Guest Post: Is Housing An Attractive Investment?

Tyler Durden's picture

Submitted by Chris Martenson contributor Charles Hugh Smith

Is Housing an Attractive Investment?

In a previous report, Headwinds for Housing, I examined structural reasons why the much-anticipated recovery in housing valuations and sales has failed to materialize. In Searching for the Bottom in Home Prices, I addressed the Washington and Federal Reserve policies that have attempted to boost the housing market.

In this third series, let’s explore this question: is housing now an attractive investment? 

At least some people think so, as investors are accounting for around 25% of recent home sales.

Superficially, housing looks potentially attractive as an investment. Mortgage rates are at historic lows, prices have declined about one-third from the bubble top (and even more in some markets), and alternative investments, such as Treasury bonds, are paying such low returns that when inflation is factored in, they're essentially negative.

On the “not so fast” side of the ledger, there is a bulge of distressed inventory still working its way through the “hose” of the marketplace, as owners are withholding foreclosed and underwater homes from the market in hopes of higher prices ahead. The uncertainties of the MERS/robosigning Foreclosuregate mortgage issues offer a very real impediment to the market discovering price and risk. And massive Federal intervention to prop up demand with cheap mortgages and low down payments has introduced another uncertainty: What happens to prices if this unprecedented intervention ever declines?

Last, the obvious correlation between housing and the economy remains an open question: Is the economy recovering robustly enough to boost demand for housing, or is it still wallowing in a low-growth environment that isn’t particularly positive for housing?

Factors Affecting Housing Demand

The demand from investors can be roughly bifurcated into two distinct camps: those buying distressed homes to “flip” them for a profit as market conditions improve, and those buying homes and multi-unit buildings for rental income and future appreciation.

The “flippers” are counting on continued demand by non-investor buyers, such as first-time buyers. The rental housing investors are counting on continued strong demand for rentals from those who lose their homes to foreclosure and must now rent, as well as from household formation resulting from population growth.

Both lines of reasoning are implicitly based on continuing Federal and Federal Reserve support of the housing market via first-time buyers’ incentives, such as low-down payment FHA and VA-backed mortgages, and the Fed’s continuing support of mortgages via low interest rates and the roughly $1 trillion in mortgages that the Fed purchased in 2009-10.

The assumption behind any forecast of improving demand and higher prices is that private demand for housing and mortgages will slowly replace government-stimulated demand. 

If either of these conditions deteriorates -- that is, if government support of the housing/mortgage markets declines due to the rising pressure to trim fiscal deficits, and private demand does not appear to replace it -- then the forecast of steadily improving markets weakens.

While direct government support of the housing market via ultra-low rates and guaranteed FHA/VA mortgages is well-known, the rental housing market is also implicitly supported by government transfers; i.e., cash distributed by the federal government in Section 8 rent subsidies, extended unemployment benefits, etc.

These transfers now make up an unprecedented share of household income, as this chart shows:


Common sense suggests that the pressure to trim unprecedented (in peacetime) Federal deficits -- roughly 8%-10% of the nation’s gross domestic product (GDP) for four years running -- will eventually impact all government spending, including transfers and housing/mortgage subsidies.

Combine the prospect of declining government transfers with the deterioration in household disposable income since 2007, and the household income picture darkens considerably. 

Why these factors matter to investors is self-evident: If households receive less income, then they will be less able to afford either a mortgage or high rent.

The fact that inflation has outpaced disposable income should also give real estate investors pause. If rents have by and large kept pace with inflation (rental markets are local, so any national figures are generalizations that may not apply), then this divergence between income that has flat-lined and rents that have risen with inflation suggests a future convergence: Either incomes rise to align with higher rents, or rents decline to align with flat-lined income.

Though most believe the Fed has the power to counter deflationary forces, it is worth recalling that in the early 1930s, rents declined by roughly 40% as demand and incomes fell. Prudent investors should ponder the possibility that incomes won’t rise to align with higher rents but that rents will decline to align with flat-lined income.


The general expectation in the real estate market is that whatever declines in home and rental prices could happen, have happened. This is reflected in this composite chart of the home price futures market:


Clearly, the futures market is anticipating a bottom in home prices in mid-2012 and a gradual improvement in home valuations from then on.

