US Real Estate Market Sits in the Waiting Room

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Dead guys walking…

An article at the Zero Hedge website says Paul Krugman is either “an imbecile or a fraud.”

We wouldn’t go that far. He might be only mildly retarded…or the victim of higher education. He has learned so much about modern economic theory that there is no room left in his brain case for good, old common sense.

More on that later in the week….

In the meantime, the Dow closed up 46 points yesterday…not enough to get excited about one way or the other. Oil traded at $74 when they turned off the lights. And gold slipped a little, but still is close to a new record.

This time gold approaches its old high in silence. All eyes and ears are focused on the US Treasury market, which many analysts say is in a bubble. Few notice gold creeping up to an all-time high.

Neither gold nor Treasuries are really in bubbles – yet. Gold is about where it ought to be, it is about as valuable as it has usually been for the last 2,000 years. And Treasuries? Well, there the story is more complicated. But here’s something interesting: 30 years ago, 30 year US bonds gave you a double-digit yield. Now, they give you less than half that much. And short-term loans to the government give you a yield with almost no digits at all.

Thirty years ago, the fellow running the Fed – Paul Volcker – worked to lower inflation. The current occupant of that post – Ben Bernanke – labors to raise inflation.

Thirty years ago, a wise investor should have taken Volcker at his word and bought US Treasury bonds. What’s a wise investor to do now? Take Ben Bernanke at his word and sell them?

Maybe. We will leave the question dangling…and turn to real estate. Let’s imagine that Ben Bernanke succeeds. Let’s imagine that he nudges consumer price inflation upwards. What happens to mortgage rates? Well, they go up too. Then, what happens to the housing market?

Ooh la la… Housing would be a dead guy walking. There are millions of people who are not buying already – even with the lowest rates since the Eisenhower era. Imagine all those who will not be buying at higher rates!

But many people think real estate has bottomed out. One of our colleagues posed the issue yesterday:

“I think we’re seeing the bottom of the real estate market. There are deals out there. Now is the time to act.”

He was proposing to buy an office building in Baltimore. It had been offered to us for $2.2 million two years ago. We passed. Now it is available at $1.5 million. We will offer $1.1.

“Maybe the downturn is over and maybe it isn’t,” we replied, with our customary helpful assurance. “But why not wait? If prices are going up, they probably won’t go up by much…and not fast. There’s too much inventory coming onto the market.

“So why not wait and see? If the market steadies…or rises…you won’t give up much. If, on the other hand, it goes down…you could get a much better deal by waiting.”

As near as we can tell, the real estate market is just waiting. It doesn’t know whether to go up or down. Some areas are cheap – Detroit, Las Vegas, California. And some areas have barely dropped at all – such as Washington, DC, where the zombies live. Also, there can be a big difference depending on what kind of property you are looking for. There are buyers at the top and the bottom, but not at the middle.

At the bottom of the market are the bargain hunters – bidding on what they consider good deals. At the bottom and lower part of the middle of the market there are also people taking advantage of record low interest rates. They do the math – but only on a month-to-month basis. At today’s low rates they can buy a mortgaged house and make a reasonable monthly payment. What do they have to lose? They need a place to live.

There are buyers, too, for properties at the top end. Rich buyers still have money – though not as much as they had three years ago. They still buy the properties they want when they want – though they may pay less.

The problem, according to our sources, is in the middle. Couples with two incomes. People who need substantial mortgages, but are thoughtful about their money. People who see a house as a substantial part of their assets and the purchase as an investment decision as well as the choice of a place to live. They don’t want to make a mistake.

Is it a mistake to buy now? They’re not sure. So they play it cool. They don’t want to put down a big down payment and then find it wiped out as the market slouches again.

David Lionhardt in The New York Times:


At times, real estate seems to be in the early stages of a severe double dip. Home sales plunged in July, and some analysts are now predicting that the market will struggle for years, if not decades.

Others argue that the worst is over. As Karl Case, the eminent real estate economist (and the Case in the Case-Shiller price index), recently wrote, “Buying a house now can make a lot of sense.”

No one doubts that prices rose roughly with incomes from 1970 to 2000. The issue is whether that period was an exception. Housing bears like Barry Ritholtz, an investment researcher and popular blogger, say it was. The government was adding new tax breaks for homeownership, and interest rates were falling. These trends won’t repeat themselves, the bears say.

