Real Estate Is Grossly Overpriced

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. 

Another Housing Bubble?

A long-time friend asked me on Facebook if now was the time to buy real estate. Probably not. 

Ask yourself some questions. Will I live in the area for the next 5 years? Is my job secure? Is it cheaper to rent? (Be sure to include all owner’s expenses.) Are you sure?  There will be a natural tendency to buy a bigger house than you really need. Avoid this at all costs. John and Mark can share a room, although if your children are named John and Martha ...

If I am right about the upcoming crisis, you will thank me for this unsolicited advice. The flexibility of renting is the ability to move quickly and not be tied to a fixed location. But as the great fictional detective Charlie Chan once said, “Advice is like castor oil, easy to give but difficult to take.” I need to take some too. 

I have mentioned in the past one idea that some may take advantage of. You can buy up to a 4-unit apartment and live in one and rent the others and still get the ridiculously cheap fixed interest rates. Do not manage the units yourself. Do not tell your neighbors you are the landlord. Form an LLC so the checks will not be made out to you. It is doubtful you have the skills to be a successful landlord. 

Rather than try to reinvent the wheel and give you all the reasons why I think the recent housing price increases are temporary, instead click here to see an interview of David Stockman conducted by Lauren Lyster, two of my favorites. I am not quite as pessimistic as Stockman as I am guardedly pessimistic.  

To Infinity and Beyond

Toy Story was recently declared to be the second best animated film ever made. (Who decides these things? It is clearly number one.) The catch-phrase of Buzz Lightyear has entered our collective conscience—“to Infinity and Beyond.” This catch-phrase is starting to make the rounds in the usual places with regard to Ben “Buzz” Bernanke, who has just announced QEIII.

What is QE? It is an abbreviation for Quantitative Easing. Wikipedia describes QE this way. 

Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money, in order to inject a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to keep market interest rates at a specified target value. Quantitative easing increases the excess reserves of the banks, and raises the prices of the financial assets bought, which lowers their yield. 

Financial Times of London describes the current round of Quanitative Easing this way:

It was not so much QE3 as QE∞.  [The symbol ∞ is the “infinity sign” in math.]

Why is this a big deal? Compared to the two previous QEs (it stands for “quantitative easing” and refers to a central bank buying bonds to push down their yields), this one is unlimited. While the previous two were for fixed amounts, this time the Fed will keep buying $40bn of mortgage-backed securities until the labour market has improved “substantially”. That word is to be interpreted by the Fed, allowing it to carry on for as long as it likes.  

Romney and Ryan need to be in this picture too. Buying 40 billion dollars of mortgages every year, er ... no, that should be month… will please Paul Krugman, but no one else. Gold took an immediate spike upward in price. I wish I owned more. While I have been in favor of QE, I wanted it to be a part of a package that included tax increases and budget cuts. Such a package is not even being talked about as a possibility. 

Buying mortgages is also the very worst place that the Fed could buy securities. Interest rates are low enough already in that area. Driving them lower will only distort the market even more and encourage more debt. This we do not need. 

We Americans, as a people, already put way too much of our assets into houses. Why not enjoy it now, and then sell it later for retirement? Unfortunately, the homeowner has run out of bigger fools to sell to. This constant pressure will be with us permanently. Note that since my profession over the last few decades involves buying and selling houses and residential land, and supplying contractors with hardware and lumber, I may need to adjust my personal business plan a mite.  (I will talk more about housing tomorrow.) 

Having sold my 4,000 sq. ft. house and moving into a 2,000 sq. ft. has shown me that my family does not need all that space. My daughter is a little shy on space, but we can move her into the office when she is older if we need to. Or maybe, just maybe, she can learn to cope with one closet. As long as I have room for my toys we will be fine. Actually, I got rid of most of my toys—my books—in the move. I brought ten boxes of books to California. I have ten boxes of books still in storage for a later trip. Those who have seen my former library will instantly realize what a huge reduction in books this is. I counted my books many years ago. I had 1400+ at the time. It has been actually somewhat traumatic for me to pare the collection down. This is not a joke. Well, maybe a little one. 

