It’s déjà vu. Home prices in major cities are at the same levels (or even higher) than prior to the 2008 Financial Crisis.

Economic conditions, however, are very different today.

Before the financial crisis, home prices jumped due to to easy credit (no documentation, no down payment), record-high workforce numbers, a 4% unemployment rate, and rising wages.

That is certainly not how things are today. And that’s why I’m starting to see a growing number of real estate warning signs.

West Coast Bubble?

Perhaps no part of the country has benefited from the private-equity, IPO, tech boom more than San Francisco. Yet, appreciation has stalled.

In April and May, the median price of a San Francisco home increased by 2% YOY to $1.38 million. While 2% is still positive, it’s a far cry from the 23% increase of 2015.

The high end of the market is dead. A record 95 homes for $2.5 million and above are on the market—up 42% from the prior year. A record 75 luxury condos (defined as $2+ million) are for sale, too—a 44% increase.

Overall, luxury home sales declined in the first five months of 2016, the first time since 2010.

East Coast Bubble?

A penthouse near Central Park in Manhattan is for sale for $250 million: the highest listing price ever for a residential property.

Now, add in $520,000 a year for condo fees and the $675,000 property tax bill!

Far East Bubble?

I don’t want to leave out our international friends.  So, take a look at what is happening to the price of raw land in China. The average price in the 100 largest Chinese cities has jumped to a record 3,100 yuan (US$463) per sq. m.

That is an unbelievable 50% increase in the last 12 months!

More surprisingly, the price of raw land in many parts of China is now higher than the price for completed houses nearby.

REITs and property funds are eroding

Real estate isn’t very liquid. It takes time and money to sell a piece of real estate. So, many hard-asset fans have invested in REITs and property funds instead.

Even those seemingly liquid real estate investments are turning out to be less liquid. Since the Brexit vote, four UK property funds with $23 billion of investors’ money have suspended redemption as their share prices have plummeted.

And that is against the backdrop of the super-accommodative central bankers and record-low interest rates.

Investment Implications

Are real estate prices headed lower? I think so, but as always, timing is everything.

When real estate does drop, one of the best ways to profit is by buying shares of ProShares Short Real Estate (REK),  an ETF designed to deliver the inverse performance of the Dow Jones US Real Estate Index.

Tony Sagami has worked in almost every part of the financial services industry, including a stint as a life insurance salesman for Prudential; a stockbroker at Merrill Lynch; and a portfolio manager at The Donohue Group. Later he switched to publishing and eventually became one of the most widely read market writers of the last generation. Click HERE to learn how Tony uncovers the real story behind the week’s market news. To read more of his articles, GO HERE NOW.