Today's Housing Strategy - Don't Get Burned Again!

So, how would I approach real estate today?

Well, I've made several references in prior blog posts to having a well thought-out housing strategy so I will expand upon things here for a full perspective.  It is so important to be thinking long-term when buying, owning or selling real estate these days yet many give that little thought.  You don't want to buy, sell or even own real estate just based on current market conditions (e.g., you buy just because someone tells you "it's a great time to buy" OR you sell because you think the market has peaked OR you own because "housing has been a sound long-term investment"). These are not valid reasons to be a principal to likely the highest valued asset you'll ever own in your lifetime! 

Further, don't let the National Association of Realtors or anyone else whom has a vested interest in your doing something to tell you "now's the time!"  Get their input but make such decisions based on your timeline not someone else's.  What I'm referring to is having a minimum of seven years but prefer a 10 year window on your life.  I know that sounds difficult given so many variables and unknowns let alone all the good and bad surprises that life throws at you.  However, anything less suggests there is too much uncertainty whether it be your relationship status, the security of your income, your family size, geographic preference, climate tolerance and so forth.  If you know you'll be finally relocating to be closer to family in a few years or can't stand the cold weather for the foreseeable future you better start considering your options about housing today not later. The possibility of renting rather than owning during transitionary periods should be considered.

Be it as it may but renting is not such a bad option when not knowing if you could tolerate another winter or "hang with your job" for another few years let alone another few months.  Don't make the mistake of buying just to own nor renting long-term when you know you'll want to live in the neighborhood for the foreseeable future.  In other words, so many personal life choices need to be taken into consideration before transacting homeownership at any level.  And, therefore with the "clearest" window into the future of your life, here are my top ten housing tips for long-term success in real estate for the new debt-ridden American landscape:

· Don't pre-pay any additional principal on any home or investment property mortgage if your interest rate is 4% or less.  Take full advantage of these incredibly low rates for the life of your loan.  If you have a 30 year loan term and in 5 years interest rates were to double (it's possible given the economic backdrop of this "recovery") that money you have saved on prepayments will earn more than the mortgage rate and you've got 25 more years that it could do so.  You must be able to save that money though or this provides no benefit whatsoever.  If you're a compulsive spender, better to force yourself to pay off debt than to try and save when all is lost on the next credit card bill that comes in the mail.

· Don't get into 10, 15 or even 20 year term mortgages get the full 30 year mortgage term almost regardless of the interest rate differential.  Having the ability to pay back debt with "cheaper" dollars down the road due to inflation or loss of purchasing power of the dollar will put a mortgagee in a better position not worse.  This kind of cheap debt is a good "diversification" that matters when the future is more cloudier than ever.

· Don't have but the bare minimum cash or equity in your home or investment property.  Again, a low interest rate loan below 4% today would surely qualify for low and be much better than cash.  Don't get a 2nd or an equity line of credit to access that equity either. Typically, you'll pay much higher interest rates and the term of the loan will be much shorter.  Lock-up as much cheap debt as possible on a 1st mortgage only but don't treat the market's rise as another opportunity to get cash out - stick to the original cost or current market value, whichever is lower, as to what can be financed.

· If going to buy with all cash to beat out other buyers then state your intention to do in the contract to have the best shot to lock-up the property.  Then finance the purchase if escrow time allows (do the financing in the background of the escrow transaction - you always have the option to close with cash should it not play out as hoped).  Ask the seller for a time extension too if needed, it doesn't hurt to ask.  Lastly, refinance your cash out of the property ASAP afterwards if close with cash...don't leave so many eggs in one basket!

· Look at your business and ask yourself if your business failed or your business income were to get hit as it did in the Great Recession or worse, what house could you afford to live in with the reduced income or replacement job you'd be comfortable securing.  Need to be sure you're living not just within your means but at an income level that can be easily shaved by 30 to 50%, if necessary.  Having a mortgage payment and other housing expenses treated as though you make half of your current annual income or combined annual income is not only great expense management but it allows for savings and emergency funds too.  The freedom from being "married" to your mortgage is also liberating as well.

· Don't sell because you just got back to breakeven on market value from what you paid for it and you never thought that would happen.  Sell because you don't foresee yourself living in that home for an appropriate amount of time to be comfortable about what a changing real estate market might do when you're ready to make a lifestyle change.  Each year, go through that mental exercise of how long you can stay in the home you're in now.  The lucky ones say forever and never sell.  Think strategically not emotionally!
 
· Live closer to your employer and don't buy if commuting more than 10 miles each way - suburban life works if your job is around the corner.  At a minimum, live close to a large employment center if at all possible and consider a very high cost of fuel when determining if a rural or suburban home is affordable versus a more urban property.

 

· Consider downsizing, rightsizing or upsizing well in advance of actually being there in real time.  If you know this now, then this is the best time to act not later in hopes for a "better" housing market or for the better opportunity.  Today's market is really good and only because of the low interest rate environment.  Maximize the opportunity today presents and look as far in the future as possible.  Heck, maybe look for and buy that retirement home you want in Arizona now and rent it out for awhile until you get there.

· Seek out and/or hold rental properties that have a cost-to-income ratio of less than 15 times current annual gross rental income.  Many rental properties don't warrant holding them as such as they provide very low if not negative returns on capital when factoring in all costs of maintaining the property and the "renter risk" of additional damage occurring unbeknownst to you until much later.  Market values fluctuate but rents are more constant.  Properties at the lower-end of the price range will generally be the better investments due to rent affordability.  Holding high-end homes seeking rents above $3,000 per month starts getting dicey in my mind regardless of your ability to afford the monthly shortfall.  Housing is much more speculative when doing this.  Sell that property and buy two yielding $1,500 per month in rent each.

· Don't buy because the market seems right, buy when you're right.  Too many folks see what others are doing and they want to follow the crowd.  America has been about "keeping up with the Joneses" since the end of WWII but today just might be different.  Try to follow your own lifestyle path and not that of your neighbor's - it pays to be different!  We all know many of those that used their homes as ATM's during the housing boom this past decade and lost their homes for being so reckless with their spending. 

 

Remember, having a strategy for whatever you're doing is the most important factor not whether you've got it perfectly market timed or not.  Housing is not about making money anymore or even buying at the "perfect time" but simply living the lifestyle you desire and can comfortably afford.  Homeownership is way overblown in this country and will become another example of the American Way diminished by poor governmental policies and short-sightedness.  And, yes, there is some self-interest and greed by so many others that taints housing as a stable long-term investment too not just government.  Just be sure you're on a solid "affordable" housing foundation and that's the best you can do.  Future housing prices are anybody's guess up or down including mine.  But following my tips should keep you from getting burned or at least not burned too badly going forward provided your initial housing time horizon is realistic.

A Housing Evolution Not Revolution!

Given I'm a veteran Realtor(r) one would expect me to talk a lot about housing and even promote it "as a got to own it" like so many within this industry.  I recently read an article from another Realtor(r) titled "The Housing Revolution" and comparing what today's robust real estate market means to America "the engine that will drive our U.S. economy." He concludes his article with "I would like to think we are not experiencing a housing bubble but actually a housing revolution" with a job growth creation comparison to the Industrial Revolution.

OMG, that is not the way to go about creating jobs nor building an engine for driving an economy forward!  This is quite the opposite and is more of a broad characterization of a housing bubble forming than not.  Even if not a bubble that deflates suddenly but a housing market trend that is very troubling and certainly not sustainable regardless of how far below we are still from 2006 home prices.  Why?  Well, housing is not a sustainable job creator and certainly not the best use of today's available funds for investing in the future of this country.  I would rather today's cheap dollars be spent on investments in manufacturing, mining, technology, agriculture and many other real job creators.  Housing is dependent on people working and having incomes to pay mortgages from non-housing related jobs.  We need new and expanding industries not more new houses! 

Without real jobs housing will become suspect to deflationary pressures that can get exponentially worse with each housing dollar malinvested. This huge misallocation of financial resources spells big trouble to me...not real economic growth.  This path of rising home prices is not sustainable because it's not based on created jobs but jobs created.  A colossal difference!  Another pyramid scheme or Ponzi scenario for that matter that will adjust once again when the foundation for this economy is exposed for the lack of real employment support it has.  Scary, but housing has been monetized by the government once again and that means trouble as it did leading to the Great Recession.  Housing is evolving into just being a place to live not a place to be heavily invested financially like the last fifty something years.  All of this might make "renting" the new American dream!

All of these new housing construction jobs, retail and service jobs (like mortgage officers, real estate agents, escrow officers, inspectors, etc.), government jobs and many other industries feeding off new construction and increased consumption due to improving housing prices tend to expand/contract as real estate markets expand/contract.  So, anyone within those industries buying today really shouldn't as a large percentage of these jobs are here today gone tomorrow.  They're cyclical jobs...we have cyclical housing markets so correspondingly cyclical job markets. 

But, don't shoot the messengers (all those newly employed or previously under-employed "housing related" persons) for buying!  The biggest culprit in this pyramid scheme is the U.S. Federal Reserve.  By driving interest rates to historic lows and printing money to purchase U.S. Treasuries and mortgage-backed securities they've effectively invigorated an economy with easy money flowing to hard assets not otherwise worth holding (except for a lifestyle argument).  Reminds me of folks using the equity in their homes as ATM's back in the day except now the bank is giving you the cash over the term of your mortgage.  How's that for the government doing this one better! 

You see, lower mortgage payments on an artificially inflated risk asset means you get to "take some ATM cash out each month" through reduced mortgage payments and when housing declines you get the same whether you have equity or not.  Sadly, it has convinced many with cash saved in money market, CD's and other liquid accounts to follow along in the re-inflation of real estate prices by buying now.  We all know what happens next when assets are artificially inflated. 

Basically, no one wanted to buy those assets then, so why do they want to buy them now?  Even with lower interest rates than what drove the market to the tipping point previously should that be the reason to buy especially in a jobless recovery?  If an asset is falling in price, the government's response is to re-inflate it with cheap money.  Makes you wonder why you hold anything of value that can be so easily monetized by the government. 

Cheap money is twofold too on housing:  low interest rate mortgages for homebuyers and conversely cash investors drawn to housing seeking higher yields not available elsewhere. The Great Recession brought about a huge downturn in real estate prices even when interest rates by historical standards were already very low. We're now not anywhere better than what was done back then except now we have the illusion of a safer investment as lenders tightened lending standards due to increased government regulation.  Unfortunately, not the case here as U.S. Federal Reserve monetary policies are an indirect unwinding of such controls.  I see the evolution being deflationary on real estate prices for the foreseeable future despite all the efforts of the government to otherwise promote sustainable long-term inflation!

My dad once commented, be careful what you say as you might turn away real estate business talking "bad" about buying real estate. An interesting thought.  My response was "it's much better to take the self-interest out of the equation and guide people into what is right for them than what is right for me." Let them make the decision to buy or sell based on a lifestyle desired not based on a market bottoming or peaking to earn a commission.  Besides, there are always one of each on any transaction in any evolving economy, up or down.

Apple Confirms It's Too Good To Be True!

Apple recently got back into the financial borrowing business with its selling of $17 billion of floating and fixed rate corporate debt obligations.  Granted they've done this before but never at this grandeur scale.  Why would a company with a market capitalization of over $400 billion and over $145 billion of cash already in its coffers tap into the corporate bond market at this time?  After all, they have announced their desire to pay higher dividends and to increase their stock buyback thereby returning some of their cash hoard to shareholders through these programs rather than invest it either internally or externally.  So, why borrow money?

Typically, most corporations only return cash to shareholders when management is of the opinion that organic growth prospects ("spending money on R&D") is not likely to give them the return on investment they could realize from returning that cash to shareholders.  Acquisitions are also another way for management to grow a company but for an innovative company like Apple such acquisitions would hardly make a dent in their future revenue or bottom-line net income.  Besides they still have ample cash should some "killer" new company come along and they want that technology for their own devices.

So, why is this event worth noting?  Besides it helping Apple to avoid $9.2 billion of corporate tax implications had it chosen to repatriate their cash reserves held at international subsidiaries, well, it tells me that one of the smartest companies in the world knows an amazing deal when they see it.  They view the corporate debt market as a great opportunity to secure cheap money and better act upon it or it could easily fade into the sunset never to be realized again.  So, with that, Apple borrows a ton of money at an incredibly low interest rate to be paid back over the next 3 to 30 years.  And, with interest expense being tax deductible, they can now get that after-tax interest rate down by another 35% (their effective tax rate).

I believe Apple management's timing here is impeccable and will be looked at as one of the greatest engineered financing transactions of 2013.  After all, it is the largest corporate debt offering on record.  Now, let me be clear, I'm only referring to the cheap debt aspects of this transaction not their chosen use of the proceeds.  I'm not a believer in buying back stock of a company in such a precarious economic climate but I am for one paying dividends especially with their huge cash position.  Some might argue that's one in the same as they both return cash to shareholders only dividends are paid to ALL shareholders and the buyback is limited to just those shareholders that actually sell stock.  Any inflated share price due to the buyback (increased demand for the stock) could easily be deflated by a down market and economy just as quickly so this kind of payback can be limited.

So what does one do with this information?  Well, if you've not locked in to a long-term mortgage by now, expect to be paying higher borrowing rates soon.  If you are holding long-term debt instruments (like newly issued Apple corporate bonds!) then you might consider unloading them before everyone else does in a rising interest rate environment.  It seems crazy to me to be a holder of any long-term debt obligations at this time but makes all the sense in the world to borrow money at manageable debt service levels during this unprecedented low interest rate environment.  Remember, whether it is a company the size of Apple or you buying or owning a home, don't pay with cash when you can lock in such a low interest rate on borrowed money and for now, it's tax deductible interest expense.  It really is less risk!

Predictions Or Simply History Repeating Once Again

At the risk of sounding like Goldilocks crying wolf repeatedly, I thought it might be more bold of me to simply say when the wolf is coming so everyone can be on guard.  No further shout-outs are necessary.  Oh, if you're not aware of what is so disconcerting to me, then note it is the perilous economic position of this country and the world at present.  My fear is the wolf that appeared during the Great Recession will surely morph into something even more unsettling before this situation finally corrects for good. 

So, let me set forth my timeline for calamity in this country and let the masses draw their own conclusions over the coming years  At least with concrete dates and notable events, one can easily measure my win-loss record. 

