The Growing Threat To Paper Assets
With negative interest rates metastasizing across the globe and central banks once again speaking in unison about resuming QE (a.k.a., massive money printing), we have a pretty good sense that we’re approaching the limits of current monetary policy.
After a decade of injecting tens of $trillions of ‘thin air money’ into the world economy, what do the central planners have to show for it?
Not a return to robust economic growth, which was the outcome sold to us.
Not a “normalization” of these “short term” emergency measures, which was also promised.
Instead, we’ve had rampant inflation in the prices of all the assets that the elites own. Fore everyone else, the cost of living has exploded. But wages have been stagnant. Savers have been starved of return. Companies have borrowed to reward their executives handsomely while investing in automation eliminating an ever greater percentage of jobs.
We’re left with the widest wealth gap in US history. One that’s worsening every year.
The response from the central banks at this point is clear: to do more of what isn’t working. To intervene more. To double down. And then triple down. (the latest example: Mario Draghi’s swansong stimulus announcement from yesterday)
So as we look into the future, we see a high risk of the world money supply increasing further. Or put in layman’s terms, your money being devalued by rampant inflation.
Which is why we’ve long been advocates of owning inflation-adjusting income streams produced by tangible assets. Productive farmland. Profitable businesses. Resource mining companies. Investment real estate property.
These are investments whose innate value can’t be inflated away. As more money is printed, their product prices will keep pace with inflation. Plus, you’ll be building long-term equity along the way.
But odds are high we won’t simply ride up the inflation curve in a straight line from here.
Deflationary corrections, perhaps severe ones, will punctuate the process. And when they do, windows of very attractive investment opportunities will open.
Take real estate; which appears to entering the start of a correction now.
Why Housing Is About To Go On Sale
At some point, housing prices become so expensive that no matter how low interest rates go, the average household simply can’t afford to buy.
We may very well be at that point now. But even if not yet, it’s clear that the tremendous tailwind driving US housing prices since the Great Financial Crisis is sputtering out.
With this year’s plummet in mortgage rates and the seasonally-strong summer months just ended, one would expect a strong boost to home sales. But instead, Realtor.com just reported a highly unusual price drop from July to August — the largest summer decline seen since the company started compiling this data set.
Suddenly, many of the most incandescent of the red-hot US housing markets are now cooling off fast. This list of the 16 Fastest Shrinking Housing Markets includes San Francisco, San Jose and Boulder, CO
It’s not just prices that are slumping. Home construction is plummeting in hot markets, too. Take San Diego, which just reported that there were 43% fewer homes built in H1 2019 than the year prior. All of SoCal fell 25% for the same period.
What’s behind the sudden softening?
Well, as mentioned, affordability is a big issue. While wage growth has been anemic since the Great Recession, US household debt is now higher than it has ever been:
Home prices, meanwhile, are back over their 2007 bubble highs — leading Robert Shiller (famed co-developer of the Case-Shiller Home Price Index charted below) to state last week “I wouldn’t be surprised at all if house prices started falling”:
Beyond affordability, fear is becoming a factor after years of absence in the housing market. As we’ve been covering here at PeakProsperity.com, the recent inversion of the yield curve and other too-big-to-ignore recessionary warning signs have (finally) caught the attention of the average Joe.
A recent ABC News poll shows that now 60% of Americans believe a recession is ahead. With that concern, folks are becoming less enthused to pay the high prices today’s sellers are asking for.
But perhaps no other variable is as important right now as marginal capital flows. We’ve written in the past about the critical role the marginal buyer plays in real estate. If s/he disappears, how much less is the next marginal buyer able to afford?
Well, we’re now finding out. For the past decade, foreign capital has flooded into US real estate, largely to seek safe haven, though also to chase yield as more and more countries have resorted to negative interest rates.
But that flood of money is beginning to dry up. Fast.
For the period April 2018-March 2019, the value of US homes purchased by foreigners dropped 36%, from $121 billion down to $78 billion.
That’s the result of capital controls, trade war concerns, a slowing global economy, and a host of other factors. The net result is that a lot less money is flowing in to prop up today’s inflated housing prices. And as the data above show, we’re beginning to see the start of a decline.
How far will it go? Are we staring at another vicious bursting like we saw from 2007-2009?
It’s too early to tell at this point. But with interest rates near all-time lows, bubble asset price levels in the financial markets, and a recession looming, the outlook is not positive.
Fortune Favors The Prepared Mind
As we often emphasize: Your prospects tomorrow will be determined by the actions you take today.
If your take on the data is the same as ours, than it behooves you to ask yourself how you want to be positioned should home prices indeed drop substantially over the next several years.
If you own property, perhaps you might want to sell now. Or, if you plan to hold, at least mentally prepare yourself for the emotional stress should market values drop for a prolonged period of time.
Or if you have tenants, you may want to lock in longer leases to ensure you have the necessary income to ride out the down cycle. Or re-finance or re-capitalize as may make sense.
And if you’re interested in using a market correction as an opportunity to buy property at much better valuations than today, then you should use the time now to become prepared.
Because real estate investing takes serious time to be successful at.
You need to understand how real estate as an asset class works and its overall economics. You need to determine which type of property and what market you want to invest in. You then need to get familiar with that niche and start tracking prices and listings to develop an eye for what constitutes good value. You need to identify and recruit a good team of expert professionals to help you (e.g., realtor, mortgage lender, accountant, attorney, property manager, syndicator, etc). And you want to line up your financing.
All the above takes time, measured in months (at a minimum) to do well. So get started now.
Because remember, you won’t be the only one aiming to buy when there’s “blood on the streets”. A lot of others are, too. And many of them have a lot more experience and much deeper pockets than you. So you want to have your plan carefully prepared in advance so you can act with clarity, speed and confidence when the time is ripe.
Which brings up a meaningful point many don’t think of. Many of the investors poised to scoop up large swaths of property upon the next housing correction will be huge asset management firms like Blackrock. Its real estate arm currently holds over $24 trillion worth of properties and intends to double that amount over the next five years.
This corporate ownership of America’s housing stock is creating a company store dynamic for our society, something we’ve been loudly warning of. Where does this end? As more and more middle class workers get squeezed and forced to sell their homes, do we end up with Wall Street being the nation’s landlord? Because that’s the trajectory we’re on.
One reason (in addition to those mentioned above) to consider becoming a real estate investor is to restore some balance to the equation. To offer renters a choice other than the company store. Hopefully one with more integrity, fairness and a higher ethical standard.
So, the outlook shows that lower — perhaps much lower — real estate prices are ahead. That’s your signal to start getting your plan ready if you indeed want to become a future real estate investor.
Put the time to good use.
For those interested, we have compiled and published our excellent 6-part educational video series How To Invest In Real Estate For Safety & Profit into a Vimeo playlist. It’s a hugely helpful resource.
Its first episode (2 hours long), can be watched here for free. If you find value in that, you can purchase the other episodes individually, or purchase the full bundle at a substantial discount.
But the key point is to get started. Your prospects tomorrow will be determined by your actions today. Fortune favors the prepared mind.
The post Home Prices: Downhill From Here appeared first on Peak Prosperity.
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