Thread: Financial Armageddon and real estate

It's a general feeling that millionaires are made during recessions. During these times, it's best to buy things that do well versus inflation. This includes, but not limited to, metals, real estate, commodities, etc.

So, those who bought real estate in 1929 did well afterwards? Is there a record of that?

We will not have another 1929 because their are too many safeguards from it. Back then there was no such things as bail outs of banks, car manufacturers, insurance companies, etc. Image is these thing did not occurred in this past year. We would be in the middle of the 2nd great depression because all of these events combined would have a snowball effect on the economy.

Luckily, we are in the year 2009 and there are many agencies set-up to stop such things from happening. You can save that we've learned from the past. And yes, I feel if you have the "balls" investing in RE will pay off in the LONG term..say 10-20 years.

Originally Posted by bartek

So, those who bought real estate in 1929 did well afterwards? Is there a record of that?

Well, looks like someone is unsure of the stability of RE... Hmm, how can I put this.

1. Everyone needs a place to live, therefore the demand for housing will always be there.

2. RE will ALWAYS have a value associated with it. The national currency could devalue, and even like the Hyperinflation of Germany, the currency could be worth nothing, where a new currency would take it's place, the value of the RE will still be stable. (Whereas the old currency notes would be good kindling.) Look up Hyperinflation of Germany, you will see that people holding CASH lost the most, people holding RE seemed to weather through the storm.

Well, I could go on, but those two examples are pretty strong as arguements for RE investing... Financial Armageddon and RE? HARDLY! The reason for the "adjustment" in housing prices is because lenders were giving loans away at such a HIGH level, that it caused the DEMAND side for RE to go through the roof. Then you had people holding notes that they could not afford, and thus they started failing to make the payments, lenders tightened up their lending, now the DEMAND has fallen, and due to all these defaulted note the SUPPLY side has gone through the roof.

Simple economics... Just on steriods. Had the lenders not gone nuts and controlled their programs, this would not have happened... The DEMAND FALLING and the SUPPLY RISING at such extreme rates.

Well, I SHOULDN'T say that DEMAND is really falling, it isn't... The DEMAND is still extremely high (people would love to own their own homes,) it is just that they can not qualify for loans, which drops the available homeowners down. This is great news for those who offer "Rent-To-Own" houses, as then they are tapping into the HIGH DEMAND, UNQUALIFIED wanna-be homeowners, and they are all over the place!

Later!

Originally Posted by bartek

Can someone explain to me what is the relationship between both? More accurately, my question is: based on past financial crisises, how are real estate investments likely to perform in the event of a serious crisis? Will they be a safe heaven? If not, what other investment is likely to survive? I.e. during the 1929 world crisis ( en.wikipedia.org/wiki/Great_Depression ), when there were millions out of work, riots and famine, how did the small home investor do? Who survived that crisis better than others?

I don't like any of the answers that you have recieved here. First of all we are not looking at the same type of financial crisis seen during the depression. Our current troubles look more like the financial crisis of 1907.

Next a depression is really a deflationary spiral. What this means is that wages and goods spiral down in cost. When you first look at this you think big deal well the trouble is that wages and prices of the end goods drop in value first which means those businesses looking to sell end user products buy the components of their goods at to high a price for what they can sell them for in the end. This then causes businesses to go under leading to higher unemployment and lower wages which then leaves less money available to purchase goods made for the end user. This sort of spiral tends to be very scary because to this date man has not been able to find a way to end this sort of a spiral without a major war involving multiple countries.

An earlier statement was made that a depression will never occur again because of all the different government programs. This is hog wash. A deflationary spiral very well can occur today, although I agree that it is less likely. I believe that the chance of us witnessing a deflationary spiral was highly likely back in September when the financial system was in dire straights. Today I would argue we are in much better shape but not out of the woods yet.

Yet, another poster made the statement that assets that do well during inflationary periods tend to perform well during a depression. This makes very little sense in the manner it was posted. I would like to note that Steve is a good guy and likely just didn't take the time to explain things in its entirity. I will discuss it in full force shortly but I wanted to explain why the way the post was made is less than a reasonable answer. A dpression is a deflationary spiral so saying that you should purchase assets that do well during inflation is logically backwards. If the value of commodities fall during a depression why would it be good to hold them just because values of commodities are deflating in value? The simple answer is it wouldn't unless there is some other effect going on in the market place.

Now to answer with my take on the situation. We are not looking into the same box as the depression or the 1907 financial crisis. The cause of our troubles lays more tangent to that which occured during the 1907 crisis, however, today is different in two very important ways. First in 1907 our currency was fixed to a gold standard as was much of the worlds. This limited the amount of money that could be put into circulation to only one single ore. Having your entire means of production limited to a set value of one ore (natural resource) is kind of silly and why it was abandoned. Today we have what is called a fiat currency. Which in simple terms means that our currency only has as much value as the strength of the federal governments credit. The next difference is that in 1907 our government was not carring a large debt and looking to add substantially to it. The two major differences between todays issue and what occured during the depression is in part the same as 1907s difference that being the large debt the country currently has. The second and more unique difference is that the depression was started thanks to huge leveraging of equity positions and today the problem stems more from the securities side.

Now that we have disussed some differences in the two periods to be used as models lets look at the likely outcomes of what is happening today. If you believe the dooms dayers and we are going to enter into a deflationary spiral we will not see the same outcomes as the depression. During the depression there was never any question as to the value of the dollar simply because the government was more than able to repay any debts. Today this is not the case. If we do enter a deflationary spiral the federal government will not be able to keep good on its debt obligations. If the federal government defaults on treasuries (form of debt government takes on) we will see super hyper inflation as the dollars value approaches zero. The reasoning behind this is that the only true value to the dollar lies in the federal governments credit. If the credit goes south so does the value of the dollar. The value of the dollar decreasing is the same as the cost of goods increasing in what one experiences. So, in the end if you want to protect yourself against a deflationary spiral today you need to hold commodities, commodity based assets and companies that own and control commodities or commodity based assets. The best choice being commodities or commodity based assets. Examples of commodities would of course be gold, silver, platnium, copper, timber, oil, gas, land and so on. Examples of commodity based assets would be plastics, improvements made to land (frequently referred to as real estate). In the end a home is actually a blend of two of these asset classes. The structure is made up of commodities and the land is a commodity. And this is why real estate would be a good item to hold if we entered into a significant deflationary spiral.

Now if we have seen the worse and begin to see a turn around nearly any economist or financial advisor type would tell you that we are going to see inflation hit during the recovery. Every single federal bank has been pumping money into the markets to prevent us from having a deflationary spiral. This "added liquidity" is in essence printing lots of money which devalues a currency which then will cause one to experience an increase in the costs of goods. Also well known as inflation. Interesting enough both cases held within the frame work of todays situation say that one should hold commodities, commodity based assets or companies that own or control commodites or commodity based assets. This is why I did not disagree with what Steve suggested you put your money into. I just did not like his answer as with out playing out the scenarios it was in defiance to logic. If you would like to discuss this subject in further details or recieve links discussing what I have said here just let me know.

Good precisons, jamesww. I'll retain this portion of your reply as a reference answer to my original question about the safest depression-proof investments:

The best choice being commodities or commodity based assets. Examples of commodities would of course be gold, silver, platnium, copper, timber, oil, gas, land and so on. Examples of commodity based assets would be plastics, improvements made to land (frequently referred to as real estate). In the end a home is actually a blend of two of these asset classes. The structure is made up of commodities and the land is a commodity. And this is why real estate would be a good item to hold if we entered into a significant deflationary spiral.