Wednesday, July 31, 2013

Why The Housing Market Is Still Failing In 2013 (And The Future Looks Worse)

A recent upsurge in housing in late 2012 and early 2013 got the nation's realtor's and their potential buyers all excited about the future of housing returning to the glory days that ended 6 years earlier. But it was in fact an artificial rise built on artificial demand built by a flurry of hiding hedge fund activity. In reality, the prognosis for housing in America is sadly dim, and that is because of the incompetence of governments, and their bureaucracies.

First of all the reason that housing rose over the 12 months prior to April of 2013 is entirely based on the fact that the hedge fund investors - flush with cash, and with nowhere to put it (stocks were unstable, bond returns were falling, and derivatives were gone), saw a potential value increase in the undervalued housing sector that like any stock or bond that is undervalued, and has the potential to return to its earnings based equilibrium, housing was seen as a good interim (short-term) investment.

Investment value is not what generally supports the value of housing except at the entry level as a rental rate driven commodity. And this is what single family residential (SFR) housing was actually bought for when home values had bottomed out at fire sale pricing. What historically has created the demand for housing is owner-occupied purchases where an individual, couple or family chooses to buy a home so that they can 'have their own place' and invest in it the way they want to.

People have traditionally moved from renting to owning for several reasons. The most common thinking is that people buy houses so they can 'quit throwing away rent'. In reality, rent is simply a value derived by markets based on demand for the 'housing cost' (real cost of living in a property) that is relevant to both owning and renting. Either way, housing costs money. As a renter, the cost is the rent paid. As an owner, the forfeited earning power of a down payment plus the cost of interest, and fees on a mortgage, combined with property taxes, maintenance costs, and in many cases HOA/POA fees all contribute to the cost of living in an owned home. With costs growing constantly associated with the ownership of property, combined with the illiquidity of the real estate marketplace, now with a questionable at best potential rise in value, makes the cost of owning simply unattractive to many renters after they crunch the numbers - even in an ultra low mortgage rate environment.

Historically, a new home owner could almost certainly count on real estate value appreciation - often well in excess of inflation. Real estate was seen for more than 75 years as the most stable investment in America, and when combined with the inflation defeating equity appreciation, was always seen as the way in which real wealth was built in America - particularly for the individual whose net worth was often fairly close in value to the equity they owned in their property.

Wall Street and a lack of Congressional insight and oversight has rendered that whole scenario on housing to history after the great new millenium real estate bubble and subsequent crash. All confidence is now gone, all potential value appreciation is questionable at best, and Congress as usual is twiddling thumbs failing to understand the fundamental problems, or begin to deal with any of them.

The reality is that the public is not being attracted back to the real estate market for a variety of reasons which I will outline here, and none of these problems has any solutions on the horizon. In fact the most insidious of these problems bodes very poorly for future property values - almost guaranteeing that the ownership of real estate is going to be a bad choice in the near future, and for a long time into the future.

The primary three reasons why a real estate is a lousy investment in 2013 relate to demographics, taxes, and interest rates.

The Failing Demographics of Housing Demand

The number one reason real estate values are even sustained let alone don't fall has everything to do with demand - the number of potential buyers. We have a long term substantial problem related to the demographics of America's potential home buying class - there are very few real buyers in the current economy, and there will be even less going forward.

The baby boom was the greatest buyer of real estate over the last 30 years because they were entering the home buyer years of their lives, and they all wanted to pursue the historical 'American Dream' of home ownership. They had every reason to buy because home values were constantly rising, credit was cheap and so were mortgages, their credit ratings were good based on good employment opportunities in a solid and relatively predictable market place, and homes were relatively cheap to buy. Added to the baby boomers as a growing market potential were the legal immigrants that continued to pour into America as the number one desired economy to be a part of in the world. These too got great jobs and bought homes for all of the same reasons.

Today the baby bust group is in their home buying years - but there isn't that many of them. This is the most substantial decrease in demand ever known to humanity, with no traceable historical precedent, and no real understanding by most of the public or Congress as to the real impacts of cutting the population so substantially in these key buying years of the 20-40 year old age group. This lack of demand has now been cut out from under what has now become the worlds most shrinking economy.

Add to this the fact that America is no longer near as desirable in the world economy as the place for legal immigrants as the rest of the world's economies mature, and the internet makes living anywhere a possibility for participating in the world economy - America is no longer attracting the number of good immigrants it has traditionally as an offset to the lack of domestic demand.

These are the real demographic considerations that are decreasing the demand for housing on the macro level, and as the housing stock is reduced due to old and demolished housing, these houses will simply not be replaced with new housing construction. Housing construction has been one of the traditionally most important sectors of the economy to sustaining both the working class and the middle class with the millions of jobs directly and indirectly involved in building and maintaining the housing sector - another hit against potential housing buyers.

The Coming Hyper Taxation Of Property Added to The 'Dead Credit' Problem

Like the failed City of Detroit, governments have grown their budgets in good times, but never made a cut when the bottom falls out. Half a century ago, and before, Detroit was a destination, and the city grew year after year as the auto industry and related companies grew and built in Detroit. Along with all that economic growth, the city government also grew - logically based on the idea that all that economic growth required more government.

