I have been asked by several of you why I believe Real Estate housing will crash. If you have communicated with me over the last year I have been increasingly concerned about the markets and even warned about it in my latest book, Right Where They Want You (chapter 9).
This time, more than the tech bubble and more than the real estate bubble, it’s the everything bubble. Unlike last time, the epicenter is not real estate but, that does not mean real estate won’t be affected along with the US dollar. There are three main reasons I believe real estate will be affected.
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1. Home prices always mean revert.
To understand this, you need to understand the simple inflation cycle. Inflation drives wages and income. Wages and income drives inflation which drives home prices because home prices are affected by wages and income.Home prices reverted close to their mean in 2012 and have since bubbled up to their previous high.
This begs the question of where wages are now. When adjusted for inflation, wages have dropped over the last 20 years.
And, if you account for the fact that the personal savings rates are near the lowest they have ever been (required to purchase a home), you will quickly see what I am saying about points a and b dragging on point c below.
a. Real wages down
b. Personal savings rates near all-time low
c. Home prices at all-time highs.
I need only show charts of the real wages and savings here.
Simple logic suggests that a population with low savings and trained wages not to mention the high personal debt loads, home buying activity becomes ominous.
Home prices are at an all-time high. Places that I see being hit the hardest is virtually nationwide except the Midwest and places like Pittsburgh. Based on data, cities hit the hardest (but not limited to) would be:
b. San Francisco
c. San Diego
d. Las Vegas
g. New York
Many people start and stop their information search at a site like zillow.com. If you do that, you will likely get limited information. Case-in-point the Zillow chart below showing the US index starting at 2010.
If you have spoken to a Realtor and they show you a more favorable chart, be sure to ask them if its inflation adjusted and a chart that goes back several decades. Remember, they are salespeople at the end of the day and it’s in their interest to move properties.
But, if you look at the second chart just below with inflation adjusted, you will see that it always reverts to approximately the 100 mark (the mean) for the same time period as above (1900-2012).
There is a slight (seemingly permanent) upward trend in the mean. There are a lot of moving parts here one being the fact that the square footage of the average home has grown etc. Remove the noise and the picture is pretty clear, prices always revert to the mean.
2. Interest rates are way overdue to correct.
When rates do rise, we are likely to experience a long upward trend. When that happens, mortgage payments will go up in order to service the same dollar of debt which puts downward pressure on house prices.
When we are in a zero-interest rate policy environment (ZIRP), the professional investors like hedge fund managers are always looking for return and they have been getting it from real estate through shadow inventory holdings.
You could say the housing recovery happened with no homeowners involved.
This is big and the feeling can be overwhelming. There are strategies that can be employed to help protect yourself. Just remember, a decision to not make a decision is still a decision.
All the best
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