On the “not so fast” side of the ledger is the possibility that both home valuations and rents have been artificially inflated or propped up by government intervention and stimulus, and that the positive effects of those gargantuan transfers of cash and risk have run their course.

Though the Fed has publicly stated its goal of keeping interest rates near-zero until 2014, investors should ask what might happen when that prop under the housing market is removed; i.e., what possible consequences might flow from higher mortgage rates?

Some believe that housing demand will surge as rates start to rise, driven by potential buyers who were waiting for the bottom in prices and rates to re-enter the housing market. Once the bottom is clearly in for mortgage rates, as this line of thinking goes, these buyers will flood back into the market.

Others worry that rising rates could crimp affordability, especially if housing prices resume their climb, as anticipated by the futures market.

Though the general assumption is that the Fed can engineer super-low rates essentially forever, investors should be wary of assuming that an omnipotent Fed can control the mortgage market. The Fed only sets the Fed Funds rate; it does not directly set mortgage rates. Its only other lever over mortgages is direct purchases of mortgages and mortgage-backed securities in order to prop up the market, and many observers believe there are now political limits on what the Fed can do. In other words, the Fed could theoretically buy another $1 trillion of mortgages on top of the $1 trillion it already owns, but the unprecedented expansion of the Fed’s balance sheet is already drawing criticism.

Thus the future trend of mortgage rates is an unknown. If housing values take another dive, then the availability of mortgages may decline even if rates stay low. Buyers of mortgages will have to factor in the risk of default and/or declining rental income, and that calculation is especially sensitive when the rate of return is already paltry.

The thesis for higher demand for housing and rentals is based on these assumptions:

  1. The economy is on a sustainable uptrend of growth
  2. Employment is also on a sustainable uptrend
  3. Inflation will remain low
  4. Household income will soon resume an uptrend
  5. The Federal government will continue issuing unprecedented amounts of cash transfers to households
  6. The Federal government will continue to fund housing subsidies and mortgage guarantees
  7. The Federal Reserve’s plan to keep interest rates low for the foreseeable future will also apply to mortgage rates
  8. The MERS/robosigning Foreclosuregate issues will all be settled without disrupting the housing market
  9. The bulge in inventory will be liquidated as new supply (i.e., newly built homes) stays well below demand (sales)
  10. New household formation will drive demand for rentals and homes

While it is widely assumed that new household formation parallels population growth (which is remarkably consistent), the following chart reveals that household formation is more correlated to recessions and periods of prosperity.


We can see that peaks in household formation correspond rather well with peaks in economic growth, while the valleys correlate with recessions or periods of slow, uneven expansion.

While household formation has returned to the trendline, the long-term trend is clearly down. Other than the euphoric outlier of the housing bubble, the series displays the classic signs of a downtrend — lower highs and lower lows.

If the US economy turns out not to be decoupled from the sagging global economy, then this chart suggests another bout of recession could cause household formation to fall below its 2008 nadir. That would not be supportive of demand for housing, either home purchases or rentals.


The picture for housing is decidedly uncertain, and confirmation of the ten trends listed above will be needed to establish a clearer forecast.

In Part II: Key Insights for Those Buying Real Estate as an Income-Generating Investment, we inspect the specific factors that most frequently determine whether a real estate investment is successful or not.

Too often, when buying real estate for its income-generating potential, small investors make costly underestimatations or miscalculations that materially handicap the returns on their invested capital. In this type of sector, being forewarned is forearmed.

Click here to access Part II of this report (free executive summary; enrollment required for full access).

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yogibear's picture

Real estate taxes keep going up even though housing prices are falling. Property owners are paying for all those bloated and underfunded public pensions. The local governments see the peoperty owner as an unlimited ATM for funds.

flacon's picture

As long as my coworkers keep on "buying" (in quotes) homes, and spending about $10K per year on upgrades to "their" homes, I can not see myself selling my silver to trade for a "home".


I don't live in a cardboard box because I choose to rent because I can walk away from this "home" with no strings attached at any time of my choosing. 