But for the last 30 plus years, the City of Detroit has shrunk as a city after the growth ended, unions entrenched, bureaucrats took over, and economic advantage vaporized. Entrepreneurs moved on to greener pastures, and the City attempted to sustain with nominal increases in 'Costs of Living' etc. as the government continued to grow.

Increasingly more self interested administrations wasted millions, and the real business people of Detroit recognized that the opportunity era was over. So did the potential residents of Detroit (families and businesses) that simply decided that in the face of rising crime, corruption, chaos, and decay, they would simply choose to live elsewhere.

But as the City began to shrink in population and business base, the government continued to grow (as they always do) with ever more self serving leadership groups taking their turns in the power seats. By the time ol' Coleman Young - the ever more corrupt and incompetent master of the 'destruction era' finally relinquished power to the next generation of thugs, Detroit was a complete, and yet still pending disaster.

The reality is today that the majority of Detroit's book revenue is a paper tiger based on the 'uncollectable' property taxes due on almost 80,000 abandoned properties - many cleared off of their rotting, vermin infested buildings, but still carried on the tax rolls of accounts receivable as if their lovely homes of years past were still valuable properties. Talk about delusional.

Property taxes in America are certain to become the most controversial issue in America over the next 10 years because they are increasingly out of line with the value of properties traditionally. Property tax, (and its evil twin extension - HOA/POA fees) are the number one property expense that is certain to grow as every elemental expense within the budgets of every government grows. Taxation is about government real costs plus government waste passed on to its tax base - in this case property, and its owners.

This is particularly true given that every other taxable entity (businesses and people) is shifting out from under taxability in an ever increasing conversion to a world economy. Property however is anchored to the ground, and cannot escape. Therefore property taxation is increasingly going to be the attempted target of government taxation outside of the growing taxation of trackable economic activity.

Nothing should scare a potential property owner more than growing costs against an asset that has little to no potential of value growth. Instead, the logical calculation is to determine how and where the cost of housing can deliver the most value with the least amount of risk against future loss. Increasingly that value is deemed to be in renting.

With an enormous percentage of non-homeowners staying in the position of 'unable to buy' because of poor credit, and an increasingly predatory credit environment that the Government fails to recognize - keeping the poor ever such under the thumbs of bankers and their lawyers.

With no credit (Dead Credit), or ability to get out from under this credit rate oppression, there are no potential buyers any time in the foreseeable future for those whose credit has been destroyed over the past 6 years of american economic chaos. So you can write that 10-20% of the potential buying public off from the buyers demand group. Never before has credit history technology been so destructive to the average American causing them to rule themselves out of becoming potential buyers with their dead credit.

The Future Effects of Government Manipulated Interest Rates

Lastly, we have been operating in the false (phony) environment of government manipulated interest rates that are only made possible by the printing of money, and the still ongoing recognition of the US Dollar as the worlds decreasingly popular Reserve Currency. This scenario is certain to end sometime in the not too distant future.

Inflation is inevitable as the US Dollar is increasingly ignored in world transactions for oil, and import/export, and the demand for American treasuries decreases globally in the face of growing alternatives.

An ever more expansive currency is an unstable currency, and in the first crisis that arises of any kind, the run from the US Dollar will almost certainly be incredibly devaluing as its buying power is decimated. The net result will be the inability of America to buy from the rest of the world without costs doubling leading to enormous cost inflation. The immediate reaction has to be to stop printing money, and recall what can be grabbed by the government to attempt a prop up of the dollar's value. Regardless of how it goes down, the net result is most certainly going to be radically higher interest rates, likely bankrupting the US economy as the Government is saddled with paying double the interest on at least $ 50 Trillion of public debt (Federal, State and Local) at a minimum cost of $ 2.5 Trillion dollars per year (at 5% interest) or likely more - substantially more than our current taxation levels even generate federally.

The net result is that financing new homes and even resales will become impossible and unjustifiable - making every property in America completely illiquid (unsaleable) and therefore worthless.

The Buyers Calculation Scenario

Assume for a moment a home bought today for $ 100,000.

Property taxes (and HOA/POA fees ) today in a typical American city are at least $ 2,400. per year, or $ 200/month. This is actually the most rentable home value level in America and still has a monthly housing cost before maintenance and management of $ 6400. per year based on 100% financing at 4% and current taxation level. This is $ 533. per month in basic housing cost. If rented for $ 800. per month, the net income before maintenance and management is $ 267./month.

In three short years (or less), if lucky the same home is still worth $ 100,000. but mortgage/interest rates have risen to a historically more consistent and reasonable 8% and property taxes/HOA/POA fees have risen based on current trends to $ 250./month. The 100% financing at 8% for a potential new buyer is now  $ 8,000. per year or $ 667. per month, plus the $ 250. per month in taxation adds to $ 917./month.

With rent potential of $ 800./month, the monthly income has devolved into a loss of $ 117./month. Nobody buys that as an investment, and the only alternative is the hyper inflation of dramatically higher rent. And in such an inflationary environment, government real costs are rising more rapidly, and you can count on much higher taxation growth. Any way you slice it, everybody loses.

So if you still think you are ready to go ahead and buy a home in 2013, at least go forward with your eyes wide open. There are many dangers ahead.

No comments:

Post a Comment