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Real Estate soon to deflate! Values to crash!

February 28, 2016

After taking a tour of the greater Tucson area and looking a numerous subdivisions (all of which have been developed these past five years) I can assert that this industry is in for big trouble. First of all, lenders are providing all the big developers with 100% plus loans to build houses (mostly on spec). This works when affordability is strong and when employment is strong. But today, affordability is marginal and employment is also marginal. Store closings and lay-offs have increased these past 12 months (especially). My observations from touring these developments and subdivisions in greater Tucson reveal that more than 50% of the houses built are vacant. What does this reveal?

Spec homes (built to an excess) are evident in the greater Tucson real estate market! I assume this is a national problem! Where does this lead?

To me, a professional valuation consultant and prior finance expert, this reveals that lenders who are providing 100% plus funds for all their developers don’t really care about a decline in demand and don’t understand the concept of affordability. Most of the properties on the current market (in these developments) have prices in the range of $300,000 to $500,000. This is crazy for the greater Tucson market which attracts mostly retired people and blue-collar workers. How will all these spec homes be marketed now that the market is slowing down dramatically and affordability has not improved? Prices will need to come down (substantially) and lenders will need to write down values on their books. This may not happen this year, but it is certainly on the horizon.


Values starting their descent in the greater Tucson market! Why?

Our Keynesian lenders who can offer 100% plus loans to developers at low-interest rates will discover that the markets (probably nationally) will not be able to absorb the overbuilding which has occurred. These lenders have learned nothing from the 2008 deflation and they now have a similar situation staring them in the face (2016). If the stock markets also turn south and crash then the game for real estate is over. Values will deflate by 50% or more in order to sell these spec homes (priced way above the affordability of buyers). What a mess is emerging in the real estate industry later in 2016 and after. The Keynesian game of demand management is a farce as buyers can not afford all these new properties at the prices offered. Watch out lenders!

Overbuilding is obvious in the greater Tucson area. I assume this is also a national issue! Where does this lead but declining values and substantial defaults down the road! 

The entire industry of real estate is dependent upon continuing inflation and rising prices. The 2010 – 2016 period has allowed prices to increase by some 30 + % in the greater Tucson market. This game is now over and prices and discounts are already starting to occur. All the low-interest money and 100% + loans to developers will prove fatal as values and affordability are the real issues. I witness some of this same overbuilding in the retail and commercial markets. I assume that this is also a national problem. Keynesian lending is totally dependent upon continuing inflation in values. This situation is now slowing dramatically. Values are starting their descent too much lower levels. The awareness on this will likely be later in 2016 for most real estate professionals and their deceived Keynesian lenders! Watch this market going forward. I am:

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