Just to be clear, I'm not talking about college basketball bracketology here (although I finished in the top 97th percentile of Yahoo sports this past March Madness!).  I'm talking about the direction of our country, the world and how things might be coming at us that throw "normalcy" out the window like a feather on the dash of my buddy's convertible Porsche 911.  Keep in mind that we are creatures of habit so things not being normal might seem...well, a bit chaotic. 

As you might guess, there are many famous quotes about "predictions" especially how inaccurate they mostly are. Oh, and how those that do predict should hide in shame as they try to explain why their predictions fell short of their futuristic expectations. Hey, at least I didn't have to explain why Louisville mens team didn't win the championship! 

As one of the foundation builders of chaos theory once remarked: "It is far better to foresee even without certainty than not to foresee at all." So with that, I'll foresee here so I can blog down the road on my own wall of shame like so many before me.  I do believe everyone should be thinking of the future and being prepared differently from what we're accustom to.  It might make sense especially when the future has an eerie historical step-child like The Great Depression!

Many Wall street stockbrokers are aware we're in what is deemed a Secular Bear stock market which is just past 13 years in duration since the dot-com bust in 2000.  They also tend to know that historically these markets end badly.  We've had three Secular Bear markets since 1925.  The first being 1929 to 1942 and the second 1966 to 1982.  The first being approx. 13 years in duration, the second approx. 16 years in duration.

We are now reaching the topping phase for what I believe is the third down wave in many aspects of what is just starting to feel good.  The third down wave is sure to be the most painful and it will effect stocks, hard assets like real estate, commodities and peoples lives like nothing before we've ever experienced.  Without further ado:

1. Economic indicators turn bearishly negative by the end of summer 2014 (August 2014).
2. An official depression is declared beginning the fall of 2015 (October 2015).
3. The depression is officially declared over by the end of 2019 (December 2019).
4. A true leader of this country will take office and restore the dignity this once mighty nation has with the American people (January 2020).

Keep in mind that economists conveniently take a look back in time to "officially" declare the start and stop of economic periods such as these.  So, when the depression finally ends it won't be until much later in the year 2020 that everyone is informed.  And, it won't be until much later after that where the majority of us really start to feel better about our personal financial situations once again.  Mostly because we will be so thankful for what we have as little as what is left.  The end of this current Secular Bear market will be the longest on record of 19 years.

Next time we have a bull market in this country, I want everyone to simply accept the economic pain dictated by the following bear market as a normal consequence.  Don't let government do things to try to lessen the counter balancing payback.  I'll take my pain in small dozes rather than huge financial amputations like the one we'll be getting soon hereafter!

Housing Bubble In The Making - Take 2!

So much is being written about how housing is rebounding and real estate markets are appreciating once again across the nation that it warrants another serious look with a longer-term time horizon in mind.  Seems nearly everyone is believing we hit bottom and it's time to buy...that we are on a historical time-proven path of another real estate appreciation boom that could last for years to come.  Better climb on board now or you'll miss out is the feeling!

Yikes!  I would have to differ from the masses on this one.  To me, this seems like the perfect time to sell, IF A) you don't have a long-term time horizon to live in your home (like after year 2020), B) you can't secure a 5% or less fixed rate mortgage, and C) you can't make your mortgage payments should your household income be cut in half at some point in the future (or rental income is substantially reduced if holding investment property).  That's about the only scenario I would agree with pundits touting homeownership as a safe and sound investment. 

Even those owning real estate outright with no mortgage debt will face some serious future headwinds that will make such ownership very suspect in light of the U.S. economy of the future.  Let me explain.  First off, it's hard to NOT follow the crowd and to go against the grain.  But, that is generally the precise time to capitalize on others poor timing or herd mentality.  We all know it's not location, location, location that makes you money but timing, timing, timing that really counts these days.

So why is this the time to sell if points A through C are not in play for you?  Well, first off, let's look at what is driving this housing frenzy:

