Tuesday, March 4, 2014

Real Estate and the Three Little Pigs...Comentary

Do you remember the fable story of the three little pigs? They had a fear of the wolf and each sought a safe shelter. The problem is you need enough resources to afford a mortgage, the purchase price must be within your means and since your wages determine your means, you need a safe, reliable income to cover the mortgage and home price.
The first pig had none of the above. He knew how to build, but all he could gather was hay. After he built his house, the wolf came to his door. Laughing, the wolf blew down the house. The pig fled to his friend who had built a house out of sticks. The wolf followed the first pig to the second house. Again, he huffed and puffed and blew down the home. Now, the two pigs ran to their friend who had enough resources to build a safe house made of bricks. No matter how hard the wolf tried, he could not get into the third house. The moral of this story is two-fold. One, real estate's principal rule is location, location, location. The other rule is have enough resources to cover the three aspects in home purchasing.
This dear reader, this takes us to the present state in home real estate in the US market. There are many ways to enter the discussion, but keep in mind that shelter is the most expensive purchase one can make in our consumer economy. If it is true that 70% of our economy is consumer related, then housing is crucial to its foundation. When one buys a home, that person effects many aspects to our economy. That house needed a roofer who needed supplies. It needed a plumber who needed supplies. It needed an electrician who needed supplies and so-on and so-on. Even if the home is a resale, repairs will be needed maybe furniture, maybe appliances. Insurance will be needed. Taxes will flow into the local government. Maybe the buyer has kids. Schools will be important. Maybe public transportation or good roads to get to work. See how things are related? By the way no one questions the makeover from our industrial manufacturing society into a service orientated one. How could they? Manufacturing only represents 12% of the economy and it only provides jobs for 7% of the population. Together, this leads to our present market.
Prices Up!
Home prices have been growing since March of 2009 with a big 12% rise in 2013. New home sales surged 9.6% in the latest monthly report. This is the highest since 2008 and the supply of homes on the market is down to 4.7 months supply. What is never discussed is the fact that buyers drop their plans to buy. They cancel their contact for various reasons with the number one being affordability which is usually due to rising interest rates. Cancellation of contracts for builders was 24% in 2013. The stock market rises on news of home sales, but investors forget that almost one-quarter of sales fail. Another aspect that investors overlook is the fact that the same people who were in real estate prior to the crisis are the same people today. For example, how about David Lereah of the National Association of Realtors. In a report by Bookrate .com back in 2006 he said,"these historically high home-price gains are the simple result of more buyers than sellers in the market. The good news is the supply of homes on the market has been up and we are entering a period of more normal balance in supply and demand."
The next question is how many homes was built in that year? The average was 1.5 million prior to the crash in 2008. Today, builders only start around 478,000 homes. I'd say that is one big drop from the previous average.
How about Thomas Stevens, president of the NAR. He said this in 2007 at the dawn of the crisis,"the softening of the housing market doesn't mean home values will plummet. Housing values will keep at a high plateau because of consumer demand for housing." He later added this,"children of the baby boom generation, often called echo boomers are the second largest generation in US history. They, along with a strong immigrant impact, and the boomers themselves who remain in peak earning years, means housing will stay strong over the next decade and long-term prices will continue to rise." Talk about putting a foot in your mouth, but then again, these are the shills that influence everyone. I'm here to remind you that housing does not always rise and if you look at all the ways the market has been manipulated, I would wait for this new housing bubble to pop before you seek your dream home.
Stacked Deck
The government instituted rules for mortgage modification, so the market was not inundated with foreclosures. They helped sellers by waving the IRS rules of passive income on all short sales. They passed programs like HARP(Home Affordable Refinance Plan). This plan will possibly expire on December 31, 2015. It will allow a home owner to refinance his home at below market interest rates even his his home-to-value is 125%. It can save the owner on average $250 a month. More money for him to spend in the economy.
Of course, the Fed had the backs of big banking. Their QE programs bought toxic mortgages from the banks, not to mention the TALF program which refinanced the banks at the present .25% and then, the banks buy treasuries which gives them easy money. The government added help by suspending the FASB(Financial Accounting Standards Board)rules so the banks balance sheets would pass the phony stress tests to give confidence to the consumer. These rules affect market-to-market prices, so the banks do not have to show the decline in value of the homes in their loan portfolio.  They had their shills in the media to sway opinion about the safe haven of gold. Don't buy gold! Our banking system is solid! Together, they have done everything that they could think of to re inflate the housing market. Got to give them credit. They have succeeded, but they never admit that they are wrong. They will always throw money at a problem like the $3.9t budget that Obama introduced today. The budget offers no solutions for our economy. It is a political party rallying agenda in this an election year. If it had any merit the HMI, home-builders index would rise. Keep an eye on it as any number below 50 indicates serious problems. The president says his budget will get the GDP to 3% this year. He got a second motion from Bernanke who was in some conference somewhere. This will be the third straight year that these two phonies make that prediction. In reality GDP has never reached 3% and it has declined for the past three years in a row.
As I stated many times, our leaders never see a crisis forming until it hits them in the face which is especially true of home builders who have increased spending this year to the tune of 9.3%.
Here are some reasons to worry. Interest rates are rising. Big negative! Builders make houses which adds to a local population. This makes more demand for water, roads, schools,etc., however builders don't help with those demands. They take their money and leave. Growing problem!
Affordability is shrinking. There are many locations that ordinary people cannot afford to purchase like San Fran, LA, New York, Seattle, Portland, Denver and anything along water like our entire coast. Cities are in trouble for many reasons. Everyone knows about Detroit, but did you realize that Philadelphia has 28% of its population in poverty. Anyone in that location just lost a big chuck of buyers. Oh yea, over 46 million or 14% of the population on food stamps!
Wages are flat and if you count inflation, there goes almost all the initial buyers in the pyramid of housing from lower cost to higher cost. People, if no buyers are entering your sellers living room, there will be no movement in the garage.
Bottom line: There will be another housing crisis. If you plan to buy, I would wait for the dust to settle and go for the brick house in a good location. I may wear glasses for driving, but I won't need hindsight to see that before the year 2020, the US national deficit will hit $20trillion. Obama is building a house made of paper.
Cometary:I recall the words of wisdom from the movie, The Good, The Bad, And The Ugly. I use this part of the culture since we just had Oscar week. The good says to the ugly, "there are two kinds of people in the world. Those with loaded guns and those who dig" This past week the Ukrainian people found out that they are diggers and Russia has the loaded gun. The US has a loaded gun that we forced Iran and Afghanistan to dig. There is also a corollary in that within these same countries their population end up as diggers for a corrupt government. End the Fed!

No comments:

Post a Comment