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.
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
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 … 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) … Read More
One of the most often talked about parts of the economy is the real estate market sector. Because real estate is such a large and important part of the economy, naturally, many eyes are focused on whether or not this market sector can and will rebound from its deep decline.
While we have certainly seen a strong bounce off the bottom, there are still many concerns for the future of both the real estate market sector and housing stocks, specifically. Investors in housing stocks are definitely ahead of the curve, as many housing stocks have increased substantially. With gains in excess of 100%, the question on many people’s minds is: will the real estate market sector continue its upward trajectory or are housing stocks teetering on the edge of a massive decline?
I think recent comments by the CEO of D.R. Horton, Inc. (NYSE/DHI), Donald Tomnitz, can illuminate a lot. Tomnitz stated in a conference call that he was quite concerned that the lack of jobs might lead to lower home sales next year. D.R. Horton is, by volume, the largest homebuilder in America. One of the most sobering moments was when Tomnitz stated, “I also see the fact that there are potential layoffs in a number of industries, especially the defense industry.” (Source: “D.R. Horton Falls as CEO Cautions on Job Growth Next Year,” Bloomberg, November 12, 2012.)
The question isn’t the current level of the real estate market sector. For the fourth quarter, which ended September 30, 2012, D.R. Horton reported net income of $100 million, a massive increase of 180% from the prior year’s quarter. Revenue … Read More
It really is the perfect environment for higher oil prices, which is both good and bad for the U.S. economy. Higher oil prices reflect a better economic outlook, as speculators bet on better gross domestic product (GDP) growth in the U.S. market. This translates right into the stock market. But, as we all know, higher oil prices also mean higher gasoline prices…and this is inflationary and cuts into consumers’ incomes.
There is a slight premium in oil prices today related to tensions with Iran. It’s not a big premium, but my best guess is that it might be around $5.00 a barrel. The stock market certainly isn’t worried about higher oil prices right now; equities have too much support from the Federal Reserve to be concerned. Stock market investors are buying because of unprecedented monetary stability and the hope for better corporate visibility. Oil prices are going up because of demand and supply, coupled with some speculative fervor.
The big news in the stock market continues to be with large-caps, especially within the technology sector. As a group, I think technology is a little ahead of itself. Things just aren’t that rosy yet. But, with stock market valuations still very fair, positive investor sentiment is behind the big push. Institutional investors (like individuals) don’t have much choice out there in the investment landscape. Bonds and cash don’t pay anything and the real estate market is a bigger gamble than dividend payments.
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