Real Estate Is Grossly Overpriced
Friday, March 8, 2013 at 3:00AM 
The Real Estate Coroner gives her Toxicology Report: Real Estate died from too much governmental interference. At least that is what Peter Schiff says on page 2 of his book The Real Crash I purchased at the Cambridge House conference I attended. I even got it autographed! Be still my beating heart. Schiff is writ rather large on the hard money scene, so hearing him in person was interesting. It seems only correct to talk about him and what he had to say near the beginning of my series on the conference. I also plan to talk about his theories at the end of the series as well.
Real Estate being overpriced is not something you will hear about in the "normal media." This would not fit the allowed talking points on Real Estate. Prosperity is just around the coroner corner. I actually disagree with him on this. My own theory is worse. I think that the market is so screwed that it is impossible to value anything. I am not saying that one cannot look at recent sales and get a rough idea of potential sale price. I am saying that the market is so destroyed with horrific market conditions that the government interference dominates the market and distorts all pricing signals.
A. The strongest market destroying condition is the Federal Reserve in effect buying all residential mortgages in the US. It is charging less than the Market rate. Since most people do not buy a house, but a payment, this is propping up the real estate prices for homes. One estimate I read was that the amount of such purchases was 800 billion dollars for 2013. We know the already completed purchases for 2010, 1.25 trillion. What is the true price with such non-market pressures? I have no idea.
Are things better now? B. Another way that prices are being held higher than they would be is that many lenders are not foreclosing. A supply of such houses is a large overhang on the market. Yet at the same time when they do sell it is at a distressed price of course. But the supply of such houses is not enough to clear the market so you end up with a market that is bifurcated. These two different groups of prices are in competition. An appraiser will look to the upper group for their appraisals because if they don't, no sales will take place at all at that price with a loan. Which is the correct price? I have no idea.
While these kind of loans are available at ridiculous rates, normal loans for normal people are hard to get. C. But there is also another factor that is driving down prices. It can be difficult now to get a loan at all. In the heady days of the housing bubble, if you breathed you could get a loan. If the fraud I have read about is any indication, you may not have even needed to breathe. Many home owners’ names and credit rating were used on loans they actually knew nothing about. As a result of the too-easy credit the bubble was made worse. Now, with a look to that history, it is too difficult to get financing on a home. Many people who could have gotten credit under normal circumstances before the bubble are unable to get credit now. This is driving prices down.
I am sure that Peter Schiff's opinion is that the forces of A and B are greater than C. He is probably right, but no one knows.
The same kind of forces are taking place in all markets right now. In such a situation, debt reduction seems to be the best option. Then, with a debt-free balance sheet, one might think about investing.
Where should one invest? That is one presentation I will discuss Monday. Until then here is a Peter Schiff interview by Doug Casey.
Reader Comments (5)
When markets are propped up , or are manipulated or distorted, a good rule of thumb is to use
"replacement value".
Gold is easily mined at $600 and ounce. The current $1500 is too high.
The "Q ratio" shows us that stocks are about 30 to 50% overvalued based on historic "replacement value"
It costs about $80 a square foot to build a house.
Oil is easily produced at $40 to $50 a barrel.
Interest rates are historically inflation plus 3%.
So currently EVERYTHING is somewhat overvalued and out of whack. How it will play out will end up being a political
decision. Historically, hyperinflation has never occurred in a country with a highly developed bond market.
The bond market in the USA is many times larger than any other market other than the currency market. Bond holders have the most political clout. So the scale tips towards deflation in that regards.
The fed can keep buying up assets forever , just as long as we can keep floating our bonds. This will happen for quite a while, for as bad as we are, we will be the last man standing in the world. Then there will be some real problems.
Just as everything is overvalued, so the entire world system is in varying levels of collapse. The USA though is the "least sick" of a sick bunch.
It is a game of economic chicken.
The only answer to survive this all will be trend following/timing, and asset rotation done in a systematic, mathematical way. There will be many trends, bubbles and counter trends. The nimble will survive, but it will be a scary game.
Eddie H. Nessul
Amboy , CA
Actually the cost of mining right now is about 900 according to the panelists at the Cambridge house meeting I attended. As for housing at $80, that seems unlikely. Try $150. A very plain Jane house, maybe $120. Good to see you back.
I was quoting the construction cost only, sans the land, for the real estate. Developers in the Temecula valley
are selling brand new houses at about $110 a square foot including the land. So we are in agreement.
The gold quote is break even mining cost only, not with mark up or profit figured in. So we are probably in agreement here as well.
Since the supply of money is "oversupplied" everything is overpriced. What happens when the supply stops?
Expect TRUE VALUE and more likely , a DISCOUNT to TRUE VALUE. Those that can preserve capital will have the opportunity of a lifetime in buying up distressed assets once the chaos settles. Chaos always tends to order itself eventually. There will be a change of ownership of things, this you can count on. There will also be a new order as well.
Those that hold their assets currently without debt or encumberance , and have the ability to self fund without income for a couple years, will also likely fare ok.
Eddie H. Nessul
Amboy , CA
Ha, we almost switched to Ace.
http://www.standardpacifichomes.com/new-homes/southern-california/inland-empire/parkside-ii.aspx
Looks like I was too high 110 to 130 per square foot.
The 900 gold price did not include profit. There are some high cost mines out there, especially in so Africa. The panelists were salivating over their possible closure due to labor unrest combined with increasing costs for labor.
I am correct about the gold price production cost, at least for the largest operators. http://en.wikipedia.org/wiki/Largest_gold_companies
I know that Silver is produced at around just $7 per ounce as I recently saw an interview with the
chairman of Rio Tinto say as much, on CNBC just recently. Silver is very over valued as is gold.
As is everything!
Make sure you have at least 6 months food stores, water source or supply, for eventually there will be
disruptions in markets, which may mean income problems, supply problems or civil problems.
Wont happen next week, but I am concerned for 5 to 7 years from now. I do not think this is the end of the
world either, but definitely a cyclical change in the order of things, one that happens every 70 years or so .
Eddie H. Nessul
Amboy, CA