1. The U.S. Federal Reserve has a mandate to keep interest rates low and to buy mortgage backed-securities and long-term treasuries at unprecedented levels for the foreseeable future to stimulate the economy.  MY TAKE ("MT"): This can't last much longer especially at the clip of $85 billion per month.  Stealing a line from many others: "The Fed is leaving the punchbowl out and they want people to get sloppy drunk before pulling it back in."  When has being sloppy drunk ever been good for anyone!
2. 98% of home mortgages are purchased/supported/backed by Federal agencies like Freddie Mac, Fannie Mae, FHA, USDA, VA and others.  MT: Huge government intervention that supports low down payment loans, inflated prices to cover buyer closing costs and the re-sale of most mortgage debt by the nation's financial institutions (note: they sell the debt to the government to recognize quick shareholder profits rather than hold the low-rate paper knowing they need to protect their asset base from rising rates in the future).  This real estate market is way too dependent on future government support when in fact our government by many standards is financially insolvent therefore so are the enterprises and branches of government that rely upon it to support housing.
3. The Obama Administration is once again pushing for financial institutions to underwrite mortgage loans to low-income, weaker credit borrowers in an effort to further stimulate the housing market and expand homeownership for most.  MT: Been there done that!  We've seen the sub-prime mortgage debacle and it's not pretty.  Why do that again and hurt the very same folks that are believed to be help by this.
4. Foreclosures have been heavily restricted by new regulations and government pressure on "too big to fail" financial institutions to work with troubled homeowners in lieu of foreclosure.  MT: This keeps "available" housing inventory off the market and otherwise inflates values of such properties generally associated with higher deferred maintenance costs.  Remember, rising tides raise all boats!  It also gives rise to humans "acting in a manner" typically detrimental to long-term housing security.  Gee, if we get in this predicament once again - why would the government (now the owner of most mortgage debt) foreclose on me when they pressured the banks not to so this last time! 
5. Cash buyers represent 32% of home buying for the 3rd year in a row according to the National Association of Realtors.  As investors lose ground to taxes and inflation on their money sitting in CDs, money market and other low interest bearing investments they take on much more downside risk for not much more return by jumping ship to housing.  MT: That's a lot of eggs in one basket!  Owning real estate outright in 2006 was not good as we all know now.  It's not the banks or government taking the financial hit should this be another bubble it will be dollar for dollar the investors loss...OUCH!
6. Many buyers are taking money out of 401K's, IRAs and other retirement plans or otherwise using tax-deferred dollars with self-directed options to acquire real estate as investment properties.  MT: Less investment diversification is the result with huge expense implications down the road.  Often ill timed investment withdrawals hurt the most especially if paying taxes and penalties on such decisions.  Don't chase returns, anticipate opportunities!
7. Large hedge funds like the Blackstone Group and other institutional fast-money players have jumped into housing creating "artificial" demand.  MT:  There will be added housing inventory later as the opportunity to turn a quick profit peaks for them. Isn't their timing always the best...watch when they decide to sell their portfolio likely in bulk to some unsuspecting foreign institutional buyer and most never take heed of the moment.  Guess what happens when this foreign buyer decides to unwind its portfolio at the worse possible time!
8. Inventories are incredibly low in most markets thereby fueling impulse or overzealous emotional behavior that results in over asking price offers and buyer approved purchase price/appraisal value differential guarantees.  MT:  This has to be the definition for every asset bubble - just wait for the euphoria to wear off and values to deflate.
9. Contractors, real estate professionals, investors and many others that are unemployed or under-employed (or with less income earning options) have individually or systematically teamed up to buy fixer-uppers, repair them and then flip them for profit.  MT: Creating huge housing demand not otherwise present as well as inflated property values on resale to account for the "profit" needed by the flippers is detrimental to housing stability.  Assets need to appreciate from a "healthy" supply of homes not from an "unhealthy" demand by buyers.
10. First-time home buyers and trade-up buyers are conspicuously absent from this market.  MT: The market is not being driven by two of the bigger influences that drive housing stability.  In fact, there are more downsizing and rightsizing buyers than the aforementioned in light of this "suspicious" economy.  And of course, many more of the aging Baby Boomer generation will be considering the opportunity this market creates for them to do the same.

By all measures, what is happening is not "normal", let alone sustainable, and in many ways can be characterized once again as "irrational."  The hope of the Federal Reserve and the government is to "trick" us into thinking things are getting better and that you'll miss out if you don't get on board.  Fundamentally, things are slightly improving on the surface but undermining all of this is something deeper and less obvious to the general observer (most everyone!). So, buyer beware.

Heck, the stock market is also in bubble-mania once again as it feeds off the easy monetary stimulus of the Fed having already ascended quite substantially since the bottom in March 2009.  Coincidentally, the stock market is just now luring money back in from the small investors after hitting record highs.  An eerie parallel to how big investors lured small investors into the stock market just before the 3rd down wave during the Great Depression era.  We've had two down stock markets since 2000 with a 3rd yet to be realized? 

Besides the many contributing factors noted previously for driving housing back to inflated levels, let's look at why things might be different from past housing cycles in this country.  After all, how could this be in bubble territory already when we're just now seeing price appreciation after five long years of decline?  Well, generally because the underlying trend doesn't always surface until more time passes. Just ask Michael Dell or even Bill Gates about computer hardware and software trends. Here's a look at other possible reasons for housing to be on a downward descent not otherwise being propagated by real estate pundits and industry associations:

