The big story of this year will be how investors globally turned to gold as a safe-haven asset. The world is losing faith in the dollar as a safe-haven asset. While gold and some other investments are being seen as safe-havens during these geopolitically turbulent times, the other asset that is always seen as a good place for capital is real estate.
Let's never forget how hyper-localized real estate can be. Not unlike stocks, some soar further than imagined, and others plunge further too. Some are more 'boring' and don't go up and down all that much during booms and busts. Not unlike home prices. While average US home prices depreciated by approximately 25% - 33% from their peak in the mid-2000s to their lowest point in 2009–2011, this average decline varied significantly by region and market segment.
Some markets, such as parts of Florida, Arizona, and Nevada, experienced even larger drops, reaching over 60%. Those states were very different then to what they are today. Boston, Massachusetts experienced 5-10% declines. By comparison, the DOW hit a market low of 6,469.95 on March 6, 2009, having lost over 54% of its value since the October 9, 2007 high.
After a fall, the rise can be swift, again, area-by-area. New York City's housing market saw home values rise significantly after the crisis, eventually increasing by 30% in the 7 years following the 2011 post-crisis low. In October 2021, the DOW dropped around 20%: by July 2023 (less than two years later), it was up 48%.
Here are some important notes about rising and falling prices:
1. Most home prices experience ups and downs, but averages are unreliable. Gains or losses are only meaningful at the time of a sale. Paper profits or losses are just that. Paper!
2. No home disappears when prices plummet, and the day-to-day existence of that home (or the financial ramifications) remain mostly unaffected, unless you sell.
3. Most homes are used, providing essential shelter. A depreciated asset providing an essential need is different to one sitting empty. That need does not change when the value of the home rises or falls. A home that is used is different to an investment property.
4. The carrying costs of a home are mostly fixed if a fixed rate mortgage. Insurance, real estate taxes, regular maintenance are fluctuating expenses that rise similarly to the rate of inflation. This only becomes an issue when income is impacted by a job loss for those without savings.
5. Most people stay in their homes around 12 years, enough time to weather most economic cycles. US home prices took approximately 4–5 years to recover from the 2008/2009 recession that hit a low around 2011.
6. Those forced to sell at a loss or lower price create opportunities for others to buy homes at more affordable prices. Usually when there is a recession, interest rates are lowered to stimulate economic activity, making them even more affordable. Upgrading from a $500,000 home that is worth 20% less to a $750,000 home worth 20% less poses exceptional equity gain opportunity. Lower home appreciation can also result in lower capital gains taxes.
7. Building replacement costs are high and heading higher. We are still in an environment with massive housing shortages in some areas. Supply/demand ratios matter in all economies.
8. Approximately 40.3% of U.S. owner-occupied homes are mortgage-free, up almost 23% from 32.8% in 2010.
9. Right now total assets in US money market funds reached a record $7.26 trillion. That's a lot of cash on standby waiting to buy up assets at reduced prices and cover those times when savings are needed to get by.
10. Like most recessions, the poor are hurt the most. Most are renters. This can trigger enormous suffering, huge strains on welfare systems that are taking in lower tax revenues and lead to social upheaval and political instability, especially when the divide between rich and poor keeps expanding, now at unsustainable levels.
PS: While gold soars during uncertain times, it's also not immune from big drops: Between 2012 and 2015, gold dropped over 40%!
