Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Realities of the New Housing Market; Institutions Buy and Rent Homes

Friday, January 25th, 2013
By for Profit Confidential

Realities of the New Housing MarketHere’s the bottom line on the U.S. housing market and why it’s not really a recovery we can bank on:

The most important part of the U.S. housing market—first-time homebuyers—is missing from the action! We need first-time homebuyers in the market to see real growth in the U.S. housing market. After all, they are the ones who buy the fridges, stoves, dishwashers, and other goods that help increase consumer spending in the U.S. economy.

In December of 2012, out of all the existing home sales in the U.S. housing market, first-time homebuyers accounted for only 30%! This number was unchanged from November and more than three percent lower compared to December 2011. (Source: National Association of Realtors web site, last accessed January 22, 2013.)

Just look at sales of appliances…

According to the Association of Home Appliances Manufacturers (AHAM), as the housing market “rebounded” in the U.S. economy, the shipments of appliances to stores and warehouses actually declined to 60.7 million units in 2012, compared to 60.8 million units in 2011. (Source: Wall Street Journal, January 15, 2013.) If the housing market is rebounding, why are appliance sales declining?

The Association notes that shipments of six core appliances—washers, dryers, dishwashers, refrigerators, freezers and ovens—declined 2.3% in 2012. For December alone, the shipments dropped 4.1% compared to December of 2011.

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To the mainstream media calling this a “recovery” in the U.S. housing market: you’re missing one big point…

Home prices are slowly rising, and supply is slowly decreasing in the U.S. economy, because institutions and individual investors are running to buy residential properties.

For investors, buying up single-family homes enables them to do two things: 1) get a better rate of return on their money, and 2) diversify their portfolios as they shy from conventional stocks and bonds. Let me repeat it again, it’s not the first-time homebuyers who are rushing into the U.S. housing market.

Just as an example…

In a tax auction held in Wayne County, Michigan, one investor purchased 290 properties for $189,600. (Source: Bloomberg, January 16, 2012.) Yes, that’s less than $700.00 per property.

As for institutions, I have already talked about them in this newsletter. Companies like The Blackstone Group L.P. (NYSE/BX) are spending billions of dollars to buy residential properties, betting for higher returns.

So, what I hear in the mainstream media about the rebound in the U.S. housing market isn’t very convincing to me. In reality, we don’t have any real growth in the U.S. housing market—only speculation.

Michael’s Personal Notes:

Words of wisdom from Robert Appel, BA, BBL, LLB, our in-house gold bullion bug and “money watcher:”

“The markets seem quiet and controlled, but they are anything but that.

Among the more astute commentators (and we like to believe that this advisory enjoys the privilege of being in that category) it has been noticed that, just in the last few days, Japan’s declaration of a “currency war” (i.e., that it will print and print and print until both the yen weakens and higher “targeted” inflation is seen) has been matched word-for-word by President Obama; in his inaugural statements, Obama signaled his intent to overcome any Republican resistance, and (similar to Japan’s plan) “print” the U.S. out of its current problems. Under normal circumstances, these statements would have propelled the price of gold bullion higher.

Even in these extraordinary times, these statements have stunned politicians and academics around the world. Especially since they come at a time when Europe is still very much in the quagmire it was in last year at this point (simply getting less press, that’s all); and China is struggling to overcome the inevitable problems of too-rapid growth without a seatbelt (results which include, for example, cities where the residents are actually inhaling chunks of pollution that collect in their mouths on the way to work!).

Some writers are saying that we have now officially entered an era of chaos where gold bullion prices should boom. We agree. In the same vein, you might be astonished to see that in a world where unlimited money printing has suddenly been given the green light, both gold and the mines are down?

The explanation for the lack of price movement from gold bullion is simple but unsatisfying. This advisory—and indeed virtually every stock advisory on the planet—has been severely underestimating the ability of the banking forces (those same forces printing the money in the first place, which basically makes them the strongest financial force on the planet…so long as the belief in the value of paper money continues without question) to rein in gold bullion prices.

That last statement appears simple, but we assure you that it is not, because these same forces were unable to stop, or even slow down, gold bullion from moving from $250.00 to approximately $1,900 an ounce. It had been assumed that the banking forces were permanently out of the game. As was seen in late 2011, this proved to be a serious error.

Can the daily morning downside “hits” on gold bullion only be achieved if one stands there and sells gold bullion that one does not actually have until, first, all the buy orders are absorbed; and, second, the change in price direction takes out all the sell stops in the near vicinity of the tape action? There is no other way to do this. Charts do not lie. This is deliberate; this is intentional. And, in a parallel universe where the regulators are actually awake, this manipulation of gold bullion prices would be illegal. (It was indeed illegal when the Hunt Brothers did this to silver in 1978, but they were private citizens and not clandestine agents of Big Government.)

Nonetheless—and this is important—in the long term, these sorts of strategies can only work in a world where market forces are permanently taken offline. And, never in the history of the Western world have these kinds of tactics been effective for more than a very short while.

We believe that despite the calm that seems to prevail currently, the world financial system is more tenuous right now than at any point in the last 100 years. Even if the European Union, Japan, and Europe were able to solve their structural problems (problems which are long-term and intrinsic, not short-term and fiscal), the process could take at least a decade.

And yet the politicians, themselves elected for a short term, can only think in short terms.

Once again, at the risk of sounding repetitive, investors are urged to look at the larger picture and to snap up the values in the mining sector.”

Where the Market Stands; Where It’s Headed:

Waiting: I’m just waiting for the most recent rise in the various stock industries to have its final blow-off…the bear market rally’s “last hurrah” you might say.

I think the market’s recent lucky streak of consecutive daily advances is nearing its end. Remember, hedge funds that ride the market up and down for quick profits are fast to jump ship when the market changes direction. At this point, at least for me, it’s not a matter of “if” the market will turn down, but “when.”

What He Said:

“Bonds could now be a buy: Bonds rise in price when interest rates fall as their return makes them more valuable. After a bear market in bonds that has lasted for months, the action in the bond market, as I read it, indicates the bear market in bonds could be over. I’ve always preferred quality when buying bonds, going with government bonds over corporate bonds. If you have some cash lying around, bonds could be a great deal.” Michael Lombardi in Profit Confidential, July 24, 2006. The yield on 10-year U.S. Treasuries fell from five percent in the summer of 2006 to 2.4% in October 2011—doubling the price of the bonds Michael recommended.

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  • Rafael Kireyev

    Wow. Prices less than $ 700 per property is a big surprise for my imagination.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles