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The Real Estate Market in 2030
A number of analysts, and even some of those in the real estate industry, are finally coming around to the depressing conclusion that there will never be a recovery in residential real estate. Long time readers of this letter know too well that I have been hugely negative on the sector since late 2005, when I unloaded all of my holdings (click here for “The Hard Truth About Residential Real Estate” at http://www.madhedgefundtrader.com/may_26__2010.html ). However, I believe that “forever” may be on the extreme side. Personally, I believe there will be great opportunities in real estate starting in 2030.
Let’s back up for a second and review where the great bull market of 1950-2007 came from. That’s when a mere 50 million members of the “greatest generation”, those born from 1920 to 1945, were chased by 80 million baby boomers born from 1946-1962. There was a chronic shortage of housing, with the extra 30 million never hesitating to borrow more to pay higher prices. When my parents got married in 1949, they were only able to land a dingy apartment in a crummy Los Angeles neighborhood because he was an ex-Marine. This is where our suburbs came from.
Since 2005, the tables have turned. There are now 80 million baby boomers attempting to unload dwellings on 65 million generation Xer’s who earn less than their parents, marking down prices as fast as they can. As a result, the Federal Reserve thinks that 50% of American homeowners either have negative equity, or less than 10% equity, which amounts to nearly zero after you take out sales commissions and closing costs. That comes to 70 million homes. Don’t count on selling you house to your kids, especially if they are still living rent free in the basement.
The good news is that the next bull market in housing starts in 20 years. That’s when 85 million millennials, those born from 1988 to yesterday, start competing to buy homes from only 65 million gen Xer’s. By then, house prices will be a lot cheaper than they are today in real terms. The next interest rate spike that QEII guarantees will probably knock another 25% off real estate prices. Think 1982 again. Fannie Mae and Freddie Mac will be long gone, meaning that the 30 year conventional mortgage will cease to exist.
All future home purchases will be financed with adjustable rate mortgages, forcing homebuyers to assume interest rate risk, as they already do in most of the developed world. With the US budget deficit problems persisting beyond the horizon, the home mortgage interest deduction is an endangered species, and its demise will chop another 10% off home values.
To make matters worse, Ben Bernanke’s current massive monetary expansion assures that there will be one at least one, and possible two interest rate spikes by 2030. If you think the real estate market is bad now, wait until mortgage rates hit 18%.
For you millennials just graduating from college now, this is a best case scenario. It gives you 15 years to save up the substantial down payment banks will require by then. You can then swoop in to cherry pick the best neighborhoods at the bottom of a 25 year bear market. People will no doubt tell you that you are crazy, that renting is the only safe thing to do, and that home ownership is for suckers. That’s what people told me when I bought my first New York coop in 1982 at one tenth its current market price.
Just remember to sell by 2060, because that’s when the next intergenerational residential real estate collapse is expected to ensue. That will leave the next, yet to be named generation, holding the bag, as your grandparents are now.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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This is silly. If you plot home values on a log chart, then home values are a straight line except for the bubble. We've now suffered a predictable undershoot and overshoot, ringing as the market responds poorly to being snapped. Housing will resume it's normal climb. Now whether that climb is inflation driven or in excess of inflation, I'm not sure.
In 2009 I was confident that the bottom of prices was in and that they'd stay flat until 2011 and then resume their climb. But the market is drastically distorted because of foreclosures being delayed or derailed as note holders foolishly and desperately try to avoid booking inevitable losses and as politicians on the take step in and meddle incessantly.
So the climb might not resume in 2011, might instead in 2012, but to claim prices will never rise is not supported by any sensible theory and certainly not by any evidence.
PS: I love it how hard it was to get my ZH account, yet "designer hand bags" apparently blazed through the screening with flying colors. Is Fight Club employing TSA goons for the background checks?
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Too bad all those millienials will have spent their money on Facebook credits to buy virtual goods in their little virtual worlds. Have you seen the kids today? I don't put much faith in any of them...and our education system is partly to blame.
what about all the homes left behind by dead baby boomers?
In a world where building homes is going to be more and more difficult, inheritance is destined to play a large part.
The demographics sound right, but as been pointed out here, there are a few additional factors. By 2030, oil production declines are going to be significant, and the likelihood that we will see a complete conversion to even a partial electronic transportation grid is low for 2030, though almost guaranteed by 2060. This implies that oil prices likely will continue to climb (erratically) over the next two decades relative to inflation, which will in turn mean that desirable real estate distribution patterns will also change (as will urban density patterns).
Foreclosure deterioration, in which houses become uninhabitable, is already reducing the stock of houses, as is the poor quality of what has been produced since about the late 1970s. By 2030, between poor demand keeping home construction low for a decade and a half and physical deterioration, existing home sales will likely continue to stay abysmal, but new home sales will be strong.
