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.

About the author

Simon Black

About the author

James Hickman (aka Simon Black) is an international investor, entrepreneur, and founder of Sovereign Man. His free daily e-letter Notes from the Field is about using the experiences from his life and travels to help you achieve more freedom, make more money, keep more of it, and protect it all from bankrupt governments.

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