This Is What I Would Do Instead of Buying into the Housing Recovery

House on stack of coinsSure does seem like a lot of optimism pouring into the housing market these days. The mainstream media is telling us how the housing market has bottomed and we are only going higher in price. As an investor, you’re asking two questions: (1) are they right about the housing market coming back; and (2) how do I participate to make money from it?

While some financial gurus will tell you the housing market is going up and you should even dare to buy some real estate stocks, what they haven’t told you is that, as the U.S. dollar has collapsed in price against other world currencies (thanks to excessive money printing), investing in the housing market has been a catastrophe compared to other forms of investment.

In the 1970s, the average home price in the U.S. adjusted for inflation was $65,300. (Source: Census Bureau, Accessed October 9, 2012.) In August 2012, the average existing home price was $187,400. (Source: National Association of Realtors, September 19, 2012). A simple math calculation would suggest that the housing market went up almost 187% in about 42 years, or about 4.45% per year.

At the same time, gold bullion rose from $35.00 an ounce in the 1970s to its current price around $1,800 an ounce—a 5,043% gain in 42 years, or 120% per year.

In the 1970s, it would have cost you 1,866 ounces of gold bullion (considering its then price of $35.00 an ounce) to buy a house. In 2012, the same house would cost you only 104 ounces of gold bullion (price of gold at $1,800).

So what exactly has happened here?

The U.S. dollar has decreased in value. Adjusted for inflation, $1.00 in 1970 has the same buying power of $5.94 today. (Source: Bureau of Labor, October 9, 2012.) The greenback has done nothing but decline against other world currencies. What you could buy with $1.00 in the 1970s will cost you almost $6.00 now…and that’s only according to the Consumer Price Index, never mind the real inflation that actually matters to the average American.

While many analysts and economists now expect the housing market to go higher, housing prices may in fact rise once again because the money printing presses are running at full throttle. The third round of quantitative easing (QE3) is nothing more than a promise of bringing the U.S. dollar down.

The housing market is simply the wrong horse to bet on. Gold bullion seems to be the only winner from of the financial mess we continue to dig ourselves into and it will most likely keep shining.

As noted earlier, the current price median price of a home in the U.S. is now $187,400. Because banks are still tight on their lending requirements, the expected down payment on that home to get a loan is $46,850, or 25%, in today’s housing market.

Instead of putting that $46,850 in a home, history shows I would be much better off if I put that money into gold bullion. If I wanted to raise the risk for a better return, I would buy gold exchange-traded funds (ETFs) with the money. And if I was really aggressive, I’d put the $46,850 into quality junior and senior gold producing stocks. (I’ll report back every year around this time to see what’s doing better: $46,850 in a house or $46,850 in gold).

The best part: gold doesn’t talk back to me. When buying a house for investment in this housing market, I need to worry about finding a tenant, hoping he/she pays the rent and dealing with that broken toilet at midnight. Going with a property manager doesn’t make sense if I own anything less than 10 units in the housing market. And if I look at real estate stocks, I have to deal with the fact the major homebuilder stocks make it look like housing has fully recovered—and I’m not so sure about that. (Also see: The Great Housing Recovery Hoax.)

Michael’s Personal Notes:

The global economy is experiencing a new economic slowdown after a sluggish post-recession recovery. This time around, the global economy could be facing more severe issues.

In 2008, when the U.S. economy led to a global slowdown, emerging markets still had demand present and were able to hold up the global economy to a certain degree. Now the scenario is completely different.

Instead of the economic slowdown going from the U.S. out, it is now going from the remainder of the world into the U.S.

The emerging economies that fuelled the shaky recovery are struggling to keep their engines running. Countries like China are witnessing an economic slowdown due to the spillover effect of the European slowdown. The economic slowdown in China is becoming severe. With Chinese manufacturing slowing down, local demand decreasing and exports in a slump, we expect the Chinese economy to grow around seven percent this year—its lowest growth rate in more than a decade. (Source: Reuters, October 3, 2012.)

The Chinese economy is not the only economy sending waves of uncertainty into the global economy.

The mainstream media has been glorifying the efforts by the central banks to expand world monetary bases (create money out of thin air) in their continuous fight against the global economic slowdown. But the truth is that world central banks have not been successful with their policies—not a lot has changed.

Just yesterday, the International Monetary Fund (IMF) lowered its outlook for the global economy. The IMF expects the global economy to grow at the pace of 3.3% in 2012 and 3.6% in 2013, compared to the 3.5% and 3.9% previously projected. (Source: International Monetary Fund, October 8, 2012) The IMF lowered its outlook due to increased risk.

Similar to our predictions, the IMF believes that the eurozone crisis is still the biggest threat to the global economy. The uncertainty is still high and it’s leading to lower confidence. We see the chance of more countries leaving the euro membership as high.

We are currently in a fragile economic environment where one step in the wrong direction (e.g. a European bank failing, the discovery that China’s economy is decelerating quicker than what they’re telling us, a spike in inflation) could throw world markets into a tailspin.

Let’s put it this way: I would be extremely surprised to wake up one morning to the news that Dow Jones Industrial Average futures were up 500 points. I wouldn’t be surprised at all to wake up one morning to the news that futures on the Dow Jones Industrial Average were down 500 points.

Where the Market Stands; Where it’s Headed:

I started warning a few months back about third-quarter 2012 earnings being softer than expected. Last night, Alcoa, Inc. (NYSE/AA), the world’s largest aluminum producer, reported what I thought were terrible earnings: a third-quarter 2012 net loss of $143 million, compared to a net loss of $2.0 million in the second quarter of 2012 and compared to net income of $172 million in the same period of 2011.

Chevron Corporation (NYSE/CVX) said last night that its third-quarter earnings would be “substantially” lower than the previous period. Both Alcoa and Chevron stocks were hammered overseas during the night.

Now that the focus is off QE3, it’s back onto what really matters: corporate earnings. And I don’t think investors will be very happy with what they see from the third-quarter earnings as they are released in the weeks ahead. (See: First Time Since 2009: Earnings Growth for S&P 500 Companies Turns Negative.)

What He Said:

“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only second and third mortgages. Bottom line: The lower-interest-rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems.” Michael Lombardi in Profit Confidential, June 22, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.