A.D. 2013 - The Worst of Times?

My Two Cents

By Andy Sutton / GoldSeek.com

We got a rare moment today – it’s what I’m going to call a truth nugget. Anyone who reads this column or any one of several hundred others already knows this, but as you all well know there is nothing to see until the mainstream press declares it to be so. Today we were finally told that no, there will be no exit from the not-so-USFed’s quantitative easing program. Ever. Like I said before, this is no revelation; anyone with even the slightest of brainwaves could easily figure this out without the watchful, benevolent guidance of CNBC.

Please don’t tell us you’re going to make us endure another one of those ‘the fed is evil’ type columns? Nope. This week we’re going to talk about housing and sequestration and connect some dots. Before anyone gets the wrong idea, I am not going to write about which political figure did or said what. Frankly, I couldn’t care less. I truly mean that.

“The headlines read: ‘These are the worst of times’. I do believe it’s true.”

Those of you who have been around from the beginning know that occasionally I like to tie song lyrics into these columns. It makes it a bit more interesting for the reader and allows me to indulge in a rare moment of nostalgia from (usually) younger days. This week’s throwback is ‘The Best of Times’, an early 1980s ballad by Styx.

We have never before seen such a dichotomy in terms of the information being provided to us by governments, banks, and media outlets on a global scale. When they want cover to embark upon or continue absurd policies they tell us the world is ending. However, when they want to goose markets or get re-elected, then we’ve got a robust economic recovery going on. PLEASE go spend some money and yes, borrow it if you have to. There are a couple of shams I want to discuss this week. The first is this robust housing recovery we have going on. The second is the sequester that is allegedly supposed to start later this week. The word going into the close of markets today, Thursday February 28, is that there will be no deal and that the sequester will go on as planned – at least for a while.

Housing – Act Two of the Great Repo

In all honesty, this probably isn’t the worst time to buy a house. The worst time (so far) was about 5 years ago. I say that with tongue in cheek and a qualification or two. The first is that now is an absolutely terrible time to mortgage a property. What? Mortgage rates are at all-time lows, and you can even get a no money down mortgage! How can this be a bad time to buy the home of your dreams?

Believe it or not the answer to this question goes all the way back to the first few sentences of this essay. But before we get to that, let’s consider a few things. First is the fact that we have below-equilibrium interest rates. They’re going to go up. So those of you who are hoping to buy in now and then do a refinance in a year or three to get some cash and/or a lower payment – forget about it. The low rates are part of the enticement and the trap.

It is also abundantly clear that the media has no clue about supply and demand either. They also don’t understand demographics. I wouldn’t expect much from the National Association of Realtors either. Their job is to pump up the market. The picture below is yours truly in Ocean City, Maryland in August of 2007 posing in front of a local real estate office. If you think your local realtor really understands what is going on, forget that too. There are a few who get it, but these folks make their living by selling properties, not by chasing buyers away with the truth.

Another long-forgotten drag on the housing market are the baby boomers. Assisted living facilities are going up all over the country. The days of the nuclear family are pretty much over. That means that instead of mom and dad going to live with kids, they’re going into assisted living, then nursing homes. This means they’re going to be selling their primary homes. Or if they give them to their kids, the kids will be selling theirs. No matter how all the particulars work out, there is going to be modest downward pressure on prices for an extended period of time at a bare minimum. And don’t forget we still have publicly owned homebuilders out there who are under fiduciary obligation to their shareholders to engage in their stated business, which in this case means they’re adding to the problem.

Additionally, don’t forget that many boomer properties are not paid off. Mortgage expenses are one of the many factors hounding today’s American baby boomers, most of whom say they are nowhere near retiring. According to the National Center for Policy Analysis:

“From 1990 to 2010 the share of expenditures on housing including principal, mortgage interest, taxes, maintenance and insurance for both age groups increased 25%. Interestingly, the 55 to 64 year olds saw half of the increase in theinterest portion of housing expenditures even though mortgage interest rates have dropped over time. (emphasis mine) From the report:

Are baby boomers buying more home than they can afford or are prices for a basic home simply outpacing income growth? The median house size has increased from 2,080 square feet in 1990 to 2,392 square feet in 2010. Since the mid-1990s, the Federal Housing Authority allowed more borrowers to qualify for loans with lower down payments. This action began a proliferation of loans that required little or no down payment. Furthermore, after 2000, home price growth outpaced income growth, peaking in 2004 and 2005. Home prices began falling dramatically by the end of 2008, but many households were underwater, owing more on their mortgages than their homes were worth.”

Even in Australia, 25% of baby boomers are still paying mortgages. Myself and many others have remarked countless times since the housing bubble burst that the entire exercise was nothing more than a property grab. Now, go back to the first paragraph and read about the not-so-USFed and its never-ending QE program. They’re buying, among other things, the mortgages for residential real estate. Your mortgage. Your neighbor’s mortgage.

The bottom line is that the banking system will sell the same house ten times over and take a loss ten times after a foreclosure because to them it really doesn’t matter. They don’t have to expend labor to get the funds to engage in this activity. They create it from nothing. You, on the other hand, work your fingers to the bone to make payments. Don’t ever forget that. This is not the American Dream; it is a nightmare. When it all goes bust, instead of creating more funny money and declaring themselves solvent (which they’ve pretty much done anyway), they put your kids on the hook for the bailout tab through their lackeys in Congress.

I’ll say it one final time: All of these palliatives to reinvigorate the housing market such as no money down mortgages and historic low rates are nothing more than another ramp job to con people into taking on more debt. To make you more of a slave tomorrow than you are today. The mechanism is already in motion for the banks to come out of this owning every single piece of mortgaged property in America. And what they don’t get, we’ll end up conveying to the Chinese or another creditor as a partial settlement for the trillions of external debt. It is already happening. In conclusion – buyer beware.

“We’ll take the best, forget the rest. And someday we’ll find these are the best of times.”

Sequester the Molester – A Study in Self-Imposed ‘Austerity’?

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