As evidence, they can point to a historical data series collected by Mr. Case’s longtime collaborator, Robert Shiller. It suggests that house prices rose no faster than inflation for much of the last century.

The pattern makes some intuitive sense, too. As people become richer, they spend a shrinking share of their income on the basics. Think of it this way: someone who gets a big raise doesn’t usually spend it on groceries. You can see how shelter seems as if it might also qualify as a staple and, like food, would account for a shrinking share of consumer spending over time. In that case, house prices should rise at about the same rate as general inflation and well below incomes.

Here’s the scary thing, at least for homeowners: if this view is correct, house prices may still be overvalued by something like 30 percent. That’s roughly the gap between average household income growth and inflation over the last generation.

It’s also the overvaluation suggested by Mr. Shiller’s historical index. Today, it is around 130, which is way down from the 2006 bubble peak of 203. But it’s still far above the 1890 to 1970 average of 94.

In effect, the bears are arguing that housing was in a multidecade bubble and has now entered a multidecade slump.

And more thoughts…

Zombies, zombies and more zombies…

A friend offered a sober explanation for so many zombies:

“People are not idiots. In primitive societies, smart people always looked for the easiest way to get the calories they needed. Now, they always look for the easiest ways to get ahead. So, it is perfectly natural that they look for ways to take advantage of the system, whatever it is.

“I knew a fellow who had survived the Nazi death camps. He told me that the secret to surviving in such a situation is to be as close to the kitchen as possible. The further you got from the kitchen, the less food you got. You needed the heat of the kitchen…and the food…to survive.

“People who got inside work in the Soviet gulags, for example, survived at a much higher rate than those who had to go out into the fields and forests. The guys who had to work outside were dead guys walking. They couldn’t get enough calories to survive. The guys who worked inside didn’t need as many calories.

“In any society, people have an instinct to stay close to the kitchen. And as government becomes a larger and larger provider…responsible for a larger and larger percentage of the economy…it is more and more important to be close to it…to be close to the kitchen in other words.

“That means, getting a government job, for example. Studies all over the world show the same thing; government employees earn from about a third more to twice as much as employees in the private sector.

“If you can’t get a government job, you try to work as a contractor for the government…or in some government-supported, or government- favored, industry, such as the military or the universities. Or you get your representatives to get you a tax break, or a subsidy, or a grant…

“You get close to the kitchen and you survive.”

*** “Dead guys walking” said a local paper headline. The first “Baltimore Walk of the Dead” took place a few weekends ago, featuring hundreds of “zombies” who did a “zombie walk (and pub crawl)” across downtown Baltimore.

“Scores of the recently deceased [pounded] the streets of South Baltimore,” said the paper. And apparently there was also a prize for “Best Zombie.”

This thing is getting out of hand.

Regards,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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87 Comments on "US Real Estate Market Sits in the Waiting Room"

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Stillgotshoeson
Guest

Speaking of US markets… I noticed the DJIA is missing from the DRA website now..
Technical issues?

Stillgotshoeson
Guest

A little closer to home.. picked this blog link from the Barefoot Investors Blog in the Heraldsun…

Snapshot of Tasmania real estate….

http://tasmanianrealestatetrouble.blogspot.com/

Stillgotshoeson
Guest

We can read about Canada too….

http://www.greaterfool.ca/

Biker
Guest

There ya go, Steven. A McMansion for <$450K.

_Amazed_ to learn that TBI is a bear! ;)

Biker
Guest

Read the Nova Scotian thing right through:

“This is why the people who hoard gold, worship houses, day trade or stuff the orange guy’s shorts are all at peril in their own way. There is no one strategy right now that will protect against opposites, and the greatest risk for the bulk of the population remains running out of money.”

Biker
Guest

So Shoes, any more bear bad news for us?

Better still, do you care to be a little more precise in your exact predictions for the demise of the DOW and ASX than ‘some point in time’? ;)

Justin
Guest

Snigger, snort, guffaw.

Thanks for the link Stillgotshoeson (the first one), I’ve bookmarked it.

That guy is funny.

Stillgotshoeson
Guest

Comment by Justin on 10 September 2010:

Snigger, snort, guffaw.

Thanks for the link Stillgotshoeson (the first one), I’ve bookmarked it.

That guy is funny.

np Justin.. thought it a good read as well… someone posted it in the comments section on the The Barefoot Investors Blog.. was not from TBI himself..

Biker
Guest

“That guy is funny.”

That other guy, the one who lost his house… and is still paying his debt back at $16K per year, is even funnier. :D

Let’s see if we can find some more bad news… maybe something even more humourous? Something more to sweeten our day, perhaps? ;)

Stillgotshoeson
Guest
http://www.heraldsun.com.au/business/cba-on-mission-to-show-investors-that-australias-housing-market-is-still-robust/story-e6frfh4f-1225917155455 Interesting part…”The strong fundamentals of the Australian economy provide a firm underpinning to the housing market, reducing the risk of a sudden and dramatic collapse in house prices,” the bank said in a presentation lodged with the ASX. The strong fundamentals of the Australian economy are tied to the fundamentals of the global economy… “reducing the the risk of a sudden and dramatic collapse in house prices” maybe true.. we may just find that a $500000 house in Melbourne in 5 years time is still worth $500000… that still brings affordability down for future buyers (wage rises reduce the… Read more »
Justin
Guest

Sugar yielding pretty healthy returns actually Platinum Pete.

So how is your Platinum?

If it’s not so good I’ve got a great deal for you in Tasmanian real estate.

Buy now, or you’ll miss out, on the granite bench-tops and alfresco dining areas.

Biker
Guest

Tasmania? It’s the economy, stupid!~ :D

Justin
Guest

“trip to sell the group’s merits to investors overseas.”

This might be the key point Stillgotshoeson.

Overseas borrowings by Australian financial institutions are at a near record high, system credit is expanding (credit spreads falling) in the face of a level of prudence by the RBA not seen for many years (admittedly a low benchmark).

The next few months will be interesting. Further ‘loosening’ in credit conditions may actually allow things to ‘bubble’ along.

Stillgotshoeson
Guest

Comment by Justin on 10 September 2010:

“trip to sell the group’s merits to investors overseas.”

This might be the key point Stillgotshoeson.

I’d align that more to this article.. moving rates up outside of the RBA moves is atttractive to investors, both foreign and domestic.. not so good for holders of CBA mortgages…

http://www.heraldsun.com.au/business/first-to-lift-rates-tipped-to-be-cba/story-e6frfh4f-1225916268366

Biker
Guest

Minack: “…it just showed we dodged the prick.”

We never dodged him. We just sent him on a nice long walk….

Stillgotshoeson
Guest

Comment by Stillgotshoeson on 10 September 2010:

http://www.heraldsun.com.au/business/cba-on-mission-to-show-investors-that-australias-housing-market-is-still-robust/story-e6frfh4f-1225917155455

Interesting part…”The strong fundamentals of the Australian economy provide a firm underpinning to the housing market, reducing the risk of a sudden and dramatic collapse in house prices,” the bank said in a presentation lodged with the ASX.

Response to this article from Steve Keens website… Interesting

http://www.debtdeflation.com/blogs/

nv
Guest

Spruik, spruik, glorious spruik!

Like a few ‘n ‘ere.

Pete
Guest
nv: Yeah, I don’t visit this site anymore…at least not for the comments. It’s pretty much the Biker and Ned show as always. They yabber and yabber, but they won’t do you any favours regarding preparing yourself for any upcoming troubles – they’re completely blind to it. They’re like a parasite on this website…not the kind of commenters that you need to keep reality in check, no, just attention seeking trolls. ADR has become fairly worthless as they drive the good commenters away (there are a few good ones left..Justin, Ross, Shoes, and some others) and use the comments section… Read more »
bearamundi
Guest

You mean like the Lone Ranger and Tonto tag-team?

Pete
Guest

Yes. The same that will make a bunch of jokes that could hardly have any less relevance to this website.

Biker
Guest

“…at least the disease is fairly contained…”

Has been ever since you left, Pete. :D

Realist
Guest
@Stillgotshoeson Keen is wrong, he unfortunately used intellect and logic on a system that calls for and follows neither. The amount of wealth in this nation is truly breathtaking, the majority of us live better on average than ay of our counterparts in the world. The housing market is being driven by mum and dad investors, these make up at least 40-65% of the property owners in Oz. The government will never let such a large target audience fail in their investments and they have accumulated so much wealth to date that the need for intervention would only arise in… Read more »
Realist
Guest

What i am trying to say is DONT sit and wait for a collapse that will never come, i have resided to the fact that i will renting for my life. I’ll keep saving in he hope that one day i can buy within my means but there is no point wasting energy trying to wish a collapse based on intellect and logic.