My property taxes on silver are.... get this.... OMG.... drumroll..... my property taxes on my silver is precisely.... ZERO!

thewhitelion's picture

That's nice, but unless your landlord is an idiot you're paying his property taxes.  It seems to me that the real strategy here is to live in much less house than you can afford, whether you own it or rent it.  Oh, and buy silver!

JW n FL's picture



Conrad Murray

Municipal Finance in the Face of Falling Property Values -
Thank You Kind Sir!
markar's picture

Not the case in CA--at least not yet.

r00t61's picture

It is true that in CA, Proposition 13 "officially" limits the ability to extract revenue via ever-increasing property tax.  But the legislators aren't stupid.  They just invent new "fees" to charge to cover the shortfall.  The classic end-run around Prop 13 is Mello-Roos.

No matter the "rules" or the "law," it is undeniable that governments exist to collect taxes.  All else is justification for the gullible.

prains's picture

invest in house vaporizing, cull the herd

SwingForce's picture

Yogi, YES! Its happening in Broward county Florida. They act like the pension payments are somebody else's problem, not their's!  Sheriff's office too, not their problem that employees work 70+ hours their last year to game the system into paying BIG Pensions, the taxpayers be damned. My NYC Bus Driver neighbor did the same thing before moving to Florida.

midtowng's picture

The big thing going foward is the collapse in decent paying jobs for young people.

They can't form new households and have to move back with their parents. This is happening right when the Baby Boomers want to sell their homes to fund their retirements.

Yes_Questions's picture



The big thing going foward is the collapse in decent paying jobs for young people...They can't form new households..

From your post to GOD's ears, or not.

Easy Money made its way too soon (2003-2006) into the hands of home buyers, I suspect.  Retirees able to cash in on some equity, downsize and finally enable their entrepreneurial talents (some of them at least) is exactly what is missing now in the US Economy.  There are lots of boomers ready to start a new small business incorporating their experiences and passions, but NOOO, they instead get to look begrudgingly across the dinner table at junior thinking of this:

NOT the same as it ever was...

centerline's picture

Because retirees enabling thier passions is what is missing?  You have got to be fucking kidding me.

Yes_Questions's picture



None of them have passions and talent, huh.

Or do you automatically think retiree means feeble and TOOOOOO old to do anything?


Medea's picture

Thanks for the early morning comedy.

CrazyCooter's picture

I almost never bump posts (just not my thing) but I bumped yours. I think most people do not relate to the incredibly horrible fundamentals young workers are stuck with. I commented about this to my dad last night ... I specifically said ...

"Dad, even with my engineering degree, if I was graduating now I would have much less opportunity, I would work more hours for less, and I would have a lot less job security. I wasn't savy in my 20s like I am now, so I would be at risk of picking a bad employer in a sector that is doomed to scale down, making punishing financial mistakes, and so on."

I also think the boomers are going to retire and try to cash out in a huge wave. I mean, its basic medical physics; at a certain age you can't live by yourself or independently.

I think housing fundamentals, as a generalization, are piss poor.

Lastly, I think there is one exception to all of this; quality homes close to major work centers. So many people live in the suburbs. The price of oil is going up and staying up. In fact the State of Alaska forecast 100+/bbl average oil price for the next X years (start here and see the 2011 Fall Forecast PDF - page 10).

I think this translates into a shift in home valuations where property in the inner city areas is going to go up, reflecting the savings in transportation costs, which will be a transfer of value from homes in suburbs where commutes are longer. If a family is commuting 30 miles to work and fuel costs double, it doesn't take a genius to figure out they will want to move closer to work.

But what the hell do I know, I am just a redneck ...



Silver Dreamer's picture

In the city I live North of, there are all kinds of new communities being built.  We are apparently on an economic island.  What most people do not realize is that island will sink once federal funding in the area dries up.  The developers don't give a damn though.  They will build and build anyway, for a crash a couple years from now does not matter.  They just have to sell their drastically discounted new homes to the locals, who mostly have no idea what's coming.  From the radio to TV, they think we are in a "recovery." 

