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.
The verdict is in…
Last week, at the end of its regularly scheduled meeting, the Federal Reserve said:
1) It would continue to reduce the amount of money it creates each month. The Fed said it will be out of the money printing business by the end of this year. By that time, the Federal Reserve will have created more than $4.0 trillion new American dollars (out of thin air).
2) And when the Treasuries and mortgage-backed securities the Fed has bought mature, they will roll them over—which means they will just continue collecting interest on the securities they bought as opposed to taking the cash when they mature. (Source: “Press Release,” Federal Reserve, September 17, 2014.) I doubt the Fed has any choice on this. If the Fed doesn’t roll over the Treasuries it has bought, who would buy them when they hit the market?
The Federal Reserve also provided its economic projection on where it expects the federal funds rate, the key U.S. interest rate, to be down the road:
1) The central bank believes the U.S. economy will grow between two percent and 2.2% in 2014, then grow in the range of 2.6% to three percent in 2015. From there, it goes downhill. In 2016, the Federal Reserve projects more of the same—U.S. economic growth of between 2.6% and 2.9%. In 2017, the U.S. growth rate is projected to be sluggish and in the range of 2.3% to 2.5%. (Source: “Economic Projections,” Federal Reserve, September 17, 2014.) Hence, we are looking at four more years of slow growth.
2) A majority of the members of the Federal … Read More
According to the U.S. Congressional Budget Office, next year, the government is expected to incur a budget deficit of $469 billion and then another budget deficit of $536 billion in 2016. (Source: Congressional Budget Office web site, last accessed July 21, 2014.) From there, the budget deficit is expected to increase as far as the projections go.
Yes, the government’s own estimates are that our country will run a budget deficit every year for as long as the government’s forecasts go.
That’s quite unbelievable. We live in a country where the government (and politicians) feel it is okay to continue being “negative” every year, indefinitely. It’s like I’ve written many times: if our government were a business, it would have gone bankrupt long ago. But the government, through its non-owned agency, the Federal Reserve, has the luxury of printing paper money to fund its budget deficit and debt. If a business did that—printed money to pay its bills—that would be illegal.
Today, the U.S. national debt stands at $17.6 trillion with about $7.0 trillion of that incurred under the Obama Administration. (Is it any wonder a CNN/ORC International poll said this morning that 35% of Americans say they want President Obama impeached with about two-thirds saying he should be removed from office?)
But what happens to the budget deficit once interest rates start going up? We’ve already heard from the Federal Reserve that interest rates will be sharply higher at the end of 2015 and 2016 than they are now.
Earlier this month, the U.S. Department of the Treasury was able to borrow money (issued long-term bonds) at an interest … Read More
As I often harp on about in these pages; economic growth occurs when the general standard of living in a country gets better. You can’t say an economy is improving when a significant portion of the population is suffering. You can’t claim there’s economic growth when the poverty rate is increasing. You can’t say the economy is improving when personal incomes and savings are declining.
Looking at this a little closer…
Food stamps usage in the U.S. economy has increased 68% since 2008, with 47.66 million people, or more than 15% of the entire U.S. population, now using food stamps. Going back to 2008, there were 28.22 million Americans using some form of food stamps then. (Source: United States Department of Agriculture, November 8, 2013.)
From 2000 to 2012, the poverty rate in the U.S. economy increased from 12.2% to 15.9%—a hike in the poverty rate of more than 30% in just 12 years. In 2000, there were 33.3 million Americans living in poverty; this number grew to 48.8 million people in 2012. (Source: United States Census Bureau, September 2013.)
In 2008, the median household income in the U.S. economy was $53,644. In 2012, it was almost five percent lower at $51,017. (Source: Federal Reserve Bank of St. Louis web site, last accessed December 2, 2013.)
And because incomes have fallen and prices have risen, people have no choice but to save less.
Back in November of 2008, Americans saved an average of 6.1% of their disposable income, meaning they saved $6.10 for every $100.00 they earned after taxes. In August of this year, personal savings as a percentage of … Read More
The deleveraging that’s taking place around the world is obviously echoed in tumultuous capital markets, but a retrenchment in the bond and stock markets has been overdue for ages.
As is usually the case, several catalysts came together at the same time to produce an unsurprising stock market sell-off. These included: comments from the Federal Reserve regarding quantitative easing, rising 10-year Treasury yields, weak earnings from benchmarks, and concern over China’s real estate market and its banks.
While China’s stock market has been in a pronounced downtrend since the first week in June, its banks are still controlled by the government, so any potential banking crisis in that country is a different game than we’ve seen before because of China’s $3.3 trillion in foreign currency reserves (mostly in U.S. Treasuries).
But that very game could have serious consequences for the U.S. stock market if China needed that money to flood its capital markets with liquidity. With a different approach to saving, money creation, and fiscal management in general, currency destabilization from China is an ongoing risk.
It was just a few years ago that capital markets treated economic news from China as emerging market news only. Now, China’s economic news is taken very seriously by the global economy, and the country’s numbers directly affect the U.S. stock market.
It’s just one more reason to be very conservative with your equity holdings now. Investment risk across all financial asset classes is high.
One thing that China and many of its U.S.-listed companies have proven is that they’re unreliable with their numbers. After countless missteps with U.S. regulators and outright frauds on … Read More
My cousin and his family had to walk away from their house in Arizona. There were no buyers, and they were underwater after the market crashed. The whole thing was really hard on them on all fronts, and they had to move. They’re in Colorado now, closer to family, with the ordeal behind them.
Like most things, timing is everything. In real estate, institutional investors are buying homes like crazy to rent out. The new housing boom is for rentals.
The Wall Street Journal wrote that The Blackstone Group L.P. (NYSE/BX) is buying homes at a rate of about $100 million a week, with institutional investors now making up a third of all cash buyers. Affordability for individuals is going to get squeezed.
On the stock market, homebuilder stocks continue to roar. Lennar Corporation (NYSE/LEN) reported excellent strength in its financial results.
According to the company, its fiscal first quarter of 2013 (ended February 28, 2013), produced revenue growth of 37% to $990 million. New orders grew 34% to 4,055 homes; the company’s order backlog grew 82% to 4,922 homes. Earnings for Lennar grew significantly to $57.5 million, or $0.26 per diluted share, compared to net earnings of $15.0 million, or $0.08 per diluted share.
On the stock market, institutional investors have bid the stock up 30 points since last October. (See “Stock Market Sinkhole: ‘It Didn’t Look Unstable’.”) It’s a stock market breakout for sure, but it’s based on fundamentals. Lennar’s stock chart is below:
Chart courtesy of www.StockCharts.com
Homebuilder PulteGroup, Inc. (NYSE/PHM) quintupled on the stock market over the last six months. Hovnanian Enterprises, Inc. (NYSE/HOV) has tripled … Read More
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