DB, I too doubt that the US will exist as the same large political entity by 2030, but that has relatively little bearing on the housing market - even if the country has become two or fourteen smaller countries, people will still need places to live.
Your last paragraph is interesting. I wonder if we get into a hyperinflation state if that might happen. When taxes have to go to over half of a person's real income at the same time entitlements get severely cut there may be chaos.
Walter Williams on the radio posed the very real question of whether different peoples in a country, the U.S. could peaceably separate. Those who want an all knowing, all powerful government with the power to distribute "fairness", income and "social justice" (a laughable term) could live in one place and just have it all. Minimum wage at $25/hr, everyone forced into unions, tax rates as high as you like, 5000 page bills, no transfats in food, free abortions, no guns except government, free healthcare, free housing, free foodstamps, mandatory electric cars...everything! Just do it all and we can all watch!
I will move to the polar opposite...whatever area goes libertarian. Government runs nothing! We make our own contracts for labor, products and services, about 10 regulations against harm, theft and fraud, sound currency (or currencies!), private courts,limited police, autobahns, buy and sell anything you want to anyone you want for whatever you can get including your labor. We fundamentally reject the idea that the purpose of government is to rule citizens and control all of life. It is only to protect our rights and property. That's all.
A guy (FreedomGuy, lol!) can dream, right?
So in your world, a declining access to cheap oil will help the construction of new homes to be sold?
So many around the world had an exact opposite calculation and have been trying to stash as many homes as possible before oil decline hits too hard.
MHFT, meet Jack. I don't think you know him. Do you.
1. no doc "liar loans" 2. banks qualified borrowers based on teaser rates. 3. inflated appraisals 4. aaa ratings on mbs 5. synthetic cds to profit from default
6. ONE BIG SCAM 7. prices reverting to pre-bubble 1999
Finally! Someone gets it right. Years ago I was looking at the demographic trends and figured that housing was bad for the long run. Add in that boomers will downsize their dwellings, too. There are offsetting demographic trends such as the rise of single person dwellings. Our divorce rates plus lower numbers of marriages drive that. However, single people still buy smaller places or rent. I personally think that condos may make a comeback as boomers downsize and give up yard and home maintenance.
However, because of the easy loans, fraudulent loans and artificially low interest rates, too many homes have been built for even the current market at least nationally speaking. With high unemployment, underemployment, income drops (even if employed) and general nervousness, the ability and willingness to buy into the oversupply is insignificant.
I think the markets will be even worse in the future than the author states. The reason is that those same boomers will start calling in those government bonds as they begin drawing en masse on Social Security, Medicare/Caid and perhaps a new raft of entitlements created by Obama and crew. Effective tax rates will have to be around 70%...on that same generation that earns less than their parents. Yeah, that's gonna work out real well for housing and prosperity in general! You will have two generations living in the basement of the rent subsidized, social security collecting parents/grandparents because disposable incomes will be zero. Hedge that!
Now Bernanke offers the easiest way out. Inflate or debase the currency. Get Congress to freeze payouts by not indexing to inflation and then in nominal dollars houses and incomes will be up. Gas may be $100/gallon. However, it is a wonderful cowardly way to raise taxes and reduce benefits simultaneously. Buy metals and leave them to your progeny. It would be the decent thing to do since we are handing them an economic bowl of crap. It really shows the ruthless selfishness and cowardice of the prior generations.
FG,
Systems stay stable until there is insufficient energy/too much friction to keep them stable. The GenXers are problem solvers, and they (we) know full well the s**tstorm heading in our direction. When the system becomes too untenable, that generation will effectively go off the existing societal/economic grid and replace it with a new one. There are signs that this is happening already, and in the process its sucking the life out of the consumer driven corporatocracy that led to the conditions we're in now.
Land of Confusion, Genesis, 1986
http://www.youtube.com/watch?v=9ZtWABLuWHo
Problem with propaganda, when used and used over and over again, it is getting overused. Others have used the same propaganda than you like the wannabee war criminal Tony Blair and your generation will solve problems the same way as this guy's generation did. And it was certainly not by going hard against the 'consumer driven corporatocracy'
I agree with you, kurt. The future on a straight line projection is untenable. It is impossible. Therefore something will change. The question is who, how and will it be better or worse. A corporatocracy is actually fascism. It can be done without the jew hating and is close to what we have now. The corporations are NOT supreme. Government always holds the upper hand because they have the guns and laws. However, they get the money from large donors, which may be a George Soros, a union, a lobbyist or a business group. In this system, profits are private and losses are socialized. In return, legislative favors are returned including limiting competition. Think stimulus and bailouts. Goldman Sachs wins and Lehman loses. We are well on our way.
I like your stuff MHFT. But what if the existing inventory was only designed to last an average of 10 years. Have you seen the construction methods and materials of those track housing developments in the burbs?
The OSB used as underlay substrate on roofing and siding. Particle board for underlay on interior flooring.
Short life span indeed.
I'm a builder. RE those tract homes: OSB has been around for decades, and particle board even longer. Both are acceptible if used where they were designed to be used, and if the house is maintained.
If you fail to replace a roof before it fails, even CDX plywood will delaminate and disintegrate. Yes, plywood is superior and should be used for roof sheathing. OSB is perfectly adequate for ext wall sheathing, and particle board is suitable for flooring underlayment--OVER 23/32 plywood.
I built my last house using OSB for sheathing and particle board underlayment under the ceramic floors. 15 years later, all of it is as sound as when new.
You may be a quality builder who uses great care in maintaining your home, IDK. But that is what it takes to live in one of those homes, great, great care.
Particle board(steamed sawdust compressed with a minimal amount of adhesive mixed in) once wet swells, then falls apart. Most of these homeowners have kids who love to spill their juice on the floor. Not to mention the abundance of formaldehyde in it that gasses to home and occupants.
A well constructed house with a targeted 100 year lifespan is very possible but it kills your margins to build with any kind of integrity. It's America afterall. Build it for 30k sell it for 230k and don't look back.
You make a good point. Unoccupied dwellings deteriorate even faster. They were built by minimally trained "splash and dash" crews. I would not be surprised to see homes plowed under in the next few years. The other thing that plays into your comment is modernization. Houses from the 50's with one bathroom and two outlets per room don't sell without modernization. The same thing will turn over some homes, as well. They become outmoded.
I would not be surprised to see homes plowed under in the next few years.
Banks and underwater owners already have
#Prices aren’t going down forever.
again... still clueless as ever..
listen pal, prices CAN AND WILL FALL FOrEVER.. look at Japan
you pretend to be expert.. 15 years and counting..
but there;s another fundamental issue.. AVG INCOMe HAS been fallen
for 10 years in USA.. so i'd guess at bottom avg house gonna cost 1 year avg salary..
around 50-560 thou ( inflation adjusted)
see yo in 10 years..
alx
Finally, someone with a long term view of investing. I tend to agree with the 20-30 year horizon for Real Estate. Starting from a new price floor, probably about 20-30% below where we are now, I think RE will eventually rise and outpace safe haven commodities like oil and precious metals over that time window. But, stick with prime usable land vs. structure. Otherwise, there will be too much depreciation (physical and design style) to overcome along the way.
Aaaahhh. The nice fairy tale ending for the Fed postponed implosion.
"Fannie Mae and Freddie Mac will be long gone, meaning that the 30 year conventional mortgage will cease to exist."
Yes, well, so will the US Government, which will not survive the decade. (Texas gets my vote -- it is election day, after all -- as the state that starts the stampede.)
__________
The state can kiss my ass.
The state of Texas can kiss my ass.
There, fixed it for ya.
"The state of Texas can kick your ass."
There, fixed it for YOU.
I bought lakefront property in Texas after the guvnor said, "If this federal government gets any worse, we may have to secede."
Texans have been saying that for over a hundred years. It'll never happen.
Heck, you're talking about a State who's top athletes lost to a bunch of guys from San Francisco!
Heh - sorry, couldn't resist.
Was that Falcon Lake, which murder seems to have been flushed down the Orwellian Memory Hole?
Perry/Palin in 2012 says AJ, not too pleased about the latest corporate government Tea Party takeover ruse
http://www.youtube.com/watch?v=VzIF_CYE4J8 2:53
What are you waiting for? Get the fuck out of my country.
.... thanks for the good news, after I purchased a small condo all cash in 2005 when I was stupid about how all this stuff works ! (I only became educated when I started reading ZEROHEDGE) . Too bad for me & many others that we actually believed all the bull shit being fed to our generation (boomers) : "Always buy the nicest home you can afford & the cheapest car ". I was so dumb before I started reading ZEROHEDGE
Myself, I would be perfectly content with a doublewide, a barn, and 5 acres. You're better off with more disposable income to buy precious metals with.
Well said lynny. I think I got off the traditional media/investor bus in late 2007 after having been burned in 1987 and again in 2000 following the 'buy and hold' strategy. More dumb luck than anything. Just the hunch that I couldn't afford yet another financial punch in the gut. For me it was Jesse's and Naked Capitalism that helped me walk away from the herd.
Such an honest admittance lynnybee -- I too say I was way more ignorant prior to Zero Hedge. Cannot thank Tyler and all the other contributors enough. Without Zero Hedge I'd go back to feeling like a mushroom.