Maybe you are wondering why you hit the credit card quite so hard at Xmas or how to survive without a daily latte till you can go back to work. Well this may brighten your day, or at least help you get things in perspective.
These are some new friends of mine. They live in the building behind us. Mum can’t read or write, the older girl has had her mind damaged through abuse and they live on $80 a month. Now how is your day looking? (More images on my Facebook)
This article is from John Talbott, a consistently anti property author and researcher. It is a must read regarding the US market.
I have been waiting for more than five years to offer this advice. It is now time in most cities across the country to buy a new home or refinance your existing home with thirty-year fixed rate mortgage debt. And this from the author of The Coming Crash in the Housing Marketpublished in 2003 and my 2006 book, Sell Now! The End of the Housing Bubble. Let me explain why.
Home Prices Relative to Peak Prices During Bubble
Home prices are off anywhere from 10% to more than 60% in cities across the country. There is no reason to believe that prices were “fair” during the bubble as we have seen they were largely caused by loose and aggressive lending by banks and non-banks. But, it is always better to buy at a discount rather than at a historical peak, and these seem like awfully big discounts. And by my calculations, in most cities across the country, real prices adjusted for inflation have just about come into line with where prices were in 1997, before all this crazy bank lending started, so there should be little additional downside risk by buying today. There are still some neighborhoods across the country that have not seen very dramatic declines in price, many of them very wealthy and expensive enclaves, but given the distribution of incomes lately heavily weighed toward the wealthy, these areas may never see a really large home price decline.
Home Prices Relative to Construction Costs or Replacement Costs
Homes in many cities across the country are now selling for as little as $60 to $70 a square foot. Depending on the quality of construction and the underlying land value, this represents a 50% to 65% discount to the costs you would incur if you tried to build a similar home today in these cities. While there is no guarantee that there will be a strong rental market in the short run, in the long run it just seems to make sense to buy if you can acquire assets at half or less of the cost of building them.
Home Prices Relative to Incomes and Rents
During the peak years of the housing bubble, entire cities like San Diego were seeing their homes priced on average at 11 times the area’s median family income. Such prices financed primarily with debt are by definition unsustainable. Now, because banks have pulled back on their lending formulas, homes in many cities are changing hands at three to four times average family incomes. Similarly, at the peak, houses traded at such large multiples of possible rents that it made the projects uneconomic from the start. Now, with homes trading at more reasonable multiples of rents, houses and condos can be purchased that are immediately cash flow positive in year one and enjoy all the upside of any appreciation that will occur as inflation returns.
Home Prices in Real Terms, Not US Dollar Terms
We still talk about home prices in dollar terms, which is silly because the dollar has lost 98% of its purchasing power relative to a more stable asset like gold over the last fifty years. If instead of pricing houses in dollars, we look and see what a home would cost in ounces of gold, we see that houses today are a real bargain. As a matter of fact, this graph shows that average homes, measured in the number of gold ounces it would take to buy them, are now trading at forty year historical lows.
You might argue that this is because gold is priced highly today. I would argue that gold’s purchasing power has changed very little over time, it is the dollar that is depreciating and thus giving the appearance that the price of gold is rising. Actually, gold is quite stable relative to other assets and commodities and it is the dollar that is highly volatile and declining in value due to the US funding its deficits by printing dollars.
The Real Bubble – US Treasuries and Future Inflation
The real bubble out there is longer US Treasuries and 30-year fixed rate mortgages for home-buyers. With US debt equal to its GDP and equal to more than four times our government’s total tax revenues and with annual deficits of $1.3 trillion and growing, it is amazing to me that people will lend to the US for thirty years for less than 3.0% a year. Even more amazing is that individual homeowners can borrow at 4.0% (around 3% after tax) for thirty years on a fixed rate basis, some 300 basis points better than Italy which has a lot more people and makes much better shoes.
Homes may not appreciate greatly in real terms over the next twenty years, but they don’t have to if inflation comes back, which is the only way the US and Europe are going to get out from under the huge debts on their countries and their banks. You may not make a lot in real terms on the house, but if inflation returns, you could make a killing on your investment as your thirty year debt becomes worth less and less in real terms. Run the numbers, but if inflation and interest rates go back to say, 7% to 8%, you could easily make eight to ten times your equity investment on the house because you locked in your borrowing costs and home appreciations historically have always correlated well with unanticipated inflation.
So, run, do not walk to your neighborhood banker and either finance a new home purchase or take out the maximum amount of money he or she will lend you on a home equity loan and buy hard assets, not financial securities, with the money. When inflation comes roaring back the only perfect hedge is to be a borrower, not a lender or investor. Shakespeare said, “Neither a borrower nor a lender be,” but they didn’t have huge government deficits and the risk of future inflation back in the Bard’s time.