The site I work at though has three buildings.  One of them is losing 50% of the people, with most of that being contractors.  Our building was built for 1100, is currently around 700, and it is expected to drop to 600.  The third building is similar I'm sure, but I have not heard the details on it (I rarely go over there).  Government contract money is drying up quickly, and it is only going to get worse in the future.  Plus, a ton of officers are being "released" (fired) from their contracts.  Even though my job is at risk too, I welcome the cut backs!

Thisson's picture

Not only that, but the continued tax deductibility of mortgage interest is questionable.

SpeakerFTD's picture

It's worse than that.   I haven't seen a single commentator discuss the connection between AMT and real estate prices, but having done the math on my own recent purchase over and over, it seems like a material consideration.

I live in Long Island, so taxes are punitive.  Make a decent salary here and AMT kicks in, and all of a sudden you are not able to deduct your property/state/local  taxes and potentially even some of your mortgage interest.   Throw that consideration into the buy/rent calculator, and renting looks a lot more attractive.

RafterManFMJ's picture



I live in one unit of a tri-plex; the other two units provide enough cash flow to pay my mortgage, taxes, and utilities.  Simple logic indicates your property had better generate a cash-flow benefit - either providing you with wood for heat, head for hydro-power generation, rental income, food that you eat and can, gas rights or some such benifit to offset your property taxes - either you work for your property or it works for you.

I have a real genuine laugh at the dullards who live on 1/8 of an acre, who can spit out their bathroom window and hit 3 other houses, who pay 12K per year in property taxes IN ADDITION to an HOA fee...makes me feel no matter how fucked up my life might be, I'm not a complete tool like those clowns.

Only Americans are stupid enough to pay for their own propaganda (TV/Cable) and Fin dumb enough to pay for their own proto-commie/fascist living arrangements (HOA).


Silver Dreamer's picture

Their hamster cage is so much nicer though! I lived under an HoA once in my life, and I'll never do it again.

Michael's picture

By state constitutional amendment, Florida homestead taxes can only go up by a maximum of 3%/year based on the property value.

Thank God for the second tsunami wave of foreclosures. I'll pay less that $1000/year on my almost new 2,750sf home that's paid off for a long time to come.

New World Chaos's picture

What does "based on the property value" mean?  Would be nice if tax increases were capped at 3% increases per year in nominal dollars.  Bwahahahah

Mr Lennon Hendrix's picture

Owning arable land is attractive.  Owning rental property if you have the time to manage it is attractive.  Owning a home you could turn into a duplex is attractive.  Owning a single family home, despite what Buffet says, is not attractive.

NotApplicable's picture

Given all of the new houses that have been turned into rentals, I don't see anything attractive about having to compete against them.

General Decline's picture

I have a couple rentals that are doing quite well, actually.

Boondocker's picture

Me too, the competition for decent housing in some areas is fierce.

monoloco's picture

The pool of renters is much higher now due to all the homeowners who have defaulted on mortgages and will not be eligible for another anytime soon.

RafterManFMJ's picture

Had a rental open in Feb - had no real hopes of renting it soon; not a big moveing time in the winter.  I had over 80 calls on this property where the normal peak of early summer would have been maybe 20; interestingly, I had quite a few people say they were moving since they got their tax refund.  Raised rent from 480 to 545 for a two bedroom.

The women I rented had stellar refs; BTW, to potential renters - don't have your ringback tone some screaming rap song...any sane landlord just hangs up and crosses your number off the list.

General Decline's picture

Well said mr lh. The wild card in this is the property taxes. You can count on the parasites to continue that trend in the positive direction. I have explained to my 3 preteen boys that we are by definition not free because we are required to pay property taxes. That, in my opinion, is the basic indicator of true freedom. They are young but they completely understand this. Most adults I know do not.

TonyCoitus's picture

I own commercial real estate (class A office space) and recently had my property tax reduced 19%.  I had to file an appeal and appear in front of the "committee" to state my case.  It was an easy sell.  The Auditor's office was very helpful and friendly.  Why?  Because the Auditor wants to get re-elected and isn't so much concerned about balancing the budget; not their job. 



centerline's picture

Dont forget about property insurance if you have a mortgage.  In some cases mortage insurance as well.  In some areas if you can't keep the property the HOA's have the right to lien you and take your property too.  There are all sorts of ways to get screwed here.