1. The U.S. is crippled with an alarming debt bill currently at $148,000 per taxpayer.  We are bankrupt! Way more government belt tightening and higher taxation will be needed meaning much slower growth and less employment in the future.  Fewer jobs = fewer potential buyers.
2. There is no better path to increased tax revenues then to eliminate or significantly reduce beneficial tax provisions...especially surrounding housing.  We've already seen a recent change on capital gains tax rates having been increased to 20% from 15% (which impacts investment properties).  The capital gain personal residence sale tax break of $250K for singles and $500K for married couples will surely be eliminated.  And, despite the greatest lobbying power in Washington by the National Association of Realtors, the mortgage interest deduction will also eventually fall victim to the principal and interest payment demands of U.S. debt.
3. Interest rates will rise and with increasing rates comes decrease affordability unless values start to decline.  Creditors demand higher returns on "troubled debtors" and that will be the case for the U.S.  Cheap money will go away and house prices will need to deflate to compensate.  A doubling of interest rates from 3.5% to 7% requires a 32% reduction in value to maintain the same affordability ratio.
4. The GDP of this country is 70% consumption based.  Meaning we consume way more than we invest.  The GDP formula returns the same result whether we spend $40 on gas to go shopping, buy a new shirt to go out to eat or purchase a power tool to make a living.  Unfortunately though, only the tool would be considered an investment that can lead to wealth creation.  Too much consumption leads to wealth destruction and boy have we been a downward spiral here!
5. The Baby Boom generation is aging, downsizing and rightsizing their housing expenses for decreased employment income or retirement. Immigration and the current birth rate will not offset the downward influence this group's exodus will have on housing let alone the financial wherewithal to keep it elevated. 
6. China has been exporting their deflation through a constant exchange rate (although recently allowed to "float") thereby keeping a tight control on living standards across their population.  Inflation will eventually take hold there through increased domestic demand thereby driving prices higher to importing countries like us. Basics like food and clothing will cost so much more leaving Americans with much less for living expenses.
7. The U.S. standard of living is declining faster than you might think. With little manufacturing base, massive offshore job bias by our own corporations, huge entitlement programs and many other factors are negatively impacting wealth for the middle-class (forget wealth generation except for the super rich and powerful!). Why is the fed trying to create inflation so badly with their current monetary policies? To combat deflation. Both negatively impact true wealth protection!
8. Employment in the U.S. is service oriented and not manufacturing based.  We are a country of servants...not producers.  Further many of our higher-end paying service and technical jobs are going overseas which follows our domestic manufacturing employment base.  We are becoming a society of Starbucks, Subways, McDonald's and the like.  Hardly a fortitude of high wage earner skilled positions that support housing and can drive prices higher further.
9. The Fed is creating future inflation with its "dollar printing presses" working overtime.  However, it's not likely to benefit housing like it did in the 70's.  I believe it will result in the inflation of most everything else but not housing as real wages will not follow suit.  The most significant factors that create inflation are wages and energy prices.  However, due to a currently high unemployment rate (and potentially even much higher unemployment/under-employment in the future) and low paying service related jobs, we will not see a corresponding increase in real wages.  Higher energy prices alone are not sufficient to drive housing inflation especially in rural and suburban areas as more disposable income is used to pay for job commuting and other necessities.  Further, higher interest rates will be due to systemic/default risk which will be different than higher rates due to inflationary pressures or a combination of both.  Either way, housing affordability in an inflationary environment with deflationary wage pressures will decline as so would prices to keep the market from a complete collapse.

I'm reminded of something the president of a prominent local real estate firm stated recently in some local newspapers, blogs and the Sacramento Business Journal that bears mentioning here.  Not that what he said was so revelating but more indicative of selfishness or ignorance and I believe it to be the former.  The quote: “This (real estate boom) will last for the foreseeable future. Ignore the naysayers touting another bubble. Low interest rates and monthly payments will keep current buyers, investors and refinancers in the homes they’ve purchased for a long time.”  The last sentence is true.  However, that is not much of a supporting argument for this not to be a bubble once again.  Remember, it only takes those that are NOT locked in to the payment security he boasts about that can tank the market when there are fewer or no buyers willing to accept the interest rates and monthly payment terms of the future!

Let's also keep in mind that history does have a tendency of repeating itself especially when so many generations tend to separate us from the past and we try to dismiss basic human behavior as being different this time.  The great American Industrial Revolution started in 1790 and later led to the Great Depression beginning in 1929 and not ending until the start of World War II.  There is an eerie parallel to the great Internet Revolution that began in the early 1990's or if we go back to the great Computer Revolution that began in the early 1980's then we seem to be in lock-step with our ancestors nearly 200 years ago.  We all know how that ended.  Nearly all asset classes found another bottom one more time and those being roped in at this point paid the price the most!

Be Careful Out There!

