The fiscal cliff story is playing out just as I expected: The early, happy talk of compromise is slowly dissolving like morning fog in the summer sun. President Obama is asking for as much as $1.6 TRILLION in new tax revenue, far more than Republicans are likely willing to accept, while Republicans are standing pat on their resistance to tax rate increases.
The European debt crisis is also playing out as forecast. Greece’s economy shrank a whopping 7.2 percent in the third quarter … European industrial production and German investor confidence both just tanked … and widespread anti-austerity strikes swept over the Continent this week.
But what about the real estate market? I haven’t had much to say there because it’s been more of the same in that corner of the economy. But I’m now seeing some new challenges and opportunities there, so it’s time to circle back!
A Recovery? Yes.
But Not a Vigorous One!
The real estate market collapse of 2005-2010 was the worst in the history of the U.S. From peak to trough, existing home sales fell 53 percent … new home sales dropped 80 percent … housing starts tanked 79 percent … and home prices nationwide slumped 35 percent. Many local markets fared even worse too, with a few condos and townhouses in my neck of the woods going for 50 percent to 60 percent off peak prices!
|Homebuilding started to recover in 2011.|
But by virtually any measure — sales, construction, inventory, pricing, and so on — housing started to recover in 2011. To cite just a few examples, the supply of vacant homes for sale or rent has dropped by almost a million units to around 13.6 million — the lowest level in four years. And after declining as much as 19 percent year-over-year in 2009, the S&P/Case-Shiller house price index is now rising at a rate of about 2 percent.
That’s the good news.
The not-so-good news is that we’re still far, far below the levels of activity we saw during the bubble. Housing starts are STILL running at an annualized pace of just 870,000 units, for instance. That compares to around 2.2 million in the mid-2000s! The Case-Shiller index I mentioned earlier is also far from rising at the 15 percent to 17 percent rates we saw back then.
So yes, we’ve had a recovery of sorts. But no, it has not been a vigorous one. That fits with my forecast of a post-bubble, subdued environment for housing.
What I’m MOST Concerned About
When it Comes to Real Estate
So that’s the good news and the not-so-good news. What’s the bad? One of the key drivers of this recovery is a downright risky one!
You see, real estate is getting swept up in the same “yield insanity” trade as other asset classes. With Treasuries and bank accounts yielding next to nothing, and the Federal Reserve artificially suppressing interest rates, income-seeking investors are desperate.
They’ve been dog-piling into anything and everything that yields more than Treasuries — including emerging market bonds, junk bonds, real estate investment trusts (REITs) … and physical real estate! The idea? Buy cheap homes and rent them out to generate more yield than you’d get from a relatively safe bond.
That’s all well and good if done in moderation. But moderation isn’t what I’m seeing. Figures from the National Association of Realtors tell the tale: A whopping 27 percent of the buyers who purchased real estate in 2011 did so as an investment.
That is far above the 17 percent rate of the previous two years and only one point shy of the all-time record of 28 percent. When was that set? You guessed it — 2005, right before the market crashed!
As for REIT stocks, they haven’t been able to get out of their own way since they had a blow off top in September — one created by Ben Bernanke’s infamous promise of “QE Infinity.” The benchmark ETF for the sector, the iShares Dow Jones U.S. Real Estate Index Fund (IYR), just fell to its lowest level since late June.
Could this mean Bernanke’s ridiculous strategy of trying to inflate asset prices far beyond their intrinsic value is failing? You’re darn right it could! And does that mean investor sentiment could sour on real estate again, taking some of the steam out of the recovery? Right again!
I already advised you multiple times to lighten up by taking profits, and put some protection in place via select hedges. So you should be sitting pretty through this pullback. I believe we’ll know very soon if that pullback is going to turn into something worse. And if it does, I’ll have more recommendations for certain!
Until next time,
P.S. I wrote extensively about “yield insanity” in the November issue of my Safe Money Report. And I gave my members specific instructions on how to invest cautiously, with protection against a worst-case scenario. To learn how you can join them, RISK FREE, click here.