The Land Debt Built

U.S. real estate marketAlong with municipalities struggling in this country, I’ve been warning readers about another potential debt catastrophe. Student debt in America has crossed the $1.0-trillion mark.

Student loan debt is now larger than the country’s total credit-card debt (source: Consumer Bankers Association). So much for encouraging consumer spending.

The Federal Reserve Bank of New York recently reported that roughly 27% of student loans were more than 30 days past due. Don’t expect that 27% to increase consumer spending. (Also see: U.S. Student Loan Crisis Developing.)

The reason for this distress in paying student debt is the weak economy that is not producing enough quality jobs with good salaries, placing great strains on consumer spending. The Bureau of Labor Statistics estimates that the current unemployment rate for those aged 20-24 is close to 14%, while the unemployment rate for those aged 25-34 is 8.7%.


While the Bureau of Labor Statistics estimates the unemployment rate among these age groups, it doesn’t capture the underemployed—workers taking lower paying jobs or part-time work or work that doesn’t reflect their skill set—accurately, but just last month, the Pew Research Center released its latest study on the situation.

It finds that the unemployment rate among the young is double the national average, placing more strain on consumer spending. It also finds that, although all age groups were hit hard during this latest recession that began in 2007, those aged 18-24 were hit the hardest, as evidenced by the unemployment rate. This certainly affects consumer spending.

Those who are lucky enough to get jobs are likely to experience pay that is 10%-15% lower than those with experience (consumer spending increase?). This 10%-15% discrepancy is expected to last at least a decade before they finally catch up in higher salaries. Of course, the debt and interest on the student loan debt doesn’t wait for the newly employed to “catch up,” which will affect consumer spending as well.

PNC Financial Group released a study that revealed that 60% of those aged 20-29 are stressed about their debt. Although mostly burdened by student debt, the debt burden is increased by credit-card debt and car loans. The average debt amount for those aged 28-29 was $78,000, according to the study. Don’t expect increases in consumer spending by this group.

Only six percent of those surveyed were saving for retirement. Can you say “crisis,” dear reader?

What does this all mean? First, with younger people who are a huge part of the economy being so highly indebted, don’t expect drastic increases in consumer spending. Also, it is no wonder they are not participating in the real estate market at record low levels—they don’t have the financial means to do so…more strain on the U.S. real estate market.

What this means as well is that if the jobs market does not meaningfully recover and the unemployment rate among the young drops significantly, more and more students are going to default on their debt. (Consumer spending will continue to be under pressure as well.)

Of course, until they do so, not only does this debt place a strain on the U.S. real estate market, but it also places a strain on the entire U.S. economy, as consumer spending will be pressured by those carrying this debt; they are going to be very careful about every dollar that they spend (i.e. consumer spending).

As if the lack of consumer spending and the fragile U.S. economy needed other headwinds to fight, this is another serious one, dear reader. Watch that stock market bear rally; there are pressures brewing in the financial system.

Michael’s Personal Notes:

The numbers look good until we take a closer look…

The National Association of Realtors reported last week that home resales in February were 7.7% higher than February of last year. The U.S. Commerce Department reports that February new home sales are up 11.4% from last February. Both sets of numbers bode well for the U.S. housing market.

The year-over-year strong jump in U.S. home resales of 7.7% and of new home sales of 11.4% can be explained by the unusual warm weather in the northeast, which caused some buyers to venture out home-shopping earlier this year, as the northeast really experienced no winter.

But the important thing to note in the U.S. housing market data is that resales and new home sales month-over-month are actually trending downwards.

As a matter of fact, the number of new single family homes sold in the U.S. is at an historic low, dating back 50 years. Yes, it is bouncing a bit from 2009 levels, but not nearly enough to move it past historically low levels.

The other issue with the U.S. housing market is the inventory of homes on the market.

The inventory of homes in the U.S. housing market rose to 2.43 million homes in February. Realty Trac is reporting that foreclosures are set to rise at least 15% this year over last year’s levels, as the courts manage to work through the improper paperwork submitted by the banks last year.

In 2012 alone—to the end of February—there were 410,000 homes in the U.S. housing market that received default notices, which is expected to increase as the year progresses. Add these foreclosures to the amount of unsold homes and one can see continued pressure in the U.S. housing market.

However, there is one statistic that economists are clinging to that may indicate that the U.S. housing market is recovering. Permits to build new homes are at a three-and-a-half year high.

While companies like Lennar Corporation (NYSE/LEN) are forecasting an improvingU.S.housing market for 2012, the nation’s fifth-largest homebuilder, KB Home (NYSE/KBH), posted a wider-than-expected quarterly loss and a steep drop in margins last week.

KB Home said that cancellations of new homes rose to 36% from 29% last year, which was the reason for the miss. Those permits for new homes don’t look like they are translating to homes actually being built, which comes as no surprise considering the glut of unsold properties in the U.S. housing market, high foreclosures in the pipeline, and a consumer that is not experiencing real personal disposable income growth.

So, home resales and new home sales have been dropping off recently in the U.S. housing market, while S&P Case-Shiller Home Price Index met analyst expectations by only declining 3.8% in January 2012 from last January.

While recent numbers on the U.S.housing market are being touted as a victory and a sign of “stabilization” in the U.S. housing market, the bottom line is prices continued to drop and home prices are now at 2003 levels. I believe prices for the U.S. housing market will fall again in 2012 and possibly 2013. (Also see: Hope in Housing? Our Indicators Say Prices Still Crashing.)

Where the Market Stands; Where it’s Headed:

We are in a long-term secular bear market. Phase I of the bear market was completed when the Dow Jones Industrial Average fell from 14,164 in October of 2007 to 6,440 in March of 2009.

Phase II of the bear market started in March of 2009 and continues today. The purpose of a Phase II bear market (often referred to as a sucker’s rally) is to lure investors back into the stock market under the false pretense that the economy is improving.

Phase III of the bear market will bring stocks back close to where Phase I of the bear market ended—that’s 6,440 on the Dow Jones Industrial Average.

This is what I believe.

What He Said:

“Any way you look at it, the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second, and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. A dire prediction that came true.