Try instead to put that energy into those people talking just as loudly as Mr Keen but about wealth creation opportunities, most of which don’t involve housing.

Stillgotshoeson
Guest
Comment by Realist on 18 September 2010: What i am trying to say is DONT sit and wait for a collapse that will never come.. I still do not know where I want to live.. a “collapse” may never come this is true.. however I believe the affordability aspect will improve.. I have noticed of late in the area I live in more houses coming on market under $400K. This was rare, houses under $400K were flogged as needing TLC or developers delights… now they are sold as “opportunities for first home buyesr/investors” to get in at the ground level…… Read more »
Steve
Guest

The amount of wealth in this nation is truly breathtaking, the majority of us live better on average than ay of our counterparts in the world.

yes truly breathtaking indeed, its a shame Realist that a side affect to this means the rich get richer and the poor get poorer, put as long as the rich get rich that’s all that really matters doesn’t it

Biker
Guest

“…put as long as the rich get rich that’s all that really matters doesn’t it…”

Well, logically, if they’re rich, they’re _already_ rich, Steven.
It isn’t even a side ‘affect’ as you ‘put’ it… .

Biker
Guest

“…they are sold as “opportunities for first home buyesr/investors” to get in at the ground level…”

You mean the traditional way, Shoes? (As opposed to flying through a second-story window, perhaps?!)

Steve
Guest

I hope rates climb up again soon shoes
I am sick of this property bubble, im over it

Biker
Guest

“I am sick of this property bubble, im over it”

Hoping to clamber over the broken bodies of your neighbours, to get at their homes, will do that to you, son.

Go back to school, listen this time, get a decent job (one that pays at least the average wage) and then buy what you can afford.
Whoever told you life was meant to be easy lied to you.

A dream that relies on others falling, so that you can rise, will continue to be a long, drawn-out nightmare.

Steve
Guest
Yep that’s what I want Biker, Morons who were prepared to pay ludicrous amounts for S&%$holes deserve what they get. Just as you deserve what you get for being a greedy self centred **** with no social values, not giving a f&*% about your fellow countrymen and that you are directly to blame for trying to put them in that situation. But at the end of the day they did what you wanted and gave into you and paid the prices you want, so I guess they are equally to blame for the situation as you are. You (property investors)… Read more »
Biker
Guest
Ahh, but you do care. It’s evident in every phrase. Yes, we bought property only the _rich_ could afford to buy from us. Yes, “…they are equally to blame for the situation…” Now we provide the very best rental accommodation to families who _make that choice._ Any fall in interest rates means we can improve those homes… and provide increased comfort and reduced weekly expenses for good people… and, at the same time, increase each home’s value. ;) At your age I had the same options as you have right now. And I probably whined and whinged about it a… Read more »
realist
Guest
“Go back to school, listen this time, get a decent job (one that pays at least the average wage) and then buy what you can afford” Biker whoever told you that you can afford a home on the average wage was lying to you. don’t insult people based on your ‘perception” of them, i think it has been proven without fault that it is bordering on impossible for the average person to buy a home on the same terms you did when you purcahsed yours in the 60’s and 70’s heck even up until the late 90’s. Casting dispersions on… Read more »
Biker
Guest

“…whoever told you that you can afford a home on the average wage was lying to you…”

Then rent into perpetuity. Accept it and move forward.
Bleat not.

Steve
Guest

No don’t except it

Biker
Guest

Thus proving my point. What you mean ‘Realist’ is: “I don’t _accept_ it.”

(Just for the record, Steven, I never cast ‘dispersions’.)
Aspersions, maybe… . ;)

Steve
Guest

Biker if :

*The government got rid of negative gearing would you

“Just except it?”

*If the government decided it was going to release 1000’s of new land blocks in Perth would you

“Just except it?”

*If the RBA decides to keep increasing Interest rates will you?

“Just except it”
(your mates at the investor club don’t except it when they raise rates, they go down to the RBA and protest about it)

*If the international lenders decide they want to cut back on credit they give to the Australian banks would you

“Just except it?”

Biker
Guest

First, who am I talking to right now?
Is it….

