Regret is the gift that keeps on giving. Home re-sales sank 10.5% in November 2015 to the slowest pace in nearly two years. Sales in the month came in at a seasonally adjusted annual rate of 4.76 million. This was an "anomaly," according to our source, the National Association of Realtors. It may be easy to dismiss the data as an anomaly but it could be the beginning of a trend. That’s what this observer sees. The USA may be in a housing bubble, a stock bubble, and a fracking bubble. We all know bubbles burst, but we generally don’t recognize that a bubble has burst until after the fact.
Back in the late 1980s many Americans were convinced that Japan would take over the number one spot with the highest Gross Domestic Product (GDP). Little did we imagine that Japan would rank today as the third largest economy, according to the World Bank.
This is particularly noteworthy given that the country has the highest version of Quantitative Easing in history as compared to other central banks, but only increased their GDP by 1%, according to Trading Economics on December 7, 2015.
In the same report, you can see, “GDP Growth Rate in Japan averaged 0.49% from 1980 until 2015.” Unlike the US, there was no large baby boom in Japan, no immigration of any kind, but the country is fighting record debt levels.
As far as Europe is concerned, the refugee issues and the Paris 9/11 events haven’t brought the continent together — it has driven them further apart. There are centuries of distrust between nations across the continent.
My point is the USA is the best house in a bad neighborhood, but it isn’t strong enough to hold up the world. In addition, Europe has yet to make their bad loan situation disappear.
In 2006, many investors were convinced that real estate was the road to riches. In fact that same year, my team met with a recent widow who was a realtor with a small investment account, along with 4 homes, two in Lake Sherwood. After reviewing her situation in minute detail, our recommendation was to sell one home before year-end and list another home right after the first of the year 2007.
It was explained that having $4M tied up in four houses was not diversification. In fact, it was a risky proposition. With hope as her strategy, I am afraid the Widow did nothing.
Just as we would never recommend that kind of money be put in one stock or even 100% in a basket of stocks, where the money is in one asset class that is like putting all of your eggs in one basket. If that’s what you are going to do, you better watch that basket very carefully. I share this story with you because I am seeing a similar mood take over investors today.
Unsuspecting, ordinary Americans were decimated by the subprime crisis, mortgages that were underwater, and debt defaults. With recent history, the current face of Geopolitical events, and oil trending lower, some of us have reduced our debt, but others of us haven’t learned a thing. Here we go again, only perhaps worse.
Remember in the mid-1980’s when interest rates on mortgage rates were much higher than they are today? You also may remember baby boomers, including this one, were standing in line to buy homes at a record pace.
Today, with interest rates as low as you have ever seen in your life, where are the lines to buy houses? Those lines are history. Put prices where ever you like and keep interest rates low, what the consumer is telling the real estate market is it’s over.
Many smart people don’t take the time to study demographics. In summary, it’s the study of buying patterns based on age. Baby boomers drove spending to new highs in every category, from baby food, to Wham-O, to Mustangs, to the most furniture at age 39, to high earning and high spending between mid- 40s to their early 50s.
In 2016, George Walker Bush, born 1946 turns 70 and Michele Obama, born 1964 turns 52. Add 10 to 20 years and you tell me how much house these 76 million people will need? Less house than they have now is my best answer.
Here’s a good real estate tip for you. Buy nursing homes, cemeteries, and funeral homes. As we age into our late 50s, on average our income and spending starts to decline and never recover in nearly every category except health care.
As far as inflation is concerned, it will happen again but not anytime soon. As my friend Charles Sizemore, CFA points out, “Less spending means less aggregate demand in the economy. And this is why Japan has struggled to spur demand for the past two decades and why it still suffers from deflation and oversupply, despite having a shrinking population and workforce.”
About inflation, Sizemore goes on to say, “It won’t be the elderly causing it. It will be the millennials settling down, getting mortgages, and falling into the trappings of middle-class family life.” Technology can replace a worker, but it can’t replace a shopper. It’s one of the things economists and wealth managers fail to observe.
I wish the favorable real estate reports were proof that residential real estate was likely to bounce to new highs. Unfortunately, it would not surprise me to see the opposite. We may instead see the real estate market experience new lows. One of the problems with the reports is that the data shown is in a recent six month or twelve month period. Take a look at how new homes fell from July 2005. This chart below, thanks to Dent Research, takes rising population into account, which makes the reversal even more significant.
Adjusted for new homes per person, you see a drop of -82% here. That’s probably much worse than the US saw during the Great Depression. Notice how much attention is given to new housing starts. I get it. A new home requires lots of purchase over and above the house. But all of the old housing didn’t go anywhere.
As Harry Dent points out, “Real estate is the only durable thing we buy that lasts nearly forever. We build a home and multiple generations live in it. When the baby boomers moved through the real estate market, they built more homes, (generally in the suburbs) to accommodate their bigger numbers. But the millennial generation now following, even when adjusted for immigrants, doesn’t quite reach that same peak set by their predecessors.”
At his late 2015 Irrational Economic Summit in Vancouver, before 300 investors and wealth managers, Harry Dent put it this way, “Nature hates old people. We won’t need more real estate for decades to come, especially as the baby boomers downsize and die, leaving more homes vacant.
When I adjust real estate buying trends for peak buyers at age 41, minus dyers at age 70 in the US (who must sell, of course) the net demand for new homes actually declines into 2039, that’s 24 years from now! This will mark the greatest shift in real estate in history.’
It may be hazardous to your wealth to believe that you can get rich sitting on real estate anymore. As I like to say, governments don’t hold the trump card, Nature does. If you believe that people dying may soon outpace people buying, you won’t enjoy the appreciation your parents, grandparents, and great-grandparents enjoyed over the past 60 years.
You can hope for positive cash flow that is conceivable even in a bad market. Or with the understanding “cash is king,” with cash in hand from selling now, you may have opportunities come your way that you cannot foresee in this environment when you can own cheaper than you can rent. I believe Branch Rickey is spot on when he said, “Luck is the residue of design and desire.”
For a second opinion, or to review your situation, schedule an appointment with a financial advisor who studies demographic buying patterns today.