Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Try The “Compounding Capital Gains” Strategy Today - 26th Oct 20
UK Coronavirus Broken Test and Trace System, 5 Days for Covid-19 Results! - 26th Oct 20
How the Coronavirus is Exacerbating Global Inequality, Hunger - 26th Oct 20
The Top Gold Stock for 2021 - 26th Oct 20
Corporate Earnings Season: Here's What Stock Investors Need to Know - 25th Oct 20
�� Halloween 2020 TESCO Supermarkes Shoppers Covid Panic Buying! �� - 25th Oct 20
Three Unstoppable Forces Set to Drive Silver Prices - 25th Oct 20
Car Insurance And Insurance Claims and Options - 25th Oct 20
Best Pressure Washer Review - Karcher K7 Full Control Unboxing - 25th Oct 20
Further Gold Price Pressure as the USDX Is About to Rally - 23rd Oct 20
Nasdaq Retests 11,735 Support - 23rd Oct 20
America’s Political and Financial Institutions Are Broken - 23rd Oct 20
Sayonara U.S.A. - 23rd Oct 20
Economic Contractions Overshadow ASEAN-6 Recovery - 23rd Oct 20
Doji Clusters Show Clear Support Ranges for Stock Market S&P500 Index - 23rd Oct 20
Silver Market - 22nd Oct 20
Goldman Sachs Likes Silver; Trump Wants Even More Stimulus - 22nd Oct 20
Hacking Wall Street to Close the Wealth Gap - 22nd Oct 20
Natural Gas/UNG Stepping GAP Patterns Suggest Pending Upside Breakout - 22nd Oct 20 -
NVIDIA CANCELS RTX 3070 16b RTX 3080 20gb GPU's Due to GDDR6X Memory Supply Issues - 22nd Oct 20
Zafira B Leaking Water Under Car - 22nd Oct 20
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Great U.S. Housing Market Depression, America Stop Thinking about Homes as Investments

Housing-Market / US Housing Apr 28, 2009 - 07:21 AM GMT

By: Uncommon_Wisdom

Housing-Market

Diamond Rated - Best Financial Markets Analysis ArticleSean Brodrick There’s something you need to do for your own mental health: Stop thinking about homes as investments.

You know those guys who are trying to reinflate the housing bubble — Tim Geithner, Ben Bernanke, Larry Summers — President Obama’s posse of the ethically challenged? They’re not your friends.


They’re taking billions of dollars of your national wealth and transferring the loot to their Wall Street friends on the promise they can make things all better — the way they used to be.

America, it’s time to wake up and smell the coffee. The glory days of the housing bubble aren’t returning. You can wear a faded rose and pine for days gone by all you want, but your life will be much easier and stress-free if you can get the real estate monkey off your back.

The world has changed, and the days of flipping houses like rows of hamburgers are probably not coming back for a decade … maybe longer.

The good news is there are great places to put your money to work — and I’ll get to those. First, let’s deal with how we got here.

Time to Abandon False Hopes

The first two years after the bursting of the housing bubble saw home prices fall about 30 percent from their peak. And nothing goes down forever, right? That’s what you’re telling yourself, right, America? “Gosh darn it, prices are sure to rebound this year or next.”

As your friend, I have to tell you I think that outlook is pretty optimistic. Sure, maybe we’ll see home prices bottom sometime … in 2011 or 2012. But I’m not expecting a rubber-band bounce. And neither should you.

Let’s look at some of housing’s SHORT-term problems …

Reason #1: A Picture’s Worth a Thousand Words

Robert Schiller, an expert on housing prices and the author of “Irrational Exuberance” published a chart of how house prices behaved for the last 120 years (adjusted for inflation).

Population

The house price line is on top. Prices are indexed against the 1890 price (left scale), and the chart is updated through the end of the fourth quarter of 2008. At that time, Schiller’s analysis suggested that home prices had to fall about 10 percent to 20 percent just to get back to fair value.

Never mind the price spike — THAT was the housing bubble. On a more historical (realistic) basis, home prices have risen annually in line with the Consumer Price Index. By 2009, the median value of a home, based on historical precedent, should have risen to $150,000. But at the end of 2008, the median value of a home was $180,000.

Sure, modern homes are bigger and more modern than they were in 1969. But you know what? They were bigger and more modern in 1969 than they were 40 years earlier. The only way home prices could rise in real dollars is if incomes were going up as well — and they’re not.

In short, while we could see temporary rallies, the easiest path for home prices is still down. And since there is usually overshoot to the downside after a bubble bursts, it could be much further down.

Reason #2: The Mortgage Default Tsunami

More than 2.3 million homeowners faced foreclosure proceedings in 2008, up more than 80 percent from 2007. A huge wave of ARM (Adjustable Rate Mortgage) resets started this year and will continue through mid-2012.

Next wave of U.S. mortgage

Source: Credit Suisse

This tsunami of mortgage resets is one of the reasons why President Obama created a $75 billion plan he says will prevent 7 million to 9 million foreclosures.

We aren’t going to discuss the morals of bailing out people who bought too much house — not enough time for that today. I will point out that of homes that were delinquent last year, and then were refinanced, more than half went back into foreclosure.

Also, 40 percent of the homes sold at the peak of the bubble were second homes or investment properties. They won’t be helped by Obama’s mortgage initiative.

Obama’s plan may ease some of the pain of the housing crisis, but won’t make it go away. And it will probably weigh on the economy for years to come.

There is some good news for the housing market. A subset of mortgages called Option Arms were supposed to reset this Spring, but that day of reckoning has been put off for thousands of homeowners by as much as one year, according to Credit Suisse.

