The ‘Catastrophic Change’ in the U.S. Real Estate Market
Housing-Market / US Housing Sep 23, 2010 - 03:17 AM GMTBy: Barry_M_Ferguson
We learned today (9/22/10) from our illustrious US government that new housing starts jumped 10.5% in August. Don’t get exited. Almost all of the gain was from apartment construction. This month-over-month burst in activity is still 9% below last year’s level. Nevertheless, the recession has been declared dead, the stock market has appreciated every day since the conclusion of Bernanke’s August Jackson Hole, Wyoming meeting, and the government needs affirmation of both events. But like most people with a functioning brain cell, I have eyes and ears. Here are my observations on real estate from my little vantage point.
Two weeks ago, the largest private luxury home builder in our area (population of over one million in metro area) called it quits. The company specialized in houses costing a half million dollars on up. They said they would finish what they had started but expected to be out of business by the beginning of next year (2011). They have been in business for over 30 years. In 2006, the company won the ‘Builder of the Year’ award from Professional Builder magazine. In their statement, the company’s president said that real estate had experienced a “catastrophic change”. They went on to say “…that the real estate market has been and continues to be worse than any of us thought even remotely possible”. Cheer up, fellows! The recession is over and ‘recovery’ is here!
Okay, one builder does not make a trend. So this past week, there was an article in our local paper about a developer in my immediate proximity that is going before a local township to try and get a residential construction ordinance changed. The area under development requires builders to build all brick, large houses on at least one-half acre lots. There are only a few houses that have been built in this development over the past few years and the developer has had two of the three builders withdraw from the project. The developer says he has not so much as sold a single lot in the last 18 months. According to the developer, he needs the ordinance to be changed so he can build higher density housing with only brick facades. Or else, he faces foreclosure.
There is a development literally around the block from my residence that was originally deeded to about 36 lots 3 years ago. Each lot was at least one acre and each house would sell for at least a half-million. About six lots have been developed and one of the homes still stands vacant. No other lots are under development. To my knowledge, none of the other lots have even been sold.
Granted, I am sharing empirical evidence from my geographic area. However, our government is like a child molester and they are trying everything in their power to entice us into the back of their van so they can do God knows what to us. They will tell us anything. They will tempt us with all kinds of candy. It is time we all use our common sense and deductive logic powered by observation. From where I sit, real estate is in a depression and it’s getting worse by the month. Sadly, I see nothing on the horizon that will help real estate for the next generation. Why does it matter? Because, the US is a FIRE economy.
The acronym FIRE stands for ‘Finance, Insurance, Real Estate’. By BEA stats, this is over one-third of the US GDP. If real estate is in a depression, we must acknowledge that finance and insurance can’t be far behind as real estate stokes both finance and insurance. The result is sobering.
Housing valuation is a large percentage of what we call ‘net worth’. The ‘catastrophic change’ in real estate has shaved about $11 trillion from America’s net worth over the past two years. If you want the numbers, net worth peaked in 2007 at $64 trillion, fell to $48 trillion in 2009, and bounced back to $53 trillion in 2010. (Yes, I am rounding by ‘insignificant hundred billions.) And we are told, ‘recovery’ is at hand? Let’s look at how the con game is played.
This past week, two statistics from the second quarter of 2010 caught my distrustful eye. One, household net worth fell 2.8%. Two, household debt fell a record 2.3% - the 9th straight decline. The falling net worth is alarming but we are supposed to believe that Americans are getting their financial house in order by cutting back debt. Net worth fell 2.8% but not to worry – household debt fell an almost equal percentage of 2.3%. Things are getting better. Or, are they? The government and the media want us to believe! The media is stupid, ignorant, incompetent, and completely bought and controlled by the illuminati that runs the show. Let’s look closely at the numbers.
Household debt. According to the Federal Reserve Board, household debt equals $13.5 trillion dollars and it decreased by 2.3% in Q2. So household debt fell $310 billion ($13.5 trillion times 1.023% minus $13.5 trillion) The FDIC says banks wrote off more than $49 billion in loans in the second quarter. Most major banks report writing off close to 10% of delinquent credit card debt. According to the Federal Reserve's G.19 report on consumer credit, March 2010, total credit card debt was $852.6 billion. 10% of that would be $85.3 billion (I am rounding by hundred millions.) I think it would be safe to assume, therefore, that some of the cash for clunkers and cash for washer/ dryers has also resulted in credit write offs. So, even as the government likes to portray the decline in consumer debt as a positive, most certainly it is due mostly to charge offs from the credit issuers. And, there is more in the pipeline. According to Fitch Ratings (April, 2010), the credit card delinquency rate was 4.27%. Foreclosures are widely expected to exceed one million this year.
