End of the real estate boom?

What does that headline have to do with the Settlement business?

 At first glance, very little, but if you look deeper and step back you can see there are some serious issues on the horizon for the US economy, and as the economy goes, so go the decisions people make when settling cases.

 If you look at the ebb and flow of the settlement industry over the years, it closely mirrors interest rates, tax rates and the appeal of alternative investments. As someone who started in this business back in the late 70's I've been through Jimmy Carters stagflation and malaise, the Paul Volker Fed that busted inflation by driving rates to the high teens, the Reagan economic miracle of lower taxes and exploding growth, the 1987 market crash, the tech boom and bubble and now, the real estate mania of the last 5 years in the US.

 The one thing I hear constantly from plaintiffs considering structured annuities and other investments is, " I want to invest in a farm/ranch/vacation home/condo/real estate, and I don't like the yields on annuities and tying up my funds." We have all heard it, and who could rationally argue with them? Well, I could argue with them, and argue I have, often in vain. Just as I argued vainly back in the early 90's when they wanted to be in tech stocks, in the late 90's when everyone "knew" the market couldnt go down, and other times when investment sure things were being pitched to the vulnerable and broken people who are trying to decide what to do with their settlement proceeds.

I have in my office, a signed dated copy of the Wall Street Journal where in I called the top of the tech bubble, date circled, and with in 18 points of the top of the NASDAQ. Therefore, in the conviction i'm correct again, here goes: 

 I know this is hearesy, but i'm calling the top of the real estate market, right here, today, on this web site. In the words of the late actor Richard Crenna to Johnny Rambo in the first of the classic Rambo movies, "It's over Johnny."

How do I know? Pick up any newspaper on the weekend and count the real estate ads. Look at the number of funky loans people use to finance their dream. How you count on "a greater fool" than you to pay more for the property then you just paid. Yes, I know the fundamentals of growth, yes I've heard the arguements. I don't care. No tree grows to the sky, and with the twin shocks of the devastation of New Orleans and the gulf coast, coupled with $3.00 gas, and topped off by the Fed's inability to drop rates lower to stimulate a consumption economy,  is going to sober people up real quick. Real estate crash? Maybe in some markets. Real estate slow down and gains at an end? Definately.

 Again, the point is, if you or a client is considering what to do with their settlement money, DON'T encourage them to put it in real estate right now. Please don't do that. Have them take a look at managed trusts or structured annuities again. They need that money kept safe, earning income, and available for their needs. They can't afford the loss, the carrying costs and stress of real estate in most instances, so don't be the advisor that gets them in at the top.

It's over Johnny.  

Posted on August 31, 2005 .