My computer charger died on the 13th December. By the 14th I was powerless and internetless (?) till yesterday.
After panicking about how life would continue without being online I discovered that life did indeed go on. And in fact life was a lot less busy and I had time to think, connect with people and be creative in ways that I hadn’t remembered doing since my teens.
It was quite revelatory how different I felt and thought. We really have become slaves to the machine with our laptops, ipads and smart phones.
My Xmas newsletter will now have to be my new years newsletter as I have been unable to prepare anything meaningful due to my power outage and now that I am back online I simply have too many people to talk to this week and too many “real” things to do.
I pray that you find yourself able to unplug from the tyranny of the urgent and plug into something important this week and over the Christmas period.
There really is life outside the blinking lights and glowing screens .
I have had three meetings this week with close friends all involved in real estate in New Zealand and it is the forst time I could sense their total frustration at the never ending recession. No one expected 4 years on for things to still be so bad and it is really grinding people down. There is some talk of the Auckland market doing well but it si simply not true unless you are in certain streets on the right day holding your mouth a certain way.
My coping mechanism always has been to focus on the positive and keep looking for solutions. I don’t expect that will ever change as I think it is good for my mental health, however I think also sometimes just have to acknowledge how bad things are and let that be OK as well.
So many of my friends, and myself for that matter, are battling uphill battles or have been overtaken by their situations and there are plenty more to come yet.
So yes we are in teh worst financial crisis since the depression. Black Friday and the .com bust were nothing compared to this.
So for many the end wil be rocky and a long recovery. And that is life, sad but true as Metallica would croon.
But I can’t help myself and must look for some positive in every situation. For me it has been the rallying of friends and even clients who appreciate my candour about my own situation and can relate it to theirs. I have been overwhelmed with emails, support and affection. Almost enough to make the whole thing worth while.
One thing we are not short of is judges and spite. The news is full of it everyday world wide. You can make a difference by being the difference!
I hope that in the midst of your situation, whether it is currently great or terrible, that you will find it within you to love those you love, be kind to those you can and encourage those who need it.
It has made the world of difference to me in the last few months and forges friendships that will last any adversity.
As to the recession, keep an eye on your inbox for my Christmas newsletter shortly!!
A fascinating week in the news with The Economist warning us of a 25% drop in house prices, every real estate principal saying the opposite and the statistics able to favour any position depending on which particular part of the country you examine.
I think that New Zealand, like the USA, really doesn’t know what to do and how to assess the information coming out so in true DIY fashion, we all guess.
The fact is the world is in a mess economically. The nations most at risk are those who tried to avoid a hard landing in the early stages of the recession, propping up their economies in the hope that the recovery would come in time for them to avoid any real pain.
The problem is the recession isn’t going anywhere soon and the countries taking the big hits, who appear so incompetent now, like most of Europe, are probably no worse off than the USA and other more “civilized nations”.
Housing is an indicator of a countries wealth, their residents incomes and their general outlook on life. It isn’t something you can manipulate or control to improve an economy.
So in many caes the real hard issues aren’t yet being addressed or fixed. And until they are we will continue to have this seesaw posturing. But you can be sure of one thing in my opinion:
Every nation in the world is affected by what happens in China, followed closely by the USA. And they BOTH have an ocean of pain to go through yet, which must wash over us all.
I attended 2 churches yesterday, both full of wonderful people and both meeting in conditions you and I wouldn’t consider for one minute. Dirt floors, dangerous temporary wiring and no facilities.
But this is life and death to these people. Their relationship with God is everything and they will find a way to meet and to share Him with others no matter what. Things that we would solve with money they solve with ingenuity because they simply don’t have the money.
It causes me to question more and more of our Western life style. (Don’t worry I am not about to become a monk or anything), it is simply a case of looking at what is really important. I have understood this and even taught it for years but sometimes it’s not till you go and live in a culture where there is no room for rhetoric because they are busy actually surviving that you see the reality of some of these principles.
So the lesson for us is not to abandon our lives but to be thankful for what we have and the choices we have.
To understand that what we have is a privilege and by definition it could be taken away at any time.
And lastly to ensure our goals and dreams are about people, passion and purpose rather than money toys and glory.
I have known Dean for a few months now and I am always so impressed with his Passion for what he does. His love for helping people inspires me.
Thanks Dean. Keep Changing the World. We appreciate it. — Stephen M, Auckland, New Zealand
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