Real Estate: The Downside Risk in 20 Major U.S. Cities

I like to practice what I preach. I don’t own my home. I rent.

I’ve been renting my house in Tampa since October 2005, because I’ve seen what’s coming – the bursting of the greatest real estate bubble in modern history.

I don’t want to get caught up in the storm when it hits… and I don’t want you to either.

That’s why I’ve been saying you should sell all non-essential real estate as this bubble has rekindled – and hence, is in danger of bursting again.

I realize that’s not an easy decision to make. I can talk people out of stocks, but real estate is a more emotional issue.

You might have grown up in that house. Plan to retire – even die – there. Or just plain not want to move!

But the fact is, when real estate starts to fall, it can become very illiquid. Once the market realizes that there’s far more supply than there ever will be demand, selling your home for what you consider a reasonable price will become damn near impossible.

If you plan to retire off your home – or your home equity holds any major part of your retirement plan – you should change your plans. Home values will only depreciate in the years to come.

However… that doesn’t mean real estate will fall the same across the board.

This is a question I received recently: When real estate falls, will it be across the whole market, or more specific to cities with massive real estate bubbles?

In other words: “Harry, do I really have to sell my home?”

The quick and dirty answer is – of course it will be different.

Several factors go into pricing real estate regionally. Supply and demand. Migration from other parts of the country. Immigration from around the world.

For those reasons, the major cities are naturally the most bubbly. They attract immigration from wealthy foreigners (namely the Chinese) so they can educate their kids and launder their money out of their home country.

Vancouver, Sydney, Melbourne, London and Singapore are some of the best examples internationally. In the U.S., the coastal cities tend to be the most bubbly – New York, San Francisco, L.A., Miami, D.C., San Diego, Boston and Seattle.

When the massive and unprecedented Chinese real estate bubble implodes, it will impact many of these cities most directly.

So of course the bubbliest cities will get hit the worst. The smaller and more inland cities and counties less so.

But that doesn’t mean you won’t be hit too.

Overall, our country is looking at a real estate crash of 46% or more from the bounce since 2012. If real estate falls back to its 1996 lows – my worst case scenario – we could see a loss as much as 59%.

See the chart below, which shows the potential decrease into 2017 or later. Real estate could slide back to January 2000 levels when this bubble started, or as far as to 1996 lows:

You’ll notice this bubble had started to burst with a 34% crash during the subprime crisis, then ticked back up when the Fed and central banks around the world decided to inject our markets full of crack (read, quantitative easing).

So when this bubble bursts, for the final time this round, we’re looking at returning to either the 2000 or 1996 levels – 1996 being the worst scenario.

The chart below shows the range of this downside risk in 20 major cities across the U.S. based on these 1996 and 2000 prices:

You can tell that there are huge variations in these downside risks. They range from -5% at the 2000 lows in Cleveland, all the way to -67% to the worse 1996 lows in L.A.

Tampa, where I live, has a downside risk of -37% to -45%.

Do you understand why I don’t own a home in Tampa!?

Of course, this chart doesn’t tell the whole story.

Dallas and Denver are two examples of cities that did not bubble up as much going into 2006, so they didn’t get as clobbered in the last crash.

But since then, they’ve bubbled to new heights – partly due to the fracking revolution, which is just another symptom of this artificial economy as the housing market itself!

Again, I understand real estate is an emotional issue. But I’m warning you – there will be no mercy in this upcoming global financial crisis when credit bubbles  like our housing market  start spontaneously combusting.

My number one rule is: the greater the bubble, the greater the burst.

My number two rule: look at what your real estate – residential or commercial – was worth when the bubble started in January 2000. If you’ve built a home since then, check your city’s averages. That best defines your downside risk in a complex real estate market across the country.

Don’t wait to see what happens first. Price your property to move. Then sell quickly.