We've all heard the cliches "dollar-wise, pound foolish" or "win the battle but lose the war" and even "fool me once, shame on you; fool me twice, shame on me." Well, there is some great advice to be had from these longstanding catchy phrases.  Each of which seems to apply to the housing market today as we start to see double-digit price appreciation once again in many California markets.  Didn't we just get through a very deliberate housing bubble not too long ago!  But, leave it to the real estate industry to be the leader once again as they gear up their marketing machine to promote housing as historically a sound investment.  This home price history chart just out from the California Association of Realtors:

Wow, housing has jumped 1,196% from 1970 or a simple average annual rate of 28.5% over 42 years.  That's smoking good!  Hard to argue with those numbers isn't it?  Anyone owning a home in 1970 and selling it later reaped a windfall of good fortune for sure as did many others over the years.  This chart suggests anyone buying now should feel good knowing "that homeownership in California is a solid long-term investment."

Well, is the historical reference to housing appreciation going to have any correlation to how housing might perform going forward?  I have my doubts.  So, before jumping into the foray of homeownership, think about the economic backdrop in which we live as it seems quite different then these four preceding decades.

First, the Federal government only started going into debt in the early 1980's and it has always seemed manageable as a % of GDP.  We are now approaching clearly unmanageable levels at nearly $16.7 trillion or over 106% of GDP.  Modest forecasts puts this well above $20 trillion in a few short years.  Current economic theory states for developed countries this is still manageable but we all know it's a runaway government debt-train that can't possibly stop without crashing hard...and soon as GDP can also shrink (go figure!).  A shrinking GDP and burgeoning national debt would surely make mince-meat of those low three-digit manageable percentages.

Second, the Federal Reserve has established an unprecedented monetary policy that has pushed interest rates down to historic lows and has resulted in the printing of trillions of "diluting" dollars to pump up the banking system and consumerism.  This has never happened in any of those four preceding decades so the true consequences of these actions are still to be realized. Just know that the historic bond buying of the Fed can only last so long and at some point, the bond buying will stop.  And...rates will rise - quite substantially considering the then size of our national debt and knowing the average maturity of this debt is just over four years; too short for my comfort.  Wow! at $20 trillion that equates to finding nearly $5 trillion of U.S. debt buyers each year.  So, it's not "if" but "when" rates rise that needs to be considered when looking at housing as a good long-term investment.

Third, the majority of housing price appreciation during this period is really inflation based and according to our government at present inflation is relatively non-existent with deflation posing a bigger risk.  Want to see how quickly the government can make such a sizable return on this chart substantially disappear?  Well, factoring in the loss of U.S. dollar purchasing power over this period of time yields a much more telling line on housing.  One U.S. dollar in 1970 is worth 17 cents in 2012 or a decline of 83%.  So, really that 2012 median home price of $319,340 is worth only $54,288 in 1970 dollars due to the effects of inflation. This makes the true annual market driven supply/demand price appreciation much more comprehensible at 2.86% over this period of time.  This would be fairly consistent with population and real economic growth not government inflated "wealth" creation. 

So what does that mean?  Well, in California, we have just seen an 11.6% jump in the median home price from 2011 and in most markets there is further evidence that the supply part of the equation is well out of line with the demand side (thanks to the aforementioned historically low interest rates and many other factors which I'll blog about separately).  For example, over 72% of currently listed properties are seeing multiple offers according to the California Association of Realtors.  This unbalanced market shift is skewed and therefore driving prices higher when in reality prices should appreciate only at the previously determined historical rate of 2.86% since inflation is not a factor at present.  This tells me the jump in 2012 is over four years of "true" price appreciation and quite possibly one more year like that in 2013 and we've had all were gonna get until 2020.

Fourth, the theory of large numbers compresses growth percentages as the base numbers in beginning years get larger and larger.  From 1970 to 1980 median home price appreciation was nearly 304%.  From 1980 to 1990 it was 94.6%.  From 1990 to 2000 it was 24.5%.  From 2000 to 2010 it was oddly higher at 26.4%.  However, the 2010 median home price was surprisingly $31K higher than 2009 but strangely $21K lower the following year in 2011. Assuming 2010 was an aberration, then that decade the real median home price appreciation was approximately 18%.  So, as one can see, California housing prices are of diminishing returns over decades.  There's nothing to say those percentages can't turn negative too!

I wonder what happens to my industry when another housing bubble implodes through rising rates and our government's inability to finance its debt obligations.  What will the housing market look like when it is being crushed by foreclosed properties, massive Fannie Mae and Freddie Mac bailouts, and countless bank failures not to mention high unemployment? But, didn't we just go through this!  This next one could get very ugly is my guess and looking at that chart gives me no comfort in thinking the next ten years will be equally as rewarding to property owners.  Like an alcoholic, sometimes you have to find the "true" bottom before things really start looking up.  There is always something greater to expose the weaknesses in what man believes they can tame, control, manage or manipulate.  To me, this is the American economy at this juncture in our country's history.  We are on a path of massive wealth destruction and not generation.

