The roots of America’s financial crisis can be traced back to 2007, when the U.S. housing bubble burst. This sent the dominos tumbling and the United States into an economic meltdown in 2008. Despite government intervention, the economy has sputtered and slipped in and out of recession.
What most investors and analysts failed to realize as the bubble burst for the housing market is that much of the U.S. economy—millions of jobs—are related to the real estate market.
Since 2001, readers have turned to Michael Lombardi’s famous daily economic newsletter Profit Confidential for stock market guidance. Analyzing the real estate market is of utmost importance to figuring out where our general economy is headed.
In our daily Profit Confidential e-letter, we regularly comment on the U.S. housing market and the real estate market. Is it time to buy real estate? Where are housing prices headed?
In a June 6, 2005 Profit Confidential article, Michael started warning about the crisis coming in the U.S. real estate market just as it was peaking: “The conversation at parties is no longer about the stock market, it’s about real estate. Looking around, it would be very difficult to find people who believe that one day it could be out of vogue to own real estate because the properties would be such a bad investment. Those investors who believe a dark day will never come for the property markets are just fooling themselves.”
In July, Michael told Profit Confidential readers, “The U.S. lowered interest rates in 2004 to their lowest level in 46 years. And, what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of lowering interest rates to entice consumers to borrow more than they can afford) will, one day, be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.”
In 2006, Profit Confidential “begged” its readers to get out of the housing market before it plunged. On August 2, 2006, Michael predicted, “I’m getting very worried about the state of the U.S. housing market and its ramifications on the economy. The U.S. could be headed for its first annual decline in home prices on record, adjusted for inflation. And, I really believe this could be a catastrophe for the U.S. economy.”
Michael was also one of the first to predict the housing bubble would decimate the U.S. economy and slip into recession. On March 22, 2007, he warned, “Over the past few weeks I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy, and the stock market. There’s no escaping the carnage headed our way because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fuelled the housing boom that peaked in 2005, has yet to arrive.”
At the same time, Michael wrote that former Federal Reserve Chairman Alan Greenspan was quoted as saying, “The worst is over for the U.S. housing market, and there will be no economic spillover effects from the poor housing market.”
During the previous recession, residential construction was a major factor to recovery. Not so this time. Why? The homebuilding industry was collateral damage in past recessions. This time around, it was a major cause of the Great Recession. Over-building, brought on by over-zealous banks, easy credit, and a mountain of debt, has left the U.S economy in an extremely fragile state.
Reminding Profit Confidential readers to exit the U.S. housing market was the best real estate guidance we have ever offered. Today, we regularly follow housing prices in major American cities, foreclosure rates, interest rates, and home building stocks, not only for guidance as to where the real estate market is headed—but as guidance as to where the overall economy may be headed.