Real Estate Bubble: An aerial view!

It’s worse than I suspected. Last week, I had the chance to fly around the Northern Virginia area in a helicopter. The number of subdivisions being built as far south as Richmond is astounding. I’ve been concerned about this bubble since 2014, and frankly I can’t believe just how big it’s gotten.

Zero percent interest rates have created a massive amount of malinvestment in the Washington, D.C. area. Cranes paint the nation’s capital, and they don’t stop there. Billions continue to be poured into the D.C. Metro line, which is being extended out to the Dulles Airport and beyond. These are the type of projects that are commenced through the vast misallocation of resources that only artificially low interest rates can provide.

It’s been a busy week in the financial world. The Fed raised interest rates, America hit it’s debt ceiling (again) and digital currencies seem more volatile than ever before. Luckily we had Eric Dubin on the show to help sort out some of the things going on in the marketplace.

Be sure to submit your question for Ron Paul, and continue to protect your savings from the Fed with Goldmoney!

Financial Judo Audiobook!

In episode 55, John and I sat down with Joe Luppino-Esposito to talk about the state of the criminal justice system. Phil also covered the malinvestment and misallocation of resources created by Wells Fargo. Check it out!

More good news! The audiobook to Financial Judo is out. If you know someone who is struggling with money, then send them this FREE audiobook narrated by me.

Finally, I’m always on the lookout for “irrational exuberance” and contrarian indicators. Please share some from your area in the comments section below!

Don’t buy a house right now! HOLD!!!

In the movie Braveheart, there’s a memorable scene where Mel Gibson’s character instructs his men to “hold!” The Scots devised a scheme to dismantle the English cavalry, but it would only work if they waited until the very last moment to strike. With the English cavalry bearing down, Wallace and the Scots probably felt pressured to unleash their plan prematurely, but this would surely have caused it to fail.

Like the Scots, many Americans feel pressured to buy a house in this inflated market because “children need a home to grow up in.” This is the emotional plea that you will typically get from the National Association of Realtors (NAR) and organizations like it.  They play on your emotions, so you foolishly buy into the propaganda even though homes in many areas are more expensive than they were in 2005-2006.  I’m of the position that kids do need a house, but buying one in this second housing bubble is just foolish.

Home ownership now sits at approximately a 50 year low, and that’s because homes are still too expensive for the average family to afford. Several months ago, a housing economist from Zillow reported that it is still a seller’s market with high prices, low inventory, and even bidding wars. Call me crazy, but I’ve always wanted to buy things when they’re on sale.  In many ways this market is more expensive than the one before the 2008 financial crisis because real wages have declined and the net worth of most middle class families has been cut in half.

According to a recently released NAR report, existing home sales for February 2016 were down 7.1%! This could be the start of the softness that I have been looking for, but by no means does it mean that renters should commence their house hunting. Continue to stay on the sidelines while keeping a watchful eye on home prices in your area.  I like to save homes on my Zillow app and check back periodically to see the settlement price.  Although there is little inventory, and listings are moving fast here in Northern VA, homes are usually selling below asking and well below the “Zestimate.”

Like children who have been promised candy, most Americans want it and they want it now! But if you can have the discipline to “hold”, then there is going to be a handsome reward for you after this second housing bubble bursts.

Super Bowl 50: A Consumer Case Study

One of the worst commercials of Super Bowl 50 had nothing to do with beer, cars or shaving. It was a commercial from Quicken Loans touting their new “Rocket Mortgages.” For a financial counselor, this commercial instantly made me nauseous. The ad suggested that getting a mortgage should be as easy as ordering a pizza. After you have that brand new overpriced house, it needs to be filled with brand new expensive artifacts. Those artifacts are made by low wage hourly workers who will in turn also buy an overpriced house an attempt to fill it with credit card purchases. The whole disgusting cycle repeats itself until one day someone realizes that their brand new house is falling in value. Instead of mailing in a check, they send their keys instead, and the whole house of cards comes crashing down.

This was the playbook that brought about the 2008 financial crisis, and it’s happening all over again.  Memories are short in the United States, and no one wants to ever focus on the lessons of austere times.  That is why the exact same mistakes are being made all over again.  Fortunately, for most parts of the country, housing prices seemed to have topped and are even falling in some metropolitan areas. Here in Northern Virginia, some homes have been sitting on the market for months without an offer.  Many other homes have been reduced, but not by an amount that will lure renters back into the “dream of home ownership.”

My family has been renting for the last two years since we sold are starter home for a handsome profit.  We just signed another 18 month extension, and locked in our original monthly rent of $2,750 a month.  Why does this matter? Well, our neighbor just listed his similar home for $639,000.  Assuming he gets his asking price (which I highly doubt), the new owner will have a mortgage of almost $3,100 a month (includes $120 HOA dues).  That’s after a 20% down payment of $128,000!

I don’t know about you, but I don’t know that many people who have that much cash lying around right now.  Even if you do have it, why would you want to put it into an illiquid investment like a house?  Let’s say you’re smart and you only make the minimum down payment of 3%.  Your down payment will only be $19,200, but thanks to PMI your monthly mortgage payment skyrockets to $4,081 A MONTH!  That means that I would have to pay $1,350 more per month for the “privilege” of owning in my neighborhood.  Sure, I’ve ignored the “tax benefits” of home ownership, but those are usually wiped out by the maintenance costs.

As I have said before, there’s a reason that home ownership is at a 50 year low.  They cost too much!  I know that the figures I’ve shared are much higher than the median home price and income, but the principles can be applied to your own financial situation.  Do not succumb to the temptation to purchase a house at these prices, even if someone tries to lure you with a cool “Rocket Mortgage” app!

The Big Short: Have we learned our lesson?

The Big Short

I saw The Big Short the day after Christmas, and I can say without reservation that it’s the best film I’ve seen in awhile.  The story is accurate, the acting is superb and complicated financial information is explained so even your grandmother could understand it.  If I had to come up with a single complaint, I’d say the film didn’t blame the Federal Reserve for the housing bubble.  But Michael Lewis didn’t suggest that in his book either.

I went to the 10am matinee at a local cinema, so I joined only two other people in the movie theater.  I found myself gesticulating at the movie screen several times since the environment felt like my own private viewing.  I wasn’t expressing outrage over what has happened in the past because we already know how artificially low interest rates, no income/no job (ninja) loans and fraudulent appraisals wrecked the U.S. housing market.  What infuriates me is that we are doing all of the same things again!

The house flipping shows are back in full force on HGTV with programs like Property Virgins and Flip or FlopInterest only loans are back and other subprime loans have returned while banks try to scrape the bottom of the applicant barrel.  Armando Montelongo is back on infomercials and he is ready to teach you how to become a house flipping millionaire just like him! And I still hear people saying that buying a house is a “good investment.” As Mark Baum (played by Steve Carell) says in the film, “We live in an era of fraud.”

The fraud continues today, and there is no one with the courage to stop it.  Since the housing bubble, our public servants have become feckless matadors allowing bulls of deceit to distort our financial markets with impunity.  Former Attorney General Eric Holder admitted as much in 2013 stating, “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.” Holder now works for Covington & Burling where he earns millions defending Wall Street firms.

Michael Blurry, played by Christian Bale in the film, now says that another crisis is looming thanks to the Federal Reserve’s money printing and ZIRP.  You don’t have to be a billionaire genius to know that, but his statements surely lends credibility to those of us who have been saying this for some time now.  The truth is that America has not learned its lesson, so we are commencing another financial crisis worse than 2008.  The collapse will gain momentum in 2016, and the worst of it should be revealed no later than 2018.  By the end of this decade, Michael Lewis will need to write another book, but hopefully he will get the real culprit right this time.

Renting: The New American Dream

rent own

Janet Yellen thinks the economy is doing so well that next week she may raise interest rates for the first time in nine years.  But many of America’s renters would probably beg to differ.  Twenty-five percent of Americans spend more than 50% of their take home pay on rent.  This amounts to 11.4 million people who are simply working to pay their landlord’s mortgage.  With less than 50% of their take home available, many of these rent burdened folks have little to contribute toward an emergency fund or retirement account.

What’s more frightening is that over half of all renters are over the age of 40!  The number of Americans now renting is at a 30 year high while the homeownership rate currently sits at a 48 year low.  Many of these renters are unemployed or underemployed with insurmountable credit card, student loan and vehicle loan debt.  It’s now clear to everyone that the National Association of Realtors dream of homeownership for all Americans is dead.  Well, at least temporarily.

The sustainability of this system is as likely as Bernie Madoff’s investment fraud.  Eventually, market forces will reveal that home prices are too high for real American incomes.  In many markets, home prices will need to fall by 40-50% to reasonably turn renters into homeowners again, and I can prove it.  Currently, the median priced American home is around $280,00, but the median income is only about $55,000.  This means that a typical house is about 5 times a typical income, which is 2-3 times greater for you than it was for your grandparents (1.5-2 times income).

Let’s say that you are lucky enough to have the $56,000 (20%) down payment for a $280,000 house.  Your monthly mortgage payment will be approximatley $1,400.  You earn $2,300 a pay day 24 times a year, but it’s only about $1,700 after Uncle Sam steals his “fair share.”  This typical American will need to spend over 40% of his take home pay on their mortgage, and that’s why Americans are renting.  Most of them can’t even come up with $500 for an emergency, let alone a 20% down payment.  And even if they could, 40% of their take home pay doesn’t leave room to make burdensome debt payments.

In order for our median income renter to be able to afford a home, he should only have to spend 25% or about $850 a month.  To accomplish this at today’s rates (3.75%), the home would have to cost about $165,000 or 40% less than it does now.  This will still be three times greater than the median income, but that will be a much needed improvement to what we have now.  A $165,000 home price would have a down payment of $33,000, which is $23,000 lower (40% off) than it is now.

Renters will become owners again, but not until the U.S. experiences another inevitable correction like we did in 2008.

Spinning Gold into String

Rumpel

Freddie Mac CEO Donald Layton recently told an audience at the Mortgage Bankers Association annual convention in San Diego that loans with down payments as low as 3% are a net positive and that more low down payment products could be on their way.  Layton lauded the programs because they have boosted homeownership, but why is homeownership still at its lowest level since 1967?  Well that’s easy.  Housing is too expensive, and it’s thanks to these very loan products that Layton praises!

If were allowed to have a real market in housing, maybe housing could come down to prices that wouldn’t require these phony products to begin with.  Let me explain.  Suppose we had real prices that weren’t propped up by the government and artificially low interest rates.  Interest rates would increase to 1990 levels, and most of these housing prices would be cut by at least half.  A $200,000 house would drop to $100,000 or less.  The down payment, property taxes, and mortgage insurance would all become more affordable.  Rents for properties would drop, so Americans saving to buy a house could do so faster.  They wouldn’t have to live in a place they don’t own while coughing of up a sizable portion of their net income each month.  But none of this is allowed to happen because government has set out to make housing more “affordable.”

Just like health care, college and everything else the government touches, prices skyrockets leaving the poor and middle class with a lower standard of living.  Government is like a reverse Rumpelstiltskin spinning gold into string, and it’s the the youngest working generation who will pay the price.  Due to all the big government Americans now love, many millennials will be working well into their 70s before retirement is an option.  Don’t get me wrong.  I think work is great as long as you’re doing what you love.  The fact is that most millenials will be working not because they want to, but rather because the have to.  According to Landon Dowdy, “A new report predicts that young workers will need to work until they’re 75 on average to save enough for retirement.  Researchers at Nerdwallet, the financial site that published the report Wednesday, blamed rising rents and student debt levels.”

That’s just half the problem.  Millennials will also be expected to support the social security, health care and housing Ponzi schemes that their parents voted for.  Thanks Mom and Dad.  Of the three frauds mentioned, social security is probably the worst.  Money is stolen from you over the course of a 30 or 40 year career with the promise that good ‘ol Uncle Sam will support you during your golden years.  But even ordinary Americans are beginning to question Sam’s creditworthiness.  Nick Giambruno reports, “Recently, the government announced that there would be no Social Security benefit increase next year. That’s only happened twice before in the past 40 years.  You see, the government links Social Security benefit increases to their own measure of inflation. If the government says “no inflation” then there are no benefit increases. It’s like letting a student grade his own paper.”

We can only hope that this government flunks out of school soon enough to give millennials a real chance at retirement.