Government Math Needs Some Schooling

We have seen this time and time again whereby U.S. politicians and their inept political parties argue their positions and point fingers at the other side regarding budget deficits and the national debt.  We could surely solve the problem if the other side would just cooperate they say. Holy crap, seems no one in office made it past kindergarten math and no one wants to be truthful about the "true" state of this country.  They agree what we are doing is unsustainable but taking action is just not in their pre-school vocabulary.

Nearly every media article gives you a glimpse of the enormous problem we face.  Here's a math problem for a student - what's the national debt in four years under the sequester law if fully implemented by reading the below excerpt (without either party trying to water down its impact as we speak - which they are doing in earnest)?:

AP Tom Raum 2/22/13 Gov't downsizes amid GOP demands for more cuts: ...The federal budget deficit for the fiscal year ending Sept. 30 is estimated to be $845 billion — the first time it's dropped below $1 trillion in five years. But it's on track to rise again as more and more baby boomers retire and qualify for federal benefits and as interest payments on the national debt keep going up. The national debt first inched past $1 trillion early in the Reagan administration and has grown in leaps and bounds ever since through both Democratic and Republican presidencies. It now stands at $16.6 trillion and is on a path toward soon becoming unsustainable, both parties agree. Unchecked, entitlement payments will add roughly $700 billion to the debt over the next four years. ... Under the sequester law, roughly $85 billion in federal spending would be slashed in the remaining seven months of this fiscal year and a total of $1.2 trillion in cuts over 10 years.

Answer: $16.6T + ($845B x 4) + $700B - (($1.2T / 10) x 4) = $20.2T

According to the U.S. National Debt Clock on this day in 2017 the answer is $22.6T.  Let's just say anyone with an answer above $20T gets an "A".  So, what does this all mean...politicians are squabbling about pennies when we have $100 bills at stake!  Austerity will come and it will be forced upon us...and it will be ugly.

I'm actually of the opinion that it has gone on too long and it is not possible to solve our national debt problem without default...yes, I'm talking about the U.S. defaulting on its debt obligations.  Of course, this is the "event of last resort" but it will take this action (effectively a negotiation of reduced principal amount for a sustainable long-term payment stream) to rightsize this sinking ship.

To this end, let all U.S. citizens stop being hypocrites and complaining about the spending in Washington all the while buying the "safehaven" of U.S. Treasury's in our IRA's, 401K's and other investment accounts.  Sell your investment funds that even dab in these instruments.  Sell your US dollars for safer currencies like C$, A$ and Swiss franc.  Let's tell the politicians their math stinks and their debt instruments including the fiat US$ are worthless like a piece of gum stuck under the desk!

Buy, Buy, Buy Or Is It Really Sell, Sell, Sell!

Maybe it's the contrarian in me or me just not wanting to follow the masses but all this talk about the housing market continuing its rise from the depths of the Great Recession is making me nauseous. Not that a good hike up a stable but increasingly difficult mountain terrain is not in the cards for me, on the contrary, I would welcome the challenge.  However, when looking at this housing market recovery and the basis for its climb, I can only think of those buying and speculating now as latecomers to the ascent of Kilimanjaro:  the climbing party already left when the weather report was more opportunistic and it's not as rosy as it might appear at this point!

A review of my older posts would tell you that six months ago, I said we're in the eye of the housing storm.  This followed my earlier blog regarding the impact on housing prices should interest rates double from historically low rates of this time period.  Those posts still seem on track to me.  But why not revisit this another time when things surely look much better than they did only last summer. 

As I write today, we are seeing an historically low level of housing inventory in the Greater Sacramento area, housing prices that have jumped upwards of 20% or more from early 2012, Zillows forecasting the Sacramento area housing market to increase 11.9% in 2013 and the California Association of Realtors noting that 72% of active listings are receiving multiple offers.  With all of this great news on housing (well maybe except if you are a buyer competing in this environment), how could one not buy?  Why would anyone want to sell?

Well, to me, the 800 lb. gorilla is still hanging from the branches of the tree in the front lawn of every home in this country.  Until that beast is subdued, housing as well as nearly everything else we hold true in dollar terms is in for a wild ride unlike anything we've ever seen before.  There's just no way to relate what the future holds this time around based on the historical housing market cycles of the past.  I truly believe the mess we're in is bigger than most people can imagine and housing to me will be one of the biggest losers when the main arterial branches of this "recovery" give way.

What are the main arterial branches?  (1) The US Federal Reserve's ability to print money by buying US Treasury Bonds to keep rates artificially low and, (2) The US Federal Government's continuing burden of the citizens of this country with massive debt that far exceeds our ability to service let alone repay.  So, historical market cycles of the past that didn't have this beast lurching through the front window simply must be dismissed from our thought processes.  We are then left with a severe damaging blow as any homeowner knows when trees/branches overhang a property and the next big storm is not if but when.

I guess I would rather climb Pikes Peak in CO than a housing market that feels a lot like Mount St. Helen's in WA before its great volcanic eruption in 1980!