What to Expect in 2015 in the
(To the right is a link to an audio
version of this article if you would prefer to have it read to you.)
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Please note: I wrote this
article at the beginning of november. Since then something drastic has
happened to the world economies. The price of oil has dropped about
40%, and lower prices appear to be here for at least the near future.
This will impact on the cost of doing business, and will probably help
to push economies higher over the near term.
We have an economic war in
progress between the US and OPEC, and the US may well win. In short,
the US looks to be getting back into the economic driving seat. Maybe
we are at the beginning of a turning point here. I may well take
another look at the US property market in the new year. As of the first
week of December I am no longer so pessimistic about the US property
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It’s getting close to that time again. Every year during the later
stages of november and early december I start looking at the housing
markets and asking myself what we can expect from the next twelve
I have also been asked by a reader to make some comments on the
American housing market. I have deliberately left that little job till
closer to the year end, and it will now form part one of my annual
First, some general comments on how I am going to approach my year-end
analysis. Last year I took three approaches, and made comments
dependent upon three alternative scenarios. This year I shall develop
some of those points, but instead, I’ll concentrate on areas rather
I will discuss the housing market in the US, I will then turn my
attention to the UK, and then Europe generally.
Real Estate in the USA
My first impression is that the US market is not looking at all
healthy, and I will give my reasons in a minute. First though, let me
say that the US is a big place, and the country cannot be squashed into
a one-size-fits-all category.
There are areas where real estate is doing very nicely, and the rental
returns are not just good, they are huge. We are talking about the new
shale oil areas in Texas, the Bakken, and Marcellus. Rentals around
Williston are bringing in mega returns as I mentioned some time back in
my Big Pension
(See the side-bar for a link
of the area.
Other areas are currently doing well, including Florida and parts of
California. Los Angeles seems to be on a tear, with Memphis and Seatle
doing well. Those who are flipping property in these areas are
currently seeing as much as 50% returns.
Two things are spurring on this love affair with real estate: low
interest rates, and the group of folks known as millenials. This is the
generation born between the 1980s and the early 2000s. The oldest of
this group are now in their thirties, and some of them are now in a
position to buy.
They comprise a large group; roughly 95 million, so they do have an
effect on the market.
Unfortunately, this is only half the picture. One of the really
worrying things about the rest of the country is that despite this
boost, the general picture is not so rosy at all. We not
only have a demographic shift taking place, but an economic squeeze
upon the young. Let’s have a look at the situation, and how this is
affecting real estate prices and prospects in the rest of America, and
may well act as a drag on prices going forward.
There are several factors impinging upon real estate in the developed
countries, and they are all unhealthy, and negative in impact.
First, let me state the obvious. We live in a debt economy. That goes
for the US, Canada, the UK, the Eurozone, Japan, and China as well.
Those of you who have studied economics will know that is generally
regarded as bad news. The reason is simple. If you spend tomorrow’s
money today, then you don’t have it tomorrow. The way developed
economies have been functioning for the past few decades is to continue
to borrow in order to pay current liabilities. When the debt matures
(needs to be paid back) governments borrow more, and so the debt is not
paid off, but increases. As the phrase goes, the can is kicked further
and further down the road.
This blatently irresponsible attitude to the future is encouraged by
the low interest rates across the developed world. These low rates are
even seen as negative because we are living through an era of
deflation. In Portugal, where I live part of the year, inflation is
negative (-1%), whereas borrowing rates are roughly 2.5% for property
deals. That means the real cost of money is about 3.5% which is very
In America the real rate of inflation is anywhere between 10% and 15%
depending on whose figures you use. The government pretends it is less
than 2% because they conveniently dont count essential items such as
food, housing and energy costs. If you accept the government stats then
the real cost of borrowed money is, like in Portugal, very low. If you
accept the Shadowstats figure then borrowing costs are negative.
As I never tire of saying, when you buy real estate you are usually
buying for the longer term. Long term rates will not stay this low, so
whatever people buy at today's prices will eventually begin to cost
more as interest rates rise.
When they rise is another matter. If you can guarantee low rates for
the duration of your loan, and you can get fixed rates in the US, then
you are probably on a good deal. Despite that, it means that as
interest rates rise new buyers will find the cost of a mortgage more,
and that will tend to depress prices.
At the moment we have the illusion that all is well, except that what
effectively happening is that the current generation is borrowing from
the next in order to pay their bills. This can’t go on indefinitely,
and somewhere along the road there is going to be an almighty bang. The
big question is: how long before that happens? I don’t know, but more
and more people are beginning to realise that the end is now in sight.
This means that the next generation will be so burdened with debt that
they won’t be able to afford higher real estate prices. But that is
only one aspect of the problem.
Students leave college in the US with roughly $50,000 worth of debt.
How do they pay that back? By living with their parents because they
can’t afford to survive and pay rent. They certainly can’t afford to
take out a mortgage. That means a double whammy: less demand for rental
property, and less demand on the buy side. Less demand equals a fall in
Let’s take that a stage further. Living with parents means delaying or
not bothering to have children. That means a drop in population levels.
That also means less demand for houses in the future.
Let’s make this a bit worse. Wages in the US are now lower after
inflation than they were in 1971.
It gets worse. Real unemployment in the US is hovering around the 23%
level. Excuse me but that is rather a lot. Looking to the future,
unemployment or underemployment for recent college graduates is running
at 45%. Those unemployed folks won’t be buying houses any time soon.
It gets worse. If the government keeps borrowing to pay for the
present, the future will have to pay it back. Any money borrowed which
has to be paid back ultimately comes from money made in the future. The
more of the money made in the future that has to be used to pay down
today’s debt, the less there is to spend on other things. In short, the
current generation is stealing from their kids, who are going to have a
rough time. Hint: they sure won’t be buying houses with all that debt
dragging them down.
Let me quote a few analysts. I dont have access to the figures myself,
so I am taking them on trust.
Mark Hanson, a former mortgage banker and independent analyst, believes
the housing industry overbuilt by 3 million units in the last six
years. Why? Because the Fed is making cash available to a wide variety
of “spec-vestors” who bid up prices with no intention of actually
living in the houses. This produces a supply hangover – just as
subprime financing did in ’07 – that must be liquidated. He expects a
10% to 20% decline in prices over the next two years.
Another analyst is Joshua Pollard, formerly of Goldman Sachs’s housing
research team. In a report sent to the White House on September 17, he
warned that houses should fall 15% in price over the next three years.
One of the reasons is falling income.
The latest report from the Census Bureau shows median family income has
fallen from $57,000 in 1999 to just $51,939.
The number of households in the USA is also decreasing. The New York
Times reported earlier this year that household formation has collapsed
from 1.35 million per year between 2001 and 2007 to only 565,000
between 2008 and 2013.
Short term, the hot areas may well stay hot a bit longer. How long is
anybody's guess. Long term, things may improve, but my advice is, if
you are going to buy
anything in the US at the moment, I recommend what I have always
recommended: agriculture and forestry.