The housing bubble will deflate, not burst. As I mentioned last week, the dot com bubble burst, because suddenly a ton of investors decided to get out, and there were no buyers and a lot of sellers. The drop was sudden, as it was in 1929 and 1987. Housing is far different.
People LIVE IN HOMES, and in far too many cases, THEY AREN’T PAID FOR, but have mortgages on them. Stocks are paid for, unless a bank loan or cash advance was used to buy them. People don’t live in stocks, sleep in them, nor cook and eat in them, but rather stocks are a form of partial ownership of a corporation, intended to be an investment. If the corporation does well, it is to be hoped that a dividend will come forth. A bad reason for owning stocks, or a home, is in the hope that it will “go up” in value. As the esteemed Richard Russell has said over and over, a stock should be purchased for its return on investment, or dividends, not because of a hope of an increase in price. A home should be the same. A home should suit as to size, location, price, and desirability in many ways, not because one hopes it will go up in dollar price.
Unfortunately, the real estate markets of late, have been used as a means to borrow more dollars, or as sheer speculation. The result of this mad scramble to buy at any price, with the hope of selling at a greater price, has resulted in a typical bubble, which will deflate eventually. The reasons are simple. Prices are far higher than cost of building, in the main, and this bubble has had the effect of making buildable land, far more expensive than it should be, by any sense of economics. This excess land price, has caused it to be impossible for a person to buy land to make a living by farming. It has caused much of our food to be brought in from foreign lands, because of high land prices just for one example.
Of course the dollar is tanking, but not nearly as fast as real estate is escalating. A bad series of events, which will surely level out, with much devastation, as occurred in the dot com crash but gradually.
As dollar prices in real estate fall, due to over-supply, many home “owners” will discover that they owe more on their abode, than it could possibly be sold for, and it would make sense to simply walk away from it before the situation becomes worse. The peril of ruining one’s credit rating, and ability to buy another at a reasonable price must be considered, but credit can be restored in a few years, and it might be worth the risk. Then, there are those who realize what is going on, and decide to sell before the above happens. This will result in the same phenomena, namely that there are far more homes offered for sale, than there are buyers, with the resulting price decline. Obviously, if homes hadn’t been sold for little or nothing as a down-payment, this situation wouldn’t have developed. Borrowing to buy stocks, resulted in the same.
Then there is the ARM situation, which allowed people to buy a home with a much lower than normal interest rate, but for a short period of time. When the three to five year ARMs come due for re-finance, at much higher interest rates, the increased payments may make a lot of heavily indebted persons have to walk away, or declare bankruptcy. There are, unfortunately, far too much which is financed, besides homes. Credit card indebtedness, auto indebtedness, and debts for everything under the sun, are far too common in America today. The facts are, that foreclosures and bankruptcies are both at record levels, meaning that dark clouds are overhead, and distant thunder is heard.
Thanks to federal legislation, a person defaulting, can live in a home for up to a year after foreclosure, and this will forestall a quick decline or bubble deflation. Fannie Mae, Freddie Mac, banks, and savings and loans who have not sold their paper, will always be patient, as it is in their interest to do so. Homes that are vacant, are open to vandalizing and arson, so it is in the lenders’ best interest to keep the defaulted home occupied. All of the above take time, and it is the time required for moving, selling, defaulting, bankrupting, and legalities by both home owners and lenders, which will make the real estate bubble deflate, rather than crash. But deflate it will, and nothing can stop it.
What will be the result of real estate prices falling, and the resulting decrease in demand? This is not difficult to discern either. First of all, construction will decline and eventually stop, causing builders and their employees to be out of work. The employees are not only carpenters, plumbers, roofers, insulators, electricians, brick layers, concrete men, etc, but their sales force, office staff, and advertising budgets. With all these out of work, their purchases will slow to a crawl, and will consist of the most basics of survival. Luxury shops and outlets, will have to lay off their employees; and shops may be vacant, with the resulting hardship of the shop owners. More unemployment. More hardship. The suppliers of building materials will lay off, as well as the makers of such things. Truckers will be laid off, and rail traffic slow to a crawl. The real estate for sale, will be astronomical in sheer numbers, resulting in drastically lowered prices. Prices will decline, as has happened in stocks or anything in over-supply, till they are so low as to present a bargain not seen in decades. The NASDAQ went down 84%. Couldn’t real estate do the same?
The chain is almost endless, and of course will include the auto and truck industry. Trucks will not be bought, because the current inventory will be adequate, and auto sales will shrink to virtually nothing. The builders of cars, sellers of cars, office staffs, truckers carrying them, and steel mills furnishing the metal for them, will also have huge layoffs. Steel, plastic, rubber, glass, and electronics manufacturers will have layoffs, as will the airline industry, and all that are associated with it. The weakest retailers will fail, and banks will be left with huge, non-performing loans. A deflating of the real estate bubble, will affect everyone, and it will not be pleasant.
What is holding the economy together? Is it the stock market? Hardly. Is it the flood of Chinese merchandise coming into America? Nope. Is it the millions of illegals crossing the borders? Not by the hair of your chiny chin chin. From where do the funds come, which has kept the economy alive? One must have to agree that is not from a productive economy, which we do not have. Our economy is at a virtual standstill, with even GM on the brink of bankruptcy. The fake figures paraded out weekly by the lying government, will not fool forever. The doodoo will eventually hit the fan, and spread it everywhere. Life is good, if one makes the correct decisions. This is not just the food we eat, the mate we select, or car we buy. It involves a lot of economic decisions, which many times are difficult to make, and involve a lot of thought.
According to a guru at Merrill Lynch, the six signs of a housing bubble break are: (1) Overheated prices, (2) Excessive ownership, (3) unreasonable debt, (4) Speculation, (5) Complacency, and (6) denial.
Home and real estate decisions cannot be made by anyone but yourself. To me, it is important, first of all, if you have surplus assets, to get out of dollars, and into tangible things, which will not change, such as gold and silver. If one has a mortgage for a long period of time at a fixed rate of interest, as the dollar falls, the payments remain the same, in declining dollars. Maybe you could pay the whole thing off with a few Krugerrands eventually. Why not? If one had gold and silver, and a mortgage, the gold and silver will go up in dollars, while the mortgage payments remain the same. Sell a Krugerrand every so often to make those payments, and as time passes, it will require fewer and fewer sells, until finally, the home may be free and clear, as a result of dollars invested in gold and silver a few years before. It all makes infinite sense. If you owe too much, and have little equity, even at these high prices, is it wise to get rid of it and wait till prices go down? I can’t answer that, but I do firmly believe they will eventually go down. How long will this deflation of prices in real estate take, and how low will they go? I do not know. If I did, I would tell you, but my crystal ball broke last night, and I can’t make it work any longer. As usual, just protect yourself in the best way you know how, with cautious thoughts and actions. It’s your future. I can only analyze, not predict or advise.