Chapter 13. Real Estate

I just love real estate; it's tangible, it's solid, it's beautiful. It's artistic from my standpoint and I just love real estate.

Donald Trump

The U.S. real estate market was the epicenter of the economic and banking earthquake that shook the world in 2008 and 2009 because that is where the most egregious lending and borrowing practices occurred. The epic story of the real estate mania and bust is a very large part of the private sector debt supercycle described in Part I of the book.

Real estate is by far the biggest asset owned by households. In fact, at the top of the real estate market in 2006, households held $22 trillion of real estate versus $9.5 trillion in equities. The problem, as always, was way too much debt. Because rising nominal house prices for so many years came to look like the closest thing to a bulletproof investment, people started to borrow a larger and larger proportion of house values. House prices, in turn, were inflating after 1996 at the fastest rate in over 100 years, if we exclude the brief catch-up period from very depressed levels right after World War II. Lenders became eager coconspirators in this unprecedented house price mania.

Commercial real estate also began to inflate sharply after 2000. That bubble burst with the housing collapse, but it has been following a somewhat different cyclical pattern. Commercial property has long time lags because the process of downward rental adjustment and refinancing of debt, usually undertaken ...

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