In March of 1990, after two years of looking for a house during a hysterical real estate boom, I bought a modest home in Malibu for exactly $600,000.
The owners had paid about half that five years earlier, but I really loved the house and thought that in a highly desirable area like Malibu the downside would be limited.
Bust to Boom and Back
The real estate crash to end all real estate crashes began the next month. Within three years, I couldn't have given that house away. If I'd been able to sell it, I might have gotten $350,000 for it.
The price languished in the same miserable range for a few years, then revived, and then took off for the moon. By early 2005, I might have been able to sell it for $1.8 million -- a tidy profit. Plus, I had very much enjoyed living there. (Although I do recommend that you never buy a home with a septic tank.)
Then, in the early months of 2006, the real estate boom collapsed. I could put the house up for sale, but there are few buyers out there. I certainly couldn't get anywhere near what I could have gotten for it in early 2005.
A Long Way Down
There's a bit of a moral here. When real estate crashes happen, they rarely involve that elusive creature called "the soft landing." Yes, friends, when real estate starts to fall after a meteoric rise, it tends to fall hard.
There will be exceptions, and you'll hear of people who sell their homes for vast sums overnight, but that's not the general nature of a real estate correction.
Usually, they're grinding, drawn out, and involve real pain. Homes sit on the market for months. Owners have to seriously lower asking prices. And the houses still don't sell.
Then, one day, a Galton's whistle is blown. Buyers hear it and start buying again. No one ever knows why for certain. Maybe it's too mysterious to ever be understood.
Lessons from Busts Past
Maybe this time is different. It's possible. We haven't seen really dramatic rises in mortgage rates. The economy is still booming. And lower gasoline prices may be a pittance compared to mortgage payments, but they put consumers in a better mood.
The usual course of events, however, would be for residential prices to fall for a couple more years, and then stagnate. It wouldn't be at all unusual for a residential slowdown to last for five years.
What does this mean for you?
First, it'll probably be a good time to buy a house in a year or so. The smart buyer buys when the bust is on, not when the boom is on. (I know this suggests that I'm not a smart buyer, but I've bought other properties at the bottom and have been very happy with those purchases.)
Second, it's a reminder that you shouldn't count on your home to make you rich. Homes are for living in. They shouldn't be your main investment unless you're a builder.
And third, if you're a buyer, you can expect to be able to drive a good bargain. Conversely, if you're a seller, don't take it personally if you're hammered by buyers. That's the way markets work.
Buy at the bottom in real estate (and in everything else -- read on), or as close to the bottom as you can see, and patiently wait for the boom to come back. In the meantime, live in your house and enjoy it. A house is a machine for living, as the famed architect Le Corbusier said. It's not a machine for making money. If it does make you money that's all to the good, but it's not the main function.
Nowhere to Go But Up
For years now, I've been recommending emerging market funds such as the EEM and the DFEMX. They've been on a tear for three years. Now they're correcting.
Unsettled conditions in Thailand, extreme weakness in commodities exported by many of the emerging countries, dramatic scandals in Eastern Europe -- all of these are undermining the emerging market stocks.
In this situation, I try to remember the wise words of my pal Ray Lucia: Don't panic. If the stocks go down, buy more. Make sure you have sufficient liquidity, but stay in the markets for long periods.
I wouldn't be surprised to see serious pullbacks in the emerging markets beyond what we've already seen. The commodities super-cycle may be ending, but probably not. Commodities cycles usually last over a decade, and this one isn't even five years old.
In the long-term, growth in Asia and Eastern Europe should be substantial. I wouldn't commit more than 10 or 15 percent of your investments to it (or maybe 20 percent if you're young), but the time to buy is -- again -- when it's down, not when it's up.
Listen to Ray and keep plenty of liquidity, but don't bail when it's low. Instead, keep on buying and keep your chin up. In the long run, you'll be glad you did.