It isn’t my purpose to tell anyone to sell their home, move, rent, leave the country, or do anything. I am merely stating the facts as I see them, and you can do with them as you please, just as you would do if oncoming clouds threaten a storm. Maybe the storm will pass. Maybe it will turn into a tornado. People do what they please, and should do as they think best for them. Here are a few more facts and conditions as I see them.
Last week, another 995 people got laid off from Qwest Communications in Denver. This is in addition to the 3,000 already gone in other locations. Now, just picture a hypothetical employee of Qwest, who was laid off, or at best given a couple of weeks notice. In Chicago, the Radio Flyer wagons, which have been an American tradition for a century, are going to be made in China, laying off 90 innocents. Is the car paid for? Is the soon to be ex-employee married? Kids? House payments? Will they lose their medical coverage? Mate working? Does the laid off person live in Denver? Denver has a lot of nice neighborhoods, as opposed to Filthydelphia. Maybe West Denver, in Lakewood or the like perhaps. House prices have been going down in Denver; even in nice neighborhoods. The reason is, there is a glut of houses for sale in Denver. The reason there is a glut, is because tens of thousands have already been laid off, or have moved away from the big city at retirement to get away from bad air, noise, crime, or all the things that go with any city. In my town, 40-60 families per month are moving in, and many of them are from Denver.
As in every tangible thing on earth, when there are more for sale than are in demand, the price goes down, until the price becomes so low, that buyers are attracted. This is true of autos, farms, gold, silver, homes, lumber, or coffee. Everything follows this simple rule of the marketplace, which for years I have been calling “Stott’s Law.” (The more of anything there is, the less they will be worth), When a lot of homes are on the market, sales are slow, and prices go down. One can’t move a home to another location. It must sit there, and be for sale, until a buyer is found. With tens of thousands of Denverites or Chicagoans out of work, and millions everywhere, obviously a lot of homes are for sale because of relocating to other locations, in hopes of finding employment. Prices will go down, till there is enough demand for homes, and then prices will stabilize, or even go up. Like stocks, when there are all sellers, and no or few buyers, real estate prices will go down. No need to rehearse these basic facts. They are obvious. Unfortunately, as history will illustrate, when real estate goes down, it usually stays there for decades.
Suppose the laid off Qwest or Radio Flyer employee, had no notion of this ever happening to him or her. Their ratings were excellent, they performed well, everyone liked them, and they thought their future was secure. Qwest’s business has gone way down, and it had no choice but to lay off. With less business, fewer employees are needed, regardless of their quality or desirability. The Chinks can make Radio Flyers cheaper. Did the ex-employee buy the home with little down? Did the ex-employee take out a second mortgage to improve the home, buy a car, or pay off credit card debts? In short, is the ex-employee’s house worth less than is owed on it? Consumer debt is at all time highs, up 11% last year, while income grew by a measly 1.6%. Bankruptcies and foreclosures are at all-time highs. Those are facts. The ex-employee, may have excellent credit, and not be in arrears, but with no money coming in, the payments obviously will get behind. No one voluntarily ruins their credit.
One can drive the financed car away to a new location, where work may be found, but one can’t do that with a home. Maybe the car’s payments will be kept up, to allow transport. When a home owner gets in arrears with his payments, it may take a year before the sheriff knocks on the door and literally throws them out. How many mortgage payments are in arrears? How many credit card payments are late? Hundreds of thousands, that’s how many. Liquidity is what Sir Alan is always talking about, and this means lots of dollars being placed into the economy, causing prices to go up or inflation. In spite of inflation and prices going, up, real estate isn’t “going up” in the big cities. Rural and small town property continues to go up, and be in demand, thanks to retirees leaving the big cities. It is impossible to buy acreage at current prices and farm at a profit. Acreage is being bought for home sites. In my town, the school population is going down, while the population is going up, indicating a change in demographics, from young to old. This harms big city real estate prices where the jobs are, or used to be.
“The Economist,” had a headline on March 13th, which read, “Homing in on trouble sell, sell, sell.” The article said that house prices, in relation to average income in America, are 50% above their 30-year average, and that houses are 23% over-valued. This happens partially, because of fraudulent appraisals. Most realtors have a favorite appraiser to whom they send business, when a sale is possible. The appraiser will many times inflate an appraisal, to help with a sale, thereby securing a mortgage in excess of the homes’ actual value. It has happened millions of times. This has caused real estate prices to go ever higher, to keep sales going, and is partly responsible for the 23% over priced homes. There are two reasons for a housing severe slump, or even crash, as I see it. (1) Over-priced dwellings because of desirable locations, inflated appraisals, and (2) laid off workers who cannot find another job, forcing far more houses to be for sale than can ever be sold at inflated prices, or even at absurdly low prices. This glut of homes for sale, added to over-financing, will without doubt, cause hundreds of thousands of foreclosures. These foreclosures, will cause the selling prices of homes to plummet, due to an over-supply. This will cause hundreds of thousands to walk away from their homes, because they owe far more than the dwelling can ever be sold for, in the immediate or long-term future. The process will self perpetrate, feeding on itself, just exactly like a stock market crash. No buyers, and a lot of sellers.
The fact that Fannie Mae and Freddie Mac are seriously threatened by derivatives, phony bookkeeping, and other fraudulent actions, will have no effect on the housing market, because the mortgages have already been obtained. Freddie and Fannie stockholders are at risk, not the real estate market, unless they collapse totally, and can no longer issue paper, which is doubtful, as they are backed by government printing presses.
According to Goldman Sachs, in three years, America has lost 400,000 service, and 1 million manufacturing jobs to off-shoring. (I think this is a gross underestimate). Forester Research, says that 3.3 million white collar jobs with $136 billion in wages, will flee in the next ten years. UC at Berkeley says that 14 million US jobs are vulnerable to off-shoring. According to a piece in the new Forbes, even when American employers don’t move jobs to India, they have virtually stopped creating them in the US. I can go on and on, but like to keep my columns to 1500 words or less.
It’s like a chain re-action. As more get laid off and can’t find another job, they will default. As they default, their homes will go on the market, either through foreclosure or attempted sale. If economics really gets tough, there will be riots in the big cities, I honesty believe; causing more real estate declines, as people want to get out of danger. If you don’t believe that can happen to a major city, even without terror or riots, look at the new National Geographic Magazine and see what has happened to Johannesburg, South Africa. What is holding the economy together, now that the stock market is shaky, the buck is sliding, and terrorists are striking everywhere? It is REAL ESTATE. If that goes, what is left? The questions are, when could this happen, could it happen, and of course, where is the top? If one is going to get out, one should do it before the masses decided to do the same thing, or you’ll never get your price. Millions won’t get their price, and will ruin their credit by walking away from a home on which more is owed, than can possibly obtained in a sale. Maybe it will never happen. I can’t see tomorrow, as my crystal ball broke last week. I do have a lot of clients who have sold, are renting, and placed the proceeds in gold and silver, and are they happy! I am not selling, because I love my home and town. Suit yourself, but protect yourself.