This chart will show you what I mean. It shows the size of the average house by country by sq. meters. To get the more expected “English” measurements multiple by 10.76. So the average house in Britain is roughly 880 sq. feet as compared to 2300 in the United States. 

Typical Russian Apartment BlockWhile I was not able to find the figures for house size in Russia, it has to be smaller than Britain. In Russia each room has to serve multiple functions. When we go to Russia to visit family, the dining room becomes my computer room and a bedroom. The living room becomes a bedroom at night. The convertible beds are actually much more comfortable than the hide-a-beds we use in America—they have to be as they are used every night. Yes, there is a little work to prepare the bed at night, and a little work to make it a living room again in the morning, but this is minor. While my mother-in-law's kitchen is as small as the average American walk-in closet, it is adequate and we even eat there. The main issue is the lack of closet space, but if you are like me, you have enough clothes to last for years. I might need to buy socks, but that is about it. 

If you want some comparisons between life in Russia and America, click here.

Why am I going on and on about Russian housing? To make a point that you can downsize and not affect your lifestyle very much. Would you rather have a 2500 sq. ft. house that you lose to the bank, or a 1500 sq. ft. house you can keep? Those kinds of times are coming as a permanent reality to all of us. Be prepared. 

Ben “Buzz” Bernanke thinks that he is some sort of superhero. When Buzz Lightyear thought this he got into trouble. Ben is no different. He is just a toy of the banksters. The “powers that be" think they can kick the can down the road with QE, but the fact that this QE episode has no terminus should tell us that they do not expect a recovery any time soon. I fear it is permanent, so be prepared. 

Buy a House?

My Linkedin membership has sent me another link to an article that suggests it is time to buy a house. I bet a lot of my readers are considering it, so I decided to blog about it again. The link was to CNN Money:

Our Real Estate Future? There are several reasons. Home prices are falling. Mortgage interest rates are at historically low levels. And rents are on the rise.

...

The nation's cheapest buyer's market is Detroit, where purchasing is only 3.7 times more expensive than renting.

 Brilliant, move to Detroit. Could there be a reason prices are so cheap there? The article continues:

Housing markets, even within a single metro area, typically have local submarkets. Take New York City, for example. Renting in Manhattan is more affordable than buying. But in suburban Westchester County just miles to the north, buying is the more affordable option.

The article ignores anything but the cash flow of the rent vs. own situation where you live. But it ignores a lot of very important factors. 

If the following is true, it might be a good idea to buy a house. 

You are secure in your income stream.

You do not plan to move in the next 5 years. 

Housing prices will not continue to fall. 

I have been predicting another crisis. How certain are your answer to the above questions when, not if, the crisis hits? Charles Smith reminds us what is going on:

In constant (2005) dollars:

GDP in 2007 (pre-recession): $13.23 trillion
GDP in 2008 (recession starts): $13.31 trillion
GDP in 2009 (recession officially ends in mid-2009): $12.88 trillion
GDP in 2010: 13.04 trillion

GDP in 2011: $13.3 trillion

In constant (2005) dollars, the economy actually shrank in the three year span of 2008-2010 and is back to 2007 levels. That's what we bought with $6.1 trillion in additional debt and Federal spending. 

The economy has basically been stagnant for 5 years. Will we look back at these last 5 years with nostalgia? 

We are due to add $5 trillion to our Federal debt level over the next few years. This is not sustainable. GDP, gross domestic product, is a rather simple formula. Here is how Wikipedia describes it:

GDP = private consumption + gross investment + government spending + (exports − imports), or

Government spending is going to take a dive. I hope these cuts will be from careful planning and not a necessary response to the inability to sell bonds. But when the cuts come, GDP will go down, by definition, as government spending goes down. The cuts will come, and when they do it will not be pretty.

Do you really want a 30 year loan, even at 4%, when the fecal matter hits the circular air circulation device?

While you expect me to be trolling for the answer of no, my answer is I do not know. If you live in a state where you can walk away from your house debt, and you think that inflation is coming that will make the 4% look ridiculously cheap, then maybe buying makes sense. If you are wrong about inflation, then you can walk away from your house and rent. The decision to buy a house or not depends on your location, age, job security, and a lot of other factors. Most of the psychological factors favor home ownership. The numbers and the objective facts of your situation may say something different.