CrashisOptimistic's picture

"and alternative investments, such as Treasury bonds, are paying such low returns that when inflation is factored in, they're essentially negative."


Long US Treasury funds have returned 37% over the past 12 months and averaged 10%/yr over the past 3 yrs.  See it on Morningstar.

I didn't bother to read further.

lotsoffun's picture

dude - you got it right.  so then buy some more right now.  boatloads, wave it in.  who could have imagined the extent of the printing?  you did - great - good for you.  load up.   i'm bitter because they are sucking down my savings.  you got it right.  buy more.  it's going to go big time negative rates in US


TonyCoitus's picture

I bought 20YR TIPS at auction a few years back, held for 18 months and sold for 12% gain.  Thought I was real smart, but the same treasury is now selling at $137.  However, not planning to buy more UST anytime soon.



CrashisOptimistic's picture

Rates may go negative.

Fear will do that.

If that happens, there will be another 10%/yr for the next 3 yrs.

New World Chaos's picture

Rural Western homesteads only.  Anything else will be a big fat target for starving bureaucrats, cops/local warlords, DHS thugs, gangs, and zombies.  And it's probably best to keep everything mobile during the chaos.  You would hate to have your land end up on the wrong side of the DMZ.   Renters also may have no scruples about strip-mining your copper and suing you when they trip on the way out.  Destruction of morality is part of the plan.

Conrad Murray's picture

"Destruction of morality is part of the plan."

You might like this -

New World Chaos's picture

Looks like a modernized take on the Red Menace.  Most of it is probably true but it is still deceptive.  The agenda is not run by the Communists, it is run by Luciferian cultists who are trying to summon the Beast of world government.  And the right has plenty of dupes, thugs, profiteers and evil manipulators to match those on the left. 

I didn't junk you.

Pinktip's picture

Search Youtube for G.Edward Griffin from 1985 interview a former KGB agent.

Paraphrase quote for KGB " over the last 40 yrs communism has slowly demoralized the USA"

New World Chaos's picture

Important advantages to renting:


  • Mobility.  Mobility.  Mobility.
  • You can do it on the down low, while getting your mail delivered to friends/family, thus putting a layer between you and the Feds.  Arrange tipoff codes that won't sound suspicious if the Feds force your contact to call you for a meeting.
  • You can be gone in 60 seconds, lose nothing and not look back.
  • You won't have to worry about roving gangs taking over your place for a whole weekend and raping your family until they extract your stash locations from you.  Ferfal talks about this happening to isolated Argentinian farm families.  Neighborhood Watch is good.

Important advantages to owning:

  • You might be able to get a house with a 30-year fixed mortgage and very little money down, you might be able to pay back the mortgage after the dollar becomes worthless but before they switch all the contracts to a new (supposedly gold-backed) currency, the pig-men might decide to let you keep your house, rule of law might eventually be re-established, and the title might be clear when you sell.
kekekekekekeke's picture

do you have a blog / newsletter please

New World Chaos's picture

Not now, but since you are the second person to request this I will get off my ass with a half-assed newsletter that will consist of police state alerts, conspiracy theories and occaisonal topic-sorted links to my assorted ZH rants and bizarre ramblings.  Send an email to valis [delete this] rising at gmail.


devo's picture

*Ding ding* on the first two comments.

kito's picture

housing has at least another 30 percent to fall and may fall to cash value.........government will soon give them away like they used to do with land in the wild west. 

lolmao500's picture

But but but Shangai has houses 70 times the average salary! We can get there! USA NUMBER ONE!!! USA USA USA!!!

Troll Magnet's picture

unrelated to the topic at hand but...

shanghai fucking sucks.  been there several times on business and it is literally a city of filth filled with dirty air - not helped by their very liberal smoking non-laws (you can smoke just about everywhere - and shysters looking to rip you off at every turn.  beijing is infinitely worse but shanghai is still horrible.

xela2200's picture

ah! the smell of freedom and capitalism.

prains's picture

shanghai fucking sucks.



nothing left to say

CrashisOptimistic's picture

What happens if population declines?  Number of house units do not.