Sometimes, when I start a new post,  I feel the need to begin with the words “Don’t blame the messenger.”  This may be one of those times.  This is not necessarily “bad news” but more of a road map to provide you with information and direction that will guide you until the storm that is upon us passes over.

Remove The Rose Colored Glasses

Let me begin by sharing something with you, so very crucial to your success with money and investing.  This will require you to make a shift in thinking.  For you see, most of the financial news received through the Wall Street Syndicate is given to you through rose colored glasses.  This should not anger you any more than the annoying 2,000 word sound bite you hear at the last 7 seconds of a car dealer radio advertisement.  Wall Street sells investments.  They SPIN their message to support their self interest.  It is your job and responsibility, to see through the SPIN with your God given common sense.  But you must remember, at times, human nature is to ignore the facts when they go against what you desire or wish were different.  You can not be successful by putting your head in the sand.  Our job is to look at the facts as they are and make decisions, not cross out finders and merely hope.  Doing so will leave you broke.  The financial markets are not a place to let your emotions get the better of you.  We must learn to be resilient and resolve our will to acting in our best interest.

Measuring Risk Is The Starting Point for Success

If you want to be good with money you need to learn how to measure risk.  Don’t get worried about how you will do this for now.  Let me give you a simple example.  On your way to work and when there is oncoming traffic, you wait for an opening, right?  You don’t blindly enter the flow of 50mph traffic without looking both ways, right?   This is what I mean by God given common sense.    Here is where we tend to get goofed up.  Let me go back to my example.  Have you ever been driving with the rain coming down so hard, you literally can’t see past your windshield?  What do you do?  Speed up, slow down, pull over?   Of course, you’re going to slow down or pull over.  And, the reason why is that RISK is starring you right in the face.  When it comes to money and investing the RISKS aren’t always as obvious and starring you in the face.  So, what do most people do?  They follow everyone else because that’s what they’ve always done.

For most of you reading this, you probably wished you got out of the housing market (rain) sometime back in 2005-06, right?  And although there were plenty of indications that housing was in a bubble, we ignored the risks because we wanted to make more money.  This should not be criticized, but understood.

Bubbles like the housing market bubble from 2000-2006 are fun when they are inflating.  They allow you to live on the edge for a period of time.  Credit is abundant, deals happen without hesitation, everyone is spending money freely.  But then, just like every other bubble, they pop and come to an abrupt end.

The Supposed “Housing Recovery”

One of the reasons I decided to write this post is that I believe there is an awful lot of misinformation regarding the housing market “recovery.”  I place quotes around the word recovery because this is not going to be a recovery back to where we were 3-5 years ago in real estate values.  What we experienced in real estate prices from 2000-2006 was truly an anomaly in your and my lifetime.  So, we can not expect to return to this period (nor should we want to).  The simple reason is that when all is said and done the housing bubble which was created out of  irresponsible and misguided practices has created too much havoc and stress in people’s lives today.  These practices were allowed to occur and they have to be dealt with.

If we are going to get a handle on the situation, we need to get the facts straight and begin to understand what houses are and what they are not.  We also need to understand what determines a home’s real value versus what was completely fictitious pricing from 200o-2006.

The graph above shows the market value of the U.S. residential market.  As Yale economist Robert Shiller has pointed out, since 1890, home prices have increased about 3.3% on average.  This is the normal rate of inflation.  So,  we must understand that housing prices are not supposed to rise faster than personal income.   As the graph shows above we are simply moving back to the norm.  The excess that occurred from 2000-2006 was created by low interest rates, the mortgage backed securities market and lax or no lending standards.  There comes a point in time where the Free Markets take over and bring us back to reality.  This is what began in 2006 and is evident in the illustration above. The socialists and those with other self-interest hate this because they can not have their way anymore.  The Free Market will always go back to fundamentals and this is why you must learn to see the insanity of trying to stop such a force already underway.  This is the similar to what happened to the NASDAQ during the tech bubble from 1995-2000.  As I wrote in my last article, 2 Choices In Financial Crisis-Adapt or Get Left Behind, we must learn that markets are a self-correcting mechanism and we have to remain objective to follow their cues.

I realize this will be a hard concept for many to accept.  I don’t blame you. (Please re-read the first 2 paragraphs of this post.)  But we can see proof of this by witnessing what is occurring with unsold high-rise condos.  In case you haven’t noticed, the developers of these buildings have started renting these units out until the “recovery” occurs.  Here is an example in the Central Florida Real Estate Market, Emerson Plaza. What many of the developers don’t realize is that the rental rates they’re leasing these units at will end up setting the market value, not any recovery.

This is the the structural shift in real estate prices that I mention in the title of this post at work.

The structural shift in real estate has begun.  Houses will once again become a function of real income, not speculation.  Much of what I have written about here is obvious and not new.   Understanding the process and looking to where things are headed is the challenge and so often hard to grasp due to entrenched emotions and a desire for the good ole’ days.  The Real Estate Market is not dead and not to  be feared.  There are and will be great opportunities in real estate if you are patient and apply the fundamental concepts outlined in this post.  We must learn to adapt with the markets.

Comments are always welcomed.

Related posts:

1. Real Estate – Things I would do and things I wouldn't do.
2. Real Estate Update and Is Now A Good Time To Buy A House?
3. The Foreclosure Fraud Crisis – The Next Chapter in The Housing Market
4. Mortgage Reset Chart, A Look at Housing