* Steve, the 25 yo with $150K saved in the bank, living at home with M & D?

……………………OR

* Realist, single-mother-of-two, living in an apartment, holding 200 oz gold purchased at $300 / oz?

Let’s clarify just who you are, Steven / Realist. These dual personalities across different sites are a little confusing. I imagine either your parents or your children are also confused about your gender benders… .

Biker
Guest

Now, c’mon… this should be easy. Just check your bits. You’re one or the other. Which is it?!~ :D

Steve
Guest

What are you trying to say I am the same person as realist?
I only use this site,
I was on another site you were on about 2 years ago or something, have been back on it since then…
I didn’t even know realist was a women

Steve
Guest

haven’t been back since then I mean

Biker
Guest
OK. I accept this is one of those very difficult choices. Look, as far as I’m concerned, you can be _both._ It must be a Walter-Mitty-like existence, flitting between completely opposite personae, but lifestyle choices are your own business… Now to answer your hypotheticals (look it up): *IF the government got rid of negative gearing would you “Just except it?” NO, I’d just ACCEPT it. *If the government decided it was going to release 1000’s of new land blocks in Perth would you “Just except it?” NO, they already have and I just ACCEPTED it. *If the RBA decides to… Read more »
Steve
Guest
“These dual personalities across different sites are a little confusing.” That’s what you just said, I want you to go and find the links to the different sites that both “ME AND HER” have made posts on to show me what I supposedly have said. “OK. I accept this is one of those very difficult choices.” Its only a difficult choice because you made it a difficult choice by saying what you said and shot yourself in the foot. You can be quite deluded at times Biker I must admit you have been deluded a few times before, the one… Read more »
Biker
Guest
Here are some other hints you may ACCEPT: * Get a dictionary, if you can’t figure out how online dictionaries work; * Check Name (required) before you post. It saves gender confusion later. Go back a few posts to see how you blew it. I thought it was obvious, but it seems nothing is obvious to you, Steve / Realist. I’d offer some higher level advice to assist you, but for over two years you’ve ignored every single bit of advice given by older people. Your problem is that you have _always_ known better than your teachers and your parents.… Read more »
Steve
Guest

HAHA I was correct wasn’t I
You are unbelievable.
You are good at making assumptions very good…

Show me the other sites I have posted on…
Why couldn’t you do that?????

No proof whatsoever

What post did I “blow” it on and explain to me how your deluded brain thought how I blew it…

HAHA you are full of S*&$.

Steve
Guest

why would I want “high level advice” from an idiot who makes s*^& up.
Like lying and accusing people of saying things they never said, you can sick you “high level advice” you know where

Biker
Guest
“HAHA you are full of S*&$.” Comment by realist on 22 September 2010: “Go back to school, listen this time, get a decent job (one that pays at least the average wage) and then buy what you can afford” Biker whoever told you that you can afford a home on the average wage was lying to you. don’t insult people based on your ‘perception” of them, i think it has been proven without fault that it is bordering on impossible for the average person to buy a home on the same terms you did when you purcahsed yours in the… Read more »
Biker
Guest

“…why would I want “high level advice” from an idiot who makes s*^& up.”

My guess is that this has been your response since you first opened your mouth. Bet the first thing you ever said was “Shut the F*%# up, Mum!”
Teachers were next, I guess. More morons. Now it’s FHBs, investors, banks, governments, the system… . _Everyone_ is against you, son.

EXCEPT me.

Hums “You’ve Got A Friend”… . ;)

Stillgotshoeson
Guest
Comment by Steve on 22 September 2010: HAHA I was correct wasn’t I You are unbelievable. You are good at making assumptions very good… Show me the other sites I have posted on… Why couldn’t you do that????? No proof whatsoever What post did I “blow” it on and explain to me how your deluded brain thought how I blew it… HAHA you are full of S*&$. I have no proof, none what so ever.. but I have a suspicion that Ned S and Biker are the same person.. Ultimately.. I don’t care.. There was an interesting post here, a… Read more »
Steve
Guest

Did you get the 2nd part of the 2nd question

Explain to me how you thought I blew it???

Biker
Guest

“It is obvious Biker is a forum troll that views and comments on multiple forums.”

“that”? Surely you mean “who”?*

Not my post, Shoes. Don’t know whose. :D

* Happy to help you too, son. ;)

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