Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

U.S. Housing Market Setting Up for Another Crash

Housing-Market / US Housing Dec 17, 2013 - 07:46 PM GMT

By: EconMatters

Housing-Market

All that Glitters, is not Gold

The housing market appears to be in better shape than it really is and investors should be wary regarding investing in Housing stocks, investing in property not as a primary residence, and should conduct a thorough analysis of their own financial obligations with regards to their primary residence.


In many parts of the world real estate prices have risen quite substantially due to several factors, one is foreign buyers trying to move money out of their home countries for security purposes. Another is institutional investors hoping to buy low and sell high in an investment strategy, and then there are the small to medium size professional flippers who buy properties, make some cosmetic changes, and hope to sell these properties into an improving market because supply is artificially tighter, and the broader economy is better than when they originally purchased the properties.

Macro Headwinds

However, there are a couple of macro dynamics that are going to provide significant headwinds for the housing market. One is taxes, and all the financial obligations that are rolled up into property taxes. As governments continue to spend more and more, local as well as state, jurisdictional, and federal the fundamental result is that property taxes continue to rise on real estate.

The property taxes are the real killers in real estate because a homeowner can even diligently pay off their mortgage and owe nothing on their home (which is becoming rarer these days), but still even in these best of circumstances the future property tax obligations are going to catch up to the homeowners as their income shrinks once they retire.

Subsequently these individuals incomes shrink drastically, but the property taxes continue to escalate as these local and state jurisdictions need to get more money to support poor fiscal spending policies, and eventually homeowners have to sell their homes because they cannot afford a decade`s worth of property taxes.

Fortunes Acquired Elsewhere Often Get Lost in Real Estate Market Crashes

The more expensive the real estate the higher the taxes which when the tide goes out in the economy, and people become overextended, then they have to start dumping real estate, and inevitably there is a huge margin call that runs through all financial assets, and hits real estate especially hard.

Many multi-millionaires have lost most of their net worth mainly due to an overextension on real estate when times are good to find that the haircut on these properties when they need to sell via a fire sale just cripples them financially.

The dynamic is as follows: They need to sell, but there are many people in this boat, the few buyers out there get spooked, prices fall sharply, but they still need to sell, so these sellers are forced to take 50 to 60% losses on these properties. There goes all the stored wealth like a vanishing mirage that the investors were trying to protect by investing in hard assets – it is really a vicious, pernicious cycle that repeats itself over and over in the real estate market.

Foreigners Not Exempt

This applies to foreign buyers as well, when they need the money during a reset in other financial areas, they are not going to be able to afford the property taxes on these properties, and local jurisdictions constantly needing more money, and effectively raising these property taxes every year, only makes the problem worse, and sets up the future drivers for the inevitable crash in real estate. Ironically, this results in the local jurisdictions not collecting any taxes at all on the properties for substantial time periods.

Therefore, many foreigners who think that real estate in first world countries are safe and secure wealth storage vehicles when they buy at the top of the market with these offshoring strategies can lose 60% and more of their net worth in a market crash.

This is one of the downfalls of all cash transactions when buying real estate at elevated market levels. Investors can walk away from mortgages like they did in 2007, but with 20 and 30% down payments to secure loans these days from banks; it is still a substantial loss for investors on any market re-set.

Foreigners all hiding money away in these properties are in for a rude surprise when they calculate their future tax obligations over just a ten year period. These people may or may not be able to afford the real estate on a long-term basis, but most of these people will definitely not be able to afford the property taxes on these purchases on a long-term basis without a consistent, perpetual revenue stream.

Likewise, since many of these financial resources were acquired in less than legitimate ways, these revenue streams are not consistently perpetual in nature which is required to meet perpetually consistent tax obligations at elevated levels on expensive real estate.

Affordability Issues


The other problem is that property prices in several parts of the country are too high relative to incomes, think in terms of the two coasts, but there are many other areas as well. This means consumers are paying too high a percentage of their disposable income on housing.

This always means that the market will eventually have to reset, or be forced to reset because any small change in the local labor market causes disproportionate reverberations in the real estate values, and substantially increases the likelihood of add-on contagion which severally makes these markets susceptible to large price drops in value for these expensive real estate markets. In short, you get a market crash in real estate values like we had in 2007.


Demographic Shifts

The final worry is that with the large population of baby boomers now retiring, many of these individuals will soon realize that they don’t have the nest egg they thought they had once their incomes are reduced because they are no longer working full time.


Once they start factoring in property taxes for 15 years on higher appraised values for their homes, and they always go up for tax purposes, and the fact that comps are artificially high because home owners have to make major investments in their homes to market these properties, thereby raising taxable obligations on all homeowners in the process even though most homes haven`t been upgraded. Many of these baby boomers are going to be forced to sell their homes, and turn to the rental market so that they can live off the home equity that they have built up over the years.

This dynamic and macro driver would be very bearish for the real estate market, more supply means market saturation, and this leads to lower prices, which just reinforces the deflationary cycle causing other deflationary outcomes in the overall local economy. The baby boomer demographics are not favorable for the housing market, and this is a negative for the industry as a whole.

Final Thoughts

There are opportunities in the real estate market, but unfortunately most people don`t understand the importance of having cash on the sidelines waiting for these inevitable market crashes to buy at fire sale prices. Most investors get tied up in investments trying to get a return that they get stuck, and when the market crashes and properties are 70% off of their highs; this is the time to buy real estate.

However, the trick is have the cash available, and not tied up in other illiquid investments. And investments can be illiquid for a myriad of reasons, such as usually liquid investments being heavily underwater due to the same market forces that are causing the housing market to crash.

Cash truly on the sidelines is an undervalued investment principle, and one of the hardest long-term investment strategies to learn. Investors are always thinking about returns on an annual basis instead of sitting on cash and being in the position to buy when there are no buyers in markets.

Investors need to factor in the value of market timing in an investment strategy that focuses on long-term returns over a 10-year time period. Investors are so worried about 5% returns on their portfolios and beating inflation that they miss the 70% returns in 16 months type investments because they had no cash on the sidelines available for these market crash opportunities.

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2013 Copyright EconMatters - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

EconMatters Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules