The housing bubble has been correcting for years. Now the news is beginning to report a possible recovery in the housing market. The SPDR S&P Homebuilders ETF (XHB) has been firming up and has started to turn up. This has lead to speculation that the housing market is returning to good health. Add to this the Fed’s recent announcement that it will keep interbank lending rates low for several more years and you have reason for the market to believe an economic and residential real estate recovery are possible.
While it’s true that some first time buyers are entering the residential housing market because of lower prices and low interest rates there are still reasons for caution. What are some of those reasons?
1) Bank Inventory— Banks are still holding hundreds of thousands of bank owned foreclosures (REOs or Real Estate Owned properties). When they finally start to unload those units it will further depress residential real estate prices.
2) Unemployment and underemployment— Unemployment is high. Few high paying jobs are being created. Without stable high paying jobs people can not afford a home mortgage or the home it will buy. Until we see a drop in government spending, a drop in taxes, and the consequential improvement in long-term, private enterprise job creation why would we expect to see real jobs created that create real wealth? Government jobs, for the most part, are a drain on the economy.
3) Student Debt–Many young people are dealing with monstrous student debt as they graduate from college. They cannot afford to add mortgage debt to the college debt. They also hear from their friends about the nightmare of having bought a home and then seeing the equity disappear in the real estate deflation. Their friends also report on the ultra high cost of home ownership including outrageous property taxes, upkeep, HOA fees, insurance, and other costs. (See: “Why Aren’t Young People Buying More Houses?”:http://www.theatlantic.com/business/archive/2012/02/the-end-of-ownership-why-arent-young-people-buying-more-houses/253750/)
4) Late Payments and Foreclosures— there are about another 6 to 10 million homeowners who are in arrears on their mortgage payments. Banks are taking longer to foreclose so we don’t see those homes in the banks foreclosure numbers yet. But this huge number of defaulting homeowners is another problem that the media is ignoring. What will happen to the residential real estate market when these millions of homeowners default? Will it be positive or negative for the residential real estate market? Why are these millions of people defaulting? Could it be because they’ve lost their jobs? (See: http://www.housingwire.com/2011/09/20/amherst-to-senate-10-million-more-mortgages-set-to-default)
5) End of Loopholes— Both the democrats and the republicans are talking about “tax reform”. Democrats want to end loopholes such as the interest payment deduction for homeowners. What will a change in the tax code like that do to the residential real estate market? It may never happen. Nevertheless, we’ve seen plenty of things happen in government the last few decades that we thought could never happen.
6) Interest Rates— As the fiat currency rolls off the presses it dilutes the value of exiting dollars. Eventually bond holders start to demand higher interest rates as they see currency inflation skyrocket. What will higher interest rates in the mortgage market mean for the residential housing market? We don’t see those higher rates yet, but the time of higher mortgage rates may not be far off. Our real estate deflation may be followed by an inflationary depression. When inflation really hits, interest rates will likely climb. What will much higher interest rates do to the economy and to the residential housing market?
7) Boomers Downsizing— Boomers are retiring at the rate of 10,000 per day. A high percentage of retiring boomers are realizing that they need to downsize now that their children have left the nest, and their high paying careers are coming to an end. They can no longer afford the trophy home or even a small California home. They will be selling stocks and expensive homes to fund retirement. They are downsizing to cottages, condos, and apartments. Who will buy their big homes? Their desire to unload debt, downsize living costs, unload big homes, and move into less expensive housing will further depress the residential real estate market in the years ahead. Boomers are beginning to realize they cannot keep the debt funded party going forever. For some years now some California boomers have been selling small, expensive, debt ridden California homes to pay cash for large, less expensive homes in Utah and in other more reasonable real estate markets. They do this as they prepare for retirement and for the ongoing terrible economy spawned by an orgy of government deficit spending. These purchases in Utah may push up prices a bit in the Utah market if enough Californians flee to the Utah hills.
8) Fear— Many Americans fear the idea of taking on long-term debt today. Geopolitical turmoil, economic uncertainty, shaky jobs markets, the failure to successfully launch adult children, the frequency of divorce, increasing bankruptcies, high numbers of foreclosures, horror stories from friends who have lost equity in a declining market, declining credit ratings, tougher bank loan requirements, the rapid growth of socialism, the uncertainty that comes with aging and declining health, high taxes and the promise of higher taxes to come, and a host of other worries consume many would be home buyers and create an atmosphere of caution and fear. Young people are afraid to marry. Without marriage their desire for a home is decreased. Fear rather than confidence is too much in ascendency today among both the aging and the young. Economic fear and uncertainty are the harvests of decades of prosperity destroying socialism. When government takes an ever increasing share of the harvest, earners are left with ever more uncertainty about what they can afford in the long run.
Parts of Utah may be an exception to ongoing residential real estate deflation as Utah population growth is still strong, the Utah housing bubble wasn’t as big (and was primarily relegated to a few regions), the people were more conservative and didn’t speculate as much, many new households are being formed, and the overhang in Utah bank owned residential properties is drying up. There are still a couple of counties where there is downward pressure and or a few overbuilt areas where inventory is still being absorbed (for instance: the St. George area), but the Utah residential real estate market is more healthy than many other markets in the West.
There is more pain ahead in many U.S. real estate markets. The “correction” and “deflation” in the national residential real estate market is not over. Consider, buying some silver and gold and wait for the bottom of the real estate market. Then, when silver and gold are high and the real estate market finally bottoms, consider selling some precious metals to buy real estate. Timing is everything.
(Read also: “Establish Your Retirement With Real Estate”: https://www.area-info.net/articles/show.php?cty=Salt%20Lake%20City&st=Utah&article_id=1053&t=Establish_Your_Retirement_With_Real_Estate) Disclaimer:
Investing in stocks, real estate, and precious metals is risky and could result in losing money. I am offering ideas for your consideration and education. I am not offering financial advice. Please do your own due diligence. I am not an investment adviser. Precious metals is not for everyone. I promote precious metals through American Gold Reserve. You should do your own due diligence when making investment decisions of any kind. You should consult your own financial advisers before making any investment decision. I make no guarantees that by following any advice or suggestion I might make that you will realize any return. Beware, all commodity markets and other markets carry risk of loss.