It’s NOT Different This Time

Episode 21.001CNBC still thinks it is “different this time.”  In a post by Diana Olick entitled Frothy, yes, but don’t call it a housing bubble, she writes “This is not, however, a “housing bubble,” because by definition, an economic bubble eventually bursts, and home prices are very unlikely to fall.”  Olick continues, “…even if the Federal Reserve hikes its lending rate, mortgage rates are unlikely to jump dramatically.”  Well neither part is true, so please erase the last two sentences from your memory.

You see, homeownership is at it’s lowest level since 1967 because average Americans can only afford to rent something small.  They would probably love to have a single family home with a yard for the kids, but exorbitant home prices keep these families in apartments instead.  Interest rates need to go up so they can place downward pressure on home prices.  This will cause the monthly payment on a 30 year mortgage to eventually become more affordable for the nation’s renters.

Another thing to note is that a fair portion of purchasers are only in the market as an investment opportunity.  Olick admits this writing, “About one-third of buyers today are not using any financing, which suggests still strong investor demand.”  Many investors are jumping into the housing market because they’re temporarily able to cash flow these overpriced properties.  The profits landlords are making seem attractive in the short run since the stock market is already rolling over and saving has become obsolete.  These investors will be disappointed in the long-run though because tenants will eventually be able to afford their own place for an even lower monthly payment.

Once these landlords realize that their property is empty, then they’ll try to unload their property at fire sale prices.  The whole scene will turn into a vicious cycle, ultimately resulting in the pendulum swinging to the highest homeownership rate in U.S. history.  When measured in terms of precious metals, these homes will represent a tremendous value for the gold and silver bugs.

It may sound like the bursting of the second housing bubble will lead to economic prosperity, but that certainly won’t be the case.  Increased rates are going to stifle the economy in ways not seen since the Great Depression.  What’s worse is that these increases probably won’t keep up with the real cost of living, so prices will continue to rise on everyday items while jobs dry up.  This stagnation of rising prices in a worsening economy will be too painful for the Fed to ignore.  Most likey, the Fed will announce successive rounds of quantitative easing that will make the first three look modest.  Before anyone even realizes, the Fed could take the country into a hyper-inflationary depression (which I think is very likely) and unleash the Greater Depression ahead.

“Fool Me Once…

Home-Underwater

There’s an old expression that George W. Bush once butchered.  “Fool me once, shame on you.  Fool me twice, shame on me.”  This adage certainly applies to the biggest financial collapse in recent memory, the housing bubble.  Most adults over the age of thirty vividly remember the consequences of the bubble and subsequent credit crisis.  The fear of market contagion and the collapse of Lehman Brothers led then Treasury Secretary Hank Paulson to orchestrate a bail out of the country’s largest banks.  Paulson created TARP, the Troubled Asset Relief Program, and the U.S. tax payer suddenly became responsible for the poor decisions of Wall Street businessmen.  Although Americans have spent an exceptional amount of time focused on these crooks since the crisis, the real cause of the housing bubble seems to have been forgotten or purposely overlooked.  Lucky for you, I still remember.

Back in late 90’s, the Clinton Administration wanted more people to be able to afford a home.  The Federal Reserve, run by “The Maestro” Alan Greenspan, accommodated the goal by decreasing interest rates.  Lax lending standards became the norm, and Fannie Mae and Freddie Mac guaranteed all mortgage loans.  This provided defunct firms like Countrywide with the moral hazard it needed to make a mortgage to anyone who could fog a mirror.  The practice picked up even more speed during the Bush years, and finally ended in collapse during the financial crisis of 2008.

During the mania, there were many indicators that there was a bubble brewing in the marketplace.  A story of Las Vegas hairdresser purchasing multiple homes with interest only mortgages stands out as a glittering jewel of foolishness. Television shows like Flip This House persuaded Americans that anyone could become a real estate mogul in the new housing economy.  Anecdotally, one of the worst students from my high school told me in 2005 that he found a job working for a mortgage broker.  After the bubble burst, I swore that I would never be duped by such irrational exuberance again, and I would make sure to look for these contra-indicators in the future.

Well, they’re back!  The house flipping shows are back in full force on HGTV with programs like Property Virgins and Flip or FlopInterest only loans are back and other subprime loans have returned while banks try to scrape the bottom of the applicant barrel.  Although I don’t personally know any fools working in the mortgage industry this time around, I still hear people saying that a house is a good investment.  To that, I’ll borrow the words of W and say, “You’re not gonna fool me again.”