Net worth. According to the Federal Reserve Board, household net worth is $53.5 trillion dollars. That 2.8% decline amounts to $1.5 trillion. Thus we have the old misdirection trick. The percentages are misleading in that debt is falling but so is net worth. Only in this case, consumers have cut credit by $310 billion while they have lost net worth of $1.5 trillion. In truth, consumer debt is actually increasing as a percentage of net worth! Surely the debt reduction can be tied to an increase in bankruptcies. According to Realtytrac, August 2010 foreclosures were up 4% from July. 1 in 381 home owners received a foreclosure notice in August. There are now some 7 million homes in the US either currently vacant or under foreclosure. In June, 2010, mortgage debt (from Fed data) was $14.1 trillion. We know from current statistics that at least 10% or more of mortgages are either delinquent or in foreclosure. A statistical continuation would mean that another $1.4 trillion of net worth will be imperiled next year due to the catastrophic change in real estate.
The government’s response has been to try and manipulate the real estate market higher. They can’t bring the con game to a conclusion so they are now trying to extend it. So, they managed to instigate a slight uptick in the second quarter home sales with a tax credit to buyers. The first time home buyer tax credit may have suckered in buyers, but like most government orchestrated programs, it too was a scam. To qualify, a buyer could only have an income of less than $125,000 (ratcheted up from $75,000). The credit was 10% the value of the purchase up to $8,000. So, if a buyer bought an average priced house of $184,000, they would be eligible to claim the $8,000. That amounts to a 4% refund. However, if the home purchased in, say April, were to lose 4.5% of its value in the coming months, the proud deal-making homeowner will suffer a loss even including the tax credit. In fact, this is happening around the country as the government continues to swindle the populace in real estate deals. To that point, a story from Tampa, Florida said the $8,000 tax credit allowed sellers to raise prices that are now down $15,000 on average. According to Zillow.com, the average home price at the end of September, 2010 was $184,000 – down .5% from August. If you are interested, the average foreclosure price was $154,000. Some would even argue for more tax credits and an extension of the program. Thank you, Sir! May I have another!
Why does the government feel so compelled to intervene and manipulate? The ultimate answer is they need to prop up the economy to drive tax revenues to support interest coupons on the Treasury debt that justify the credit default swaps that allow for the perpetuation of the sovereign debt growth trend. In other words, we are broke but we can stave off the repo man for a few more quarters with some trickery. We do know that the home buyer tax credits pushed up real estate sales and prices temporarily for the second quarter. In fact, the decrease in net worth was due to a decline in stocks and mutual funds to the tune of $1.9 trillion in Q2 2010. The Fed puts the value of stocks and mutual funds at $14.9 trillion.
Given the catastrophic change in real estate, doesn’t it make sense that the trend will continue? Doesn’t it also make sense that the Fed emerged from their Jackson Hole meeting at the beginning of September with a buy strategy meant to drive the stock and mutual fund world higher? A trillion dollar hit to real estate can be offset with a trillion dollar rise in stocks. Let’s see. A 10% rise in a $14.9 trillion dollar pool of stocks and mutual funds would be about $1.5 trillion dollars. Since the Dow was at 10,000 when Bernanke parted Jackson Hole, it is now up over 7% in 14 trading days in statistically the worst stock performance month of the year. Third quarter is almost over and our hero Ben doesn’t want anybody worried about their dwindling net worth when their statements arrive. At least, not when he can jack the stock market up as an offset. Besides, that will take our minds off the catastrophic change in real estate.
I’m not a real estate expert. I’m just a guy with a calculator and a thirst for truth.
Barry M. Ferguson, RFC
President, BMF Investments, Inc.
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Barry M. Ferguson, RFC is President and founder of BMF Investments, Inc. - a fee-based Investment Advisor in Charlotte, NC. He manages several different portfolios that are designed to be market driven and actively managed. Barry shares his unique perspective through his irreverent and very popular newsletter, Barry’s Bulls, authored the book, Navigating the Mind Fields of Investing Money, lectures on investing, and contributes investment articles to various professional publications. He is a member of the International Association of Registered Financial Consultants, the International Speakers Network, and was presented with the prestigious Cato Award for Distinguished Journalism in the Field of Financial Services in 2009.
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