the early 1950's prices rose about 40% and then began to level out, staying roughly consistent until the late 1970's when prices finally reached levels not seen since 1890.

In the early 1980's we saw a 15% drop from the peak prices of the late 1970's. In 1984 the housing market began a significant boom cycle once again and by 1989 prices had risen to just above the 1970's peak. Since 1979 we've had two 10 year long cycles where prices have risen significantly, then lost approximately 15 to 20%. This tendency to increase then fall back has kept the housing market more or less constant over the past 100 years, in terms of real value.

However, since 1997 prices for real property have been on a steady increase. This means that we have sustained the longest single cycle of price appreciation in American history over the last 10 years.

And true to the historical data it would appear that yet another 10 year cycle is coming to an end.
Indeed it is already apparent that prices have dropped approximately 10 to 15% in general since the beginning of 2006.

What makes our current 10 year cycle unique is that it is the only 10 year cycle that has sustained consistent price increases for the entire 10 years. In other words this is the first time in our history that prices for housing have increased steadily for 10 straight years without any kind of decline in the middle of the cycle.

I believe that when you look at this information and combine it with other essential data such as the increase in the foreclosure rates, growing consumer debt, the popularity of exotic mortgages, and most particularly interest only payments and the recent phenomenon of negative amortization, common sense would tend to dictate that this is a recipe for a serious and long term market adjustment.

Many factors seem to be combining at present, and may eventually bring about one of the largest market corrections ever seen in the real estate industry in the United States. We've already seen a 10 - 20% correction, but that is only 20% percent relative to 2005 values. If we look at the historical corrections that have already occurred at different points in time over the last 110 years, we might make some reasonable 'guesstimates' as to what could happen in the near future.

Let's put a couple of things in perspective. The real estate boom of the last 10 years exceeds any previous peak by 70 percent. The historical peaks of the past saw approximately 15 to 20% price growth followed by a decline of about 15 to 20% which kept the market somewhat consistent from the period 1948 to 1995. But the 1997 through 2005 boom has exceeded historical averages by approximately 300%.

Translated into plain English this basically means that we should see a major correction in housing prices over the next year, two or three, depending on interest rates, and overall supply versus demand.

Indeed we've already seen an average 15% decline even with interest rates still at historically low levels.
If interest rates begin to climb significantly in the near future this could certainly trigger an adjustment
of historical proportions.

So what would this mean for the average investor like you and me?

The number one thing it means is that just over the horizon are some of the best buying opportunities
we've seen in years. While a 50% drop in housing prices may sound like the end of the world on the surface, the fact is that this would be a tremendous boon for Real Estate investors who have patiently waited for better prices to come along.

If you are positioned correctly you stand to profit greatly. On the other hand if you find yourself tied up with interest only payments and negative amortization, you could be looking at serious financial problems.
Now is the time to consider strategy adjustments to take advantage of the coming changes. Getting out of any adjustable rate mortgages in favor of fixed rates is a smart decision right now.

I believe that one of the primary factors that has pushed the present market to its all-time highs is investor speculation on a level never before seen in the U.S. housing market. I believe that speculation among new investors has been one of the primary driving forces in this current cycle. It has pushed supply above demand, and is forcing price erosion in an otherwise strong economy.

Based on all of the data that I've seen recently I would be willing to bet that as much as 30% of all housing for sale today is related to investor speculation. I believe this is also the reason for the huge cancellation rates builders are now seeing in new construction projects around the country. In some areas new construction contracts have seen cancellation rates as high as 36%. This is typical in areas where the so-called hot markets were located - New Jersey, south Florida and California, which are rampant with investor speculation.

If I'm correct about the amount of investor speculation diluting the overall housing market future price erosion could be more severe than anyone realizes at this point.

But all of this bad news is good news for smart real estate investors. I've been on the sidelines for quite a
while now waiting for these over inflated prices to drop to more reasonable levels. Once they do, smart investors who know how to avoid overpaying for properties will be out there to take advantage of the multitude of buying opportunities that will develop. There are obvious indicators that this has already begun.

There's still time to plan for the tremendous opportunities ahead. Keep an eye on your market, pay attention to the sales and foreclosure activity in your local area, get your funding sources together and get ready to profit. Things are about to get very interesting.
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