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US housing still weak. In other news, the sky is blue

February 1st, 2012
Location Undisclosed

The latest Case-Shiller numbers released yesterday showed that the US residential housing market is still very weak. After three straight months of declines, home prices are now at 2003 levels. Duh.

To some, it was a shocking revelation. The pundits I saw discussing it yesterday practically had a seizure they were in such disbelief. CNBC even ran an article on their website in response, extolling the strong fundamentals of US housing.

Let’s look at those fundamentals:

1) Most people cannot afford to write a check for $200,000 or more (roughly the median home price), which means they’ll require bank financing. Consequently, speculators and investors aside, home prices must be a function of income– do buyers make enough money to be able to afford the monthly mortgage payment?

2) Mortgage affordability is tied directly to income levels, and where there’s no job, there’s no income. When you aggregate that notion across an entire economy with high unemployment, it restrains housing affordability.

3) Millions of people have been taken out of the housing market as potential end-user owners. These are the ‘former’ homeowners who have lost their jobs and/or been foreclosed on. They can no longer qualify for a mortgage, particularly at the ultra-low rates we’re seeing now.

4) There’s a lot of talk about how low interest rates are making homes affordable. Maybe so, at least to the people who qualify for a mortgage. And while it’s possible that interest rates could go lower, there’s a lot of potential for rates to rise. And when rates rise, homes become more UNaffordable.

Example: if you can afford $1,500 per month to spend on a home, you would be able to afford a $300,000 home at today’s low rates. If rates go up to 6%, $1,500 per month only buys you a $250,000 home. If that’s what the average guy can afford, that’s where home prices will converge.

5) Many local governments are completely bankrupt; we’ve read about looming municipal defaults and laying off cops and fire fighters. Property taxes will likely rise as a result, adding an additional cost in buyers’ monthly payments.

Again, if a buyer can only afford $1,500/month, and his property tax rises by $600/year, that takes about $10,000 off the price of the home s/he would be able to afford.

6) Ditto for homeowners’ insurance rates, which are rising rapidly.

7) There are currently 15 million vacant homes in the US according to the latest census figures, and every day, more people are being foreclosed and getting kicked out of their homes. Housing prices can’t have any meaningful rise as long as there’s such excess supply in the market.

8) In bad economies, people double up in homes. Roomates. Live-in relatives. The number of households is contracting, and this is a demographic issue– too many homes, not enough families to fill them.

9) Even if every unemployed American were simply given a home to live in, it would still leave millions of vacant homes on the market.

10) Given how US Homeland Security treats everyone like a criminal terrorist, foreigners aren’t exactly lining up to tighten the slack.

Ultimately, while there are bright spots in any market, the fundamentals for US housing remain poor.

It can be tempting to jump into the market as an investor with prices so low. But gobbling up a low-grade track house simply because it’s cheap is not a sound investment strategy. There are a lot of things in this world that are cheap. That doesn’t mean the price will go up. It just means that they’re cheap.

A great investment is one that is both cheap, -and- has a catalyst for growth. Median housing in the US has few, if any, catalysts to growth. If you want to invest, stick to the highest quality assets you can find– premium homes in the best locations. They’ll be the first to recover.

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About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

Comments on this entry are closed.

  • Surfsmurf

    Simon, one thing I’ve been wondering about with regard to the US housing market is right now we have all these homes on the market.  Baby boomers are turning 65 this year but in 10 years they will be turning 75 and either start dying off or moving in with relatives, into a nursing home, etc.  That would seem to indicate that the housing market is not going to be rosy for a long, long time, without a large influx of home buyers.

  • Lavel

    My wife and I are reluctant to spend our savings to buy a house because the cost of ownership is too high.  Sure credit and homes are cheap, but you still have parasitical property taxes, repair/maintenance costs, insurance, cost of credit and the uncertainty about the jobs, wages, inflation and other things that are beyond our control. 

  • Biggs

    Give it more time. Until existing home owners are truly desperate. Until “there’s blood in the streets”.

    Homeowners are still spoiled. And the government isn’t helping either by trying to prop up prices (i.e.  buy votes).

    Real Estate is a hard asset, potentially it could be a good move, it’s just that the preceding bubble was SOOOOO big.
    It needs to deflate more.  Give it time.

  • Mrcl500-nyc

    Point 10 is completely. Foreigners, especially the Chinese, are lining up tp buy properties in the USA as with a minimum investment is also buys them a green card.

    Get real TSA does not treat us like we are all terrorists, If your mother was blown up in a plane you would think differently and ask why security at the airpprts was so lax. You cant have it both ways.

    • http://pulse.yahoo.com/_F7U5WEFZQH5UOQ74DIAYAMC2SY Matthew Clapper

      TSA imputes the actions of one stupid nigerian teenager to the entire human population, defying 800 years of western jurisprudence, 3000 years of human understanding (as independent rational thinkers), not to mention the US Constitution.  Clearly they do, in fact, treat us all like terrorists. 
      If you mother was blown up on an airplane, it would most likely be a result of pilot error – the #1 cause of airplane fatalities.  Statistically, you will live thousands of lives and die thousands of deaths before ever meeting a bona fide terrorist.  We’re fed up with TSA oppression to fuel your irrational terrorist hysterias. 
      Get a hobby.  Or a pet goat.  Or get a flashlight and fret over the boogeyman in your closet.  Just leave the rest of us alone. 

  • Hiday_happy

    hi how are u…..?

  • Tim

    When housing prices are at about the 1968 to 1972 level, they will begin to more accurately reflect the “value” of the FRN’s (Federal Reserve Notes) they’re priced in.

  • Daryl

    While I love Simon’s information, on real estate he seems a bit off base.  Anyone trying to paint the United States with a single brush ignores the fact there are 200+ major real estate markets in the country.  Las Vegas is far different than Washington D.C. or Detroit.  While 5 areas had major housing busts, most of the country did nothing – Texas, New York, most of middle America is just as flat in value as ever.   Furthermore, Simon talks like a speculator, not a real estate investor.  Real investors invest in property for cashflow and hold for ever and his arguments are strong support for increased renters to fill investment properties in high demand markets.  Hoping prices will go up is not investing and yet, they will eventually rise as population increases and construction fails to keep pace.  Appreciation and mortgages are for speculators.  Professional real estate investors are buying cash, in high-growth areas, where there are lots of renters.  There has never been a better time to invest in certain real estate markets since the great depression.  Even in the 30’s, those that stuck to investment fundamentals (and housing along with food and water are pretty fundamental) prospered greatly.  Same thing happened in 2001 in Argentina, real estate held up better than most investments.  History does repeat.  My philosophy is otherwise aligned with Simon, diversify overseas, hedge inflation with gold, silver and real estate that cashflows and prepare for the worst, while focusing on thriving in the time of turmoil.

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