The reason is that falling interest rates have delayed the loan balances hitting specified principal caps that would trigger a reset of the loan — typically 110 percent to 125 percent of the original principal.

The bad news: The big tsunami of unsecuritized ARMs, subprime loans, Alt-A, prime and agency loans will continue.

What’s more, the pain for Options ARMs is only being delayed. Credit Suisse estimates that the resets will begin to accelerate next spring, rising from about $4 billion resetting in March 2010 to a peak of $14 billion in September 2011. The current level is about $1 billion. About $500 billion of option ARM loans are outstanding, according to the bank.

These two forces should weigh on home prices going forward, even if the economy recovers during that time. A lackluster economic recovery, naturally, will also throw cold water on the housing market.

But even AFTER those two problems are worked out, there are five other longer-term reasons why the housing bubble — or any bubble — won’t be reflating any time soon.

Reason #3: Deflation Hammers Home Prices

Deflation is here and is grinding prices lower. In the U.S., consumer prices dropped 0.4 percent in March compared to a year earlier — the first year-on-year drop since August 1955.

That’s on the heels of February’s drop in personal income — down $29.1 billion. Wages should come under increasing pressure as employment declines — we recently saw employment drop by the largest amount since current data series began in 1949.

In March the unemployment rate stood at 8.5 percent, up from a cyclical low of 4.4 percent. This is the highest level since the early 1980s.

Deflation is terrible for home prices — as wages fall, rents follow, and home prices tag along.

Reason #4: Inflation Won’t Help

Our current bout of deflation is probably going to end in inflation. In the past year, the Fed’s balance sheet, as measured by the monetary base, has nearly doubled from $826 billion last March to $1.64 trillion, with much larger increases coming down the pike. This is inflationary — and if the economy bottoms, we could see inflation ignite.

That means even if your home value goes up, it’s struggling to keep pace in real terms. And if your home price doesn’t go up, that will be even worse.

Here’s an example why: The Dow Jones Industrial Average hit 1,000 in 1966. It didn’t get there again for 7 years — 1973. The inflation from 1966 to 1973 was 37 percent. So investors may have made the same paper gains, but in real dollars, they were losing money.

Reason #5: The Next Bubble WON’T Be a Housing Bubble

The implosion of the Tulip Mania in Holland and the South Seas bubble were not followed by reinflation of tulip prices or shares of the South Seas Company stock.

Likewise, after the Dot-com bubble burst, the Nasdaq didn’t reflate. There are stocks from the dot-com daze that are far from their old highs … and will likely never see them again. And some — Pets.com comes to mind — disappear forever.

Reason #6: The Fraudulent Good-Time Charlie Gravy Train Ain’t Comin’ Back

Low interest rates were only one factor in the housing bubble; the other was loose lending standards. Heck, they weren’t just loose, there was wholesale fraud going on.

Now, with regulators and Congress breathing down their necks, mortgage lenders are likely to button up their standards tighter than a nun’s pajamas.

That’s a bit like closing the barn door after the horse is out, but it means the ingredients for a housing bubble just aren’t there anymore. Speaking of that …

Reason #7: America is Getting Older

A great wall of baby boomers, born between 1946 and 1964, are approaching retirement age. The oldest baby boomers turn 63 in 2009, and when the trend peaks in 2030, the number of people over age 65 will zoom to 71.5 million — one in every five Americans.

Old people don’t need huge homes. You know — the kind of McMansions we’ve been building for the past 20 years.

And while the inventory of U.S. single-family homes, townhouses and condominiums decreased to a 9.7 month supply in February — down from 11.3 months in April last year — that’s STILL a lot of unsold inventory on the market.

How Long Could Home Prices Stay Depressed?

MAYBE we’ll see home prices recover in 2012. Or maybe it will take a LOT longer. Studies show that of the last three up waves in housing prices, 1942-1956, 1975-1979 and 1985-1989, it took the run-up time plus 30 percent before housing prices started to move up again.

Since this last housing bull market went from (roughly) 1997-2007, the housing prices won’t start a significant run-up until 2020.

And what will inflation do to the value of your home by then?

Now for the good news.

What, you thought I was going to dump all this on you and not tell you what you SHOULD be investing in?

Here are a couple of ideas …

Pick #1: The PowerShares DB Base Metals Fund (DBB). Base metals have based nicely in recent weeks, buoyed by bullish buying trends in China. The Chinese have $1.9 trillion in foreign reserves, and they’re using them to buy raw materials while they’re cheap.

Last weekend, Chinese Premier Wen Jiabao said his country’s stimulus package is working and the economy is “better than expected.”

While he cautioned that complete recovery will take much more time because the global financial crisis continues to spread, he also pledged to pull the country out of its slump by, among other efforts, expanding domestic demand and building major infrastructure projects.

You know what more infrastructure projects and consumer demand in China means. Chinese imports of iron ore are soaring, hitting a record in March. Chinese imports of copper are also soaring, and they’re gobbling up base metals as well.

I think you can buy the DBB anytime. My Red-Hot Commodity ETFs service holds it now.

Pick #2: Gold. An easy way to buy gold is the SPDR Gold Trust (GLD). Gold is in a consolidation mode right now, but I expect support between $765 and $800 to kick in. And that would be a buying opportunity for the precious metal. Gold will be excellent insurance for any portfolio if inflation kicks in the way I think it will. And it holds its value during deflationary times as well.

All the best,

Sean

P.S. For daily updates on gold and more, check out my new blog at http://blogs.uncommonwisdomdaily.com/red-hot-energy-and-gold/

This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.

Uncommon Wisdom Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules