Real Estate Boom And Bust–A History… The DEF Attack On American Trucking…Real Estate–Every Up Always Has A Down

Written by on · Leave a Comment

Podcast: Play in new window

Subscribe: Apple Podcasts | RSS

CRITICAL, CURRENT ARTICLES

RATATAT!

CORRUPTION

ECOMONY + FINANCE

The Wall Street Journal is taunting me…

I (Dan Ferris) am not saying anyone at the financial publication has ever directed a syllable of their editorial at me. I’m just saying it sure feels like they’re taunting me with a recent headline…In recent Digests, I’ve pointed out more than once that housing is one of the two great sources of many Americans’ wealth. The other, of course, is their investment portfolios.When housing prices and the value of Americans’ portfolios go up in value, folks feel wealthy and spend more. That stimulates the economy (at least the way it’s measured nowadays). On the flip side, when both fall in value, folks spend less and the economy slows.It’s called the “wealth effect.”As I noted in last Friday’s Digest, soaring home prices have made people feel very wealthy over the past two years. But at the same time, they’ve also made housing much less affordable.That’s concerning, especially since the stock market is also dealing a major blow to Americans’ wealth right now. Falling home prices would be another big punch to the gut.

That brings me back to the Wall Street Journal‘s taunt…

I opened up my web browser and went to the newspaper’s website on Wednesday morning.On the left side, the top headline talked about the Federal Reserve’s plan to bump up the benchmark interest rate by 75 basis points (“bps”). (And later that day, the central bank did that.) The next two headlines mentioned “stock-valuation worries” and falling retail sales.And then, in the middle of the page, I saw it staring back at me in big, bold letters…

Let me spell that out… U.S. home equity just hit the highest level on record ($27.8 trillion).It’s as if the Wall Street Journal read all my recent essays, knew I would be visiting its website on Wednesday morning, and decided to hit me right in the face as I planned today’s Digest.Regular readers know that financial headlines are notorious for acting as contrarian indicators. So when the Wall Street Journal announces that one of the twin pillars of the wealth effect has reached an all-time high, it gives me that “look out below” feeling.And with soaring home prices in the mix…

Comparing today to the era before the financial crisis is too irresistible…

Back then, in the wake of the dot-com crash, the Fed cut interest rates. That reduced the cost of owning a home. And the race was on…Low rates, rising home prices, and Wall Street’s growing passion for complex mortgage-backed securities (“MBS”) created a perfect storm. It spurred banks to lend money to anyone who could fog a mirror. (And probably one or two who couldn’t!)Folks bought homes like never before. Home ownership soared to an all-time high of 69.2% of American households in late 2004.It felt wonderful… until it led to the biggest financial crisis since the Great Depression.Thanks to the COVID-19 pandemic in early 2020, the housing market came alive again…Short-sighted politicians and corrupt public health officials with direct financial interests in the outcome abandoned every protocol learned about pandemics since the Spanish Flu of 1918 and shut down the global economy.That devastating economic blow left the Fed with no option other than to cut interest rates to zero (or so its 400 PhD economists would certainly tell you). The federal government piled on and spent – borrowed and effectively created out of thin air – trillions of dollars.And in turn, home prices soared farther and faster than they did at any previous time in recorded history. They even soared faster than during the housing bubble – excuse me, the first housing bubble.

Aren’t you now convinced that we’re living through a second housing bubble?

When asset prices go ballistic, they don’t usually stop going ballistic by leveling off. They tend to stall out in midair… turn right around… and crash back to Earth.Housing prices have never gone as ballistic as they are right now…Look at the chart of the year-over-year changes in the monthly S&P CoreLogic Case-Shiller U.S. National Home Price Index since 1988. The latest reading is the highest level ever…

Just look at the sheer trajectory of U.S. home prices. (Yes, I already showed you that chart a week ago. And I probably will share it another 10 times or more in the months ahead.)In other words, housing prices in the U.S. have never risen so much, so quickly. They’ve never gone this ballistic before. So what do you think will happen at some point?As the chart shows, before this year, the biggest one-year change in U.S. home prices happened in September 2005 – not long before the housing bubble peak. That month, U.S. home prices rose about 14.5% over their September 2004 levels.The latest reading shows that U.S. home prices rose about 20.6% year over year in March.That’s an all-time high. And as the Wall Street Journal spelled out to me loudly and clearly on Wednesday morning, that means home equity is also at a new high of $27.8 trillion.Folks can borrow against that $27.8 trillion or receive it as cash if they sell their homes. It’s real wealth that can be spent just like the money in your pocket – but it has yet to be spent.During the first housing bubble, home equity peaked at $14.4 trillion in the fourth quarter of 2005 (and again, not long after home-price growth peaked). Then, in the financial crisis, home equity plummeted. It fell around 40% to $8.3 trillion by the first quarter of 2012.A similar plunge from current levels of home equity would wipe out more than $11 trillion of real wealth. I promise you… If that happens, it would make a lot of Americans feel poorer than they did during the financial crisis.

Signs of stress are already cropping up behind the scenes in the housing market…

Last Friday, the U.S. Department of Labor’s latest data showed a higher-than-expected reading on the Consumer Price Index (“CPI”) in May. It increased 8.6% year over year – the largest change since December 1981. (That last part is starting to sound familiar, isn’t it?)And according to industry veteran Lou Barnes of Colorado-based lender Cherry Creek Mortgage, folks just don’t understand how bad things are in the mortgage market…Barnes said last Friday’s CPI report led to one of the five most painful moments in his 44-year career. As he wrote on his company’s website…Mortgages are covered poorly in the financial press… Today’s events still unfolding will take days for good coverage…The CPI news this morning was so awful that it changed the bond market’s view of Fed trajectory, and the weakest sector broke. In bond jargon, MBS went “no-bid.” No buyers for MBS. Then a few posted prices beyond borrower demand, not wanting to buy except at penalty prices. Overnight the retail consequence has been a leap from roughly 5.50% to 6.00% for low-fee 30-fixed loans.”No bid” means exactly what it sounds like… The CPI inflation report was so scary and so unexpected that investors and traders refused to bid on MBS. As Barnes added in his note…In today’s U.S., nobody is prepared to deal with inflation as it has developed in the last 90 days.The other four painful moments Barnes referred to in his note occurred in 1979, 1994, 2007, and 2008.In October 1979, the Fed went into full-on inflation-fighting mode. Mortgage rates were 11% on the Friday before Columbus Day and jumped to 13% the following Tuesday, when the markets reopened after the holiday.If 1994 sounds familiar, that’s because you probably heard 1,000 times on Wednesday that the Fed’s 75-bps interest-rate hike was the largest since then. Rates were rising as the country emerged from a recession.In July 2007, subprime and jumbo mortgages failed to attract any bidders – just like MBS did last week. All mortgages were no-bid by July 2008, including government-backed ones.The government-backed U.S. 30-year mortgage is widely viewed as one of the safest securities in the world. And yet, nobody would even bid on one in July 2008.That’s fear with a capital “F”… And it happened again in the MBS market last week.That’s what it looks like when liquidity evaporates.We tend to take our modern, large, deep, liquid markets for granted. We always assume we’ll find a seller for everything we want to buy and a buyer for everything we want to sell.Then, one day, buyers essentially go on strike.The same thing can happen in the stock and bond markets. Any asset can crash. We’ve seen that recently. But the fact that crashes are rare makes us more vulnerable to them.Before I go on, I must acknowledge…

When the financial crisis hit in 2008, two aspects of today’s housing market weren’t relevant…

The first one is inflation.It’s possible that persistent inflation will keep home prices elevated for many years.The Case-Shiller home-price data that I shared earlier only goes back to 1988. But we can also look at decade-by-decade average home-value data from the U.S. Census Bureau…The data show that average home prices in the U.S. rose from $17,000 in 1970 to $47,200 in 1980. That represented compound annual growth of 10.8%, compared with average monthly CPI readings throughout the decade of 7.7%.In other words, home prices didn’t merely track inflation. They beat it.The Fed’s home-equity data from 1969 to 1982 show four recessions (the shaded areas in the chart below). Total household equity in real estate only fell significantly one of those times – during the brutal bear market in 1973 and 1974. Take a look…

This chart suggests that inflation can keep home prices rising – and perhaps even at a greater rate than inflation – over the course of several years. And that can happen even as consumers are bludgeoned with higher costs of living, like they were in the 1970s.Now, let’s move on to a second important aspect that wasn’t a factor in the first housing bubble…

A new player joined the game – and it’s now the market’s biggest buyer…

I’m talking about institutions and businesses that buy homes as investments.They’re a bigger force in the home market than ever before. And they’ve become a much bigger force since the financial crisis…These investors bought fewer than 20,000 homes per year every quarter from the first quarter of 2008 to the first quarter of 2012. That’s around the time U.S. home prices bottomed.Investor interest climbed from there. And it finally returned to the 2005 high of more than 50,000 homes per quarter in 2017.Low rates and a slow market during the pandemic brought investors more aggressively back into the market than ever before…According to a new report from real estate company Redfin, institutions and businesses bought a record 93,260 homes in the third quarter of 2021. They followed that up with 87,910 purchases in the fourth quarter of 2021 and 77,829 in the first quarter of this year.The most recent number is about 17% below the record high for this metric. But it still made its own record… It represented 20% of all the homes sold in that quarter.

Individuals and institutions are both buying fewer homes this year. But individuals have been hit harder, which is allowing institutions to garner a record share of home purchases.Both groups are buying fewer homes this year for the same reason – higher home prices and interest rates make it more expensive. Investors tend to make more cash offers than the folks who will live in the houses they buy, but they still often fund offers with debt.My point is… investors respond to higher prices and rates the same way individual households do – their buying as a group slows down.

My idea about the tendency for ballistic price charts to crash might apply here, too…

The ballistic rise in investor home purchases of 2021 is already 17% off its record high.I believe it’s more likely to drop off quickly, like most ballistic movements, rather than gradually. And it could wind up bottoming out well below where it was just prior to liftoff.The whole situation feels way too bubbly.And as we discussed above, the stress of high, totally unanticipated inflation has already generated one of the five most panic-ridden days of the past 43 years in the mortgage market.Are we really supposed to believe that’s the end of the trouble in the housing market – and not the beginning of the trouble? The Mortgage Bankers Association reported last week that mortgage applications were down 16% year over year. And the industry group said refinance applications fell 76% over the same period. That’s serious damage.Many investors keep believing in “peak inflation” and that everything will be just peachy now. And I continue to believe that’s simply absurd.I’m more worried and more bearish than I was a year ago, a month ago, and heck, even a week ago.At some point, further declines will make the end of the bear market more likely. But for now, every decline pulls another leg of support from under the most expensive market in history. And that makes more declines likely from here.Perhaps my single biggest worry for investors today is that too many of them don’t understand what inflation really is – and why it tends to be so persistent when it shows up…

Inflation isn’t what you think it is…

It looks like an increase in the price of “things.” So right away, when it appears, we hear excuses…At first, inflation was a “transitory” effect of all the stimulus that governments and central banks used to counteract the insane massive global economic lockdowns.Then, it had the same cause – but it was no longer transitory.Then, it was made worse by Russian President Vladimir Putin’s invasion of Ukraine. Economic illiterates like Senator Elizabeth Warren of Massachusetts would have us believe that it’s caused – or at least exacerbated – by greedy grocers, meat packers, and oil companies.It’s all nonsense.Inflation is one thing – and one thing only. This definition is true in all times and places. And it isn’t higher prices for goods and services. Higher prices are the result of inflation.In actuality, inflation is a decline in the value of money. It is “always and everywhere a monetary phenomenon,” as economist Milton Friedman famously put it.

Reducing the value of money is one of the biggest tricks governments try to pull off…

It’s one of their most often used techniques throughout recorded history to try to deliver on undeliverable promises they make as they seek to gain greater power over you.And importantly, it has never worked out well. So watching it play out today just makes everyone who won’t acknowledge it look like an idiot or a liar (or both, in the case of most of the political class).It’s easy to see why inflation tends to hang around longer than anybody anticipates…Governments are in the business of maintaining and expanding the reach of their monopoly. They don’t have any incentive to do what’s really best for their people – which is to get out of their way and leave them alone.So governments won’t really do anything about inflation.The central banks that do take inflation seriously will raise interest rates until millions of people are suffering under a deeper-than-expected recession. If you don’t believe me, consider the horrendous one that then-Fed Chair Paul Volcker caused in the early 1980s when he sent interest rates into orbit.

Pundits often say the stock market looks forward. But maybe a new crystal ball is needed…

The market clearly didn’t expect what the CPI report showed last Friday.That’s why the MBS market went “no bid” a week ago. And then, on Monday, the stock market capped off one of the worst three-day sell-offs in history…Everything fell that day. Everything. Investors went on a mad scramble to raise cash as every major asset’s price got crushed. (My colleague Corey McLaughlin covered it well.)Until a week ago, almost nobody was talking about a 75-bps rate hike from the Fed. And then, when it happened on Wednesday, the stock market went haywire.Stock prices gesticulated wildly as Fed Chair Jerome Powell delivered the news. Then, stocks cratered hard yesterday… The S&P 500 Index fell more than 3%. The tech-heavy Nasdaq Composite Index dropped 4%. And the small-cap-focused Russell 2000 Index plunged as much as 5.2% during the day before finishing down about 4.7%.And as I explained earlier, the Wall Street Journal taunted me as everything unfolded…Wednesday’s headline about record home equity of $27.8 trillion made me think all over again about how awful it would be if a big chunk of all that wealth suddenly got wiped out.No matter what you and I think we know about the future, we know nothing. But all the returns for the investments we’re holding today will eventually arrive in that unknowable future.That truth – brought to light again by this week’s events – is why I always urge you to…Prepare, don’t predict.I’ve counseled holding plenty of cash too many times to count.Sure, cash suffers from inflation. But as I’ve said before, the proper bear market strategy is about survival. And having a lot of cash on hand is the essence of survival at the end of a bear market. It’s how you recover from those dark days when the sun shines again.But unfortunately, I fear that day is a year – or more – into our future.

Local radio stations are really responding to high gas prices…

Every time I (Corey McLaughlin) get in the car nowadays – which isn’t a lot – I’ve noticed something different on the radio… When the host is broadcasting a new promotion or sponsored giveaway, it often has to do with gasoline.Ain’t that fun.Instead of the usual promise to give away a cash prize to the seventh caller or whatnot, radio stations are now offering gift cards to a gas station or running ads that promise discounts on a gallon.This is what it’s come to… This is life in 2022 with inflation, where dollars are worth less and the gas costs more than it ever has before… and keeps getting more expensive… I can’t blame the radio stations. They know their audience: folks in the car already burning fuel.

One station in Northern California is selling regular gas for $9.60…

Most folks use the free GasBuddy app to find the cheapest gas stations. But it can also pinpoint the most expensive gas in the country. It’s sold at Schlafer’s Auto Repair in Mendocino, California, on the Pacific coast in the northern part of the state.According to a report from a local ABC affiliate in Fresno, regular gas at Schlafer’s pumps is going for $9.60… and $9.69 for plus and $9.91 for supreme… Check out this raw deal, almost $50 for five gallons…

Paying nearly $10 per gallon of gas is more the exception than the rule… so far. Even in California, which has the most expensive gas of any state today, the average cost of a regular gallon is $6.34. That’s an eye-popping record high, but at least it’s not $10.But what’s happening at this one rural gas station, without exaggeration, could go down as a dubious leading indicator. A number of factors contribute to California’s particularly high prices, as I’ll get to momentarily, but…The station’s owner says she’s charging so much for no other reason than she needs to make ends meet… The station gets its gas from Chevron, but it’s independent and doesn’t sell food or drinks to help turn a profit.

This circumstance isn’t overwhelmingly unusual, complex, or quickly fixable…

But it’s reality… all over the country. Even big chains are dealing with the scourge of inflation like everyone else.As I’ve written as far back as August 2021, the supply-demand imbalance in the oil and gas industry was likely to drive oil and gas prices much higher in the years ahead…I won’t rehash all the details – we did that recently in the May 17 Digest if you’re interested – but just know higher prices were likely going to happen even before the war in Eastern Europe poured lighter fluid on the trend…And also know that crude oil prices have accounted for at least half the price you pay at the pump for the past decade, according to a long-running monthly report published by the U.S. Energy Information Administration (“EIA”).As of April, 60% of the cost of a regular gallon of gas was tied directly to the price of oil.And that was two months ago, when a barrel of Brent crude – the international benchmark – traded about 6% lower than today’s price for much of the month.

Today, for all these reasons, gas prices continue to skyrocket at a pace the U.S. has never seen before…

The national average for a regular gallon is $4.92, according to AAA, which publishes daily gas price analysis on its website.That’s an all-time high… It’s also a nearly 60% increase from this time last year, when an average gallon was $3.10. And it’s more than 120% higher than June 2020, when the world was crawling back from the worst of the pandemic lockdowns…Even back in the 1970s, during the “oil crisis,” the price spike wasn’t nearly this bad… From 1973 to 1974, the national average for gas rose “only” 50%… Later in the decade, it soared 80%, but that was over two years from 1978 to 1980.Today, 14 states are averaging $5 per gallon or more… The cheapest state average is $4.33 in Georgia, so you’re in some form of luck if you live there, at least…Not so much in California. Things are the worst there because of a number of factors, but namely tax and regulatory policies. As Sanjay Varshney, a professor of finance at California State University, Sacramento told The Hill in March…First, taxes are higher generally in California, so the gas tax itself is higher. Number two, California environmental and emission laws are tougher, so the mix required [for] gasoline tends to be more expensive.California is also a “fuel island.” The state’s fuel supplies are either produced in-state or transported there by ship or truck – costlier methods than pipelines used elsewhere… And those costs are passed on to consumers.According to the Western States Petroleum Association, in-state production in California covers only about 30% of the state’s needs. Here’s the association’s Kevin Slagle…The other 70 percent or so is imported from around the world, some from Alaska, but really mostly from the Middle East, Ecuador, countries like that. So we have a situation where our… supply is limited by what we can produce in-state [and] we’ve had production drop quite a bit over the last five or six years.Add it all up, and you have folks who own gas stations trying to figure out how to reprogram their pumps to show double-digit prices. One gas station in Washington state has already done it, in case that possibility becomes necessary.

Moving on to a related point, about commodities…

This comes via a note we received over the weekend…Herman V., who has been a subscriber since 1999 (that’s our entire existence, by the way), wrote in with the following response to my Sunday Masters Series essay titled “The Next Commodity Supercycle Is Upon Us“…Dear Corey, You have yet to experience the real boat that’ll sail in the near future. Picture us already living on Mars and how we’ll be farming our sustainable crops. That’s right… “indoors.”Both NASA scientists, researchers, engineers and farmers are currently teaming together to thinkstorm “under the hood” farming. They’re coming up with ways to mitigate natures’ negative weather storms and reliably produce indoor “produce.”Take countries like Holland, which is currently leading the way in cultivating acreages of indoor farming. You need to start looking into these trends for future Stansberry Research investment possibilities.Indoor farming will become the rage and the world’s salvation as we turn away from meat to plant-based proteins. A recent documentary on Prime Video called “Eating Our Way to Extinction” is pounding away at our subconscious and will eventually turn us all into vegetarians.First, I can’t see myself ever voluntarily choosing to be a vegetarian… no matter how many documentaries may try to convince me I should. Still, your points are taken about the future of farming and food…I suspect we’ll hear more and more in the years ahead about exactly the ideas you’re talking about… We’re hearing and seeing a lot already… And since we’re talking about something as essential as food supply, the discussion isn’t likely to go away – and shouldn’t.As far as research on this sort of thing, we actually already have some…In Matt McCall’s MegaTrend Investor newsletter, our colleague Matt McCall has an open recommendation for a “vertical farming” company that sells products to help farmers grow crops indoors, as you discussed.Matt calls this a “picks and shovels” company. That means it provides infrastructure for farmers, which is a scalable and potentially lucrative strategy if the products are in demand. He recommended the company late last year.In his most recent issue of MegaTrend Investor, Matt updated subscribers on this relatively small company, noting that it’s expecting to grow its sales substantially compared to a year ago – a remarkable feat in this economic climate.The company has several catalysts…

A land of little to no water…

I’m not trying to start a climate-change debate, but for example, there’s no doubt right now that California has been suffering through a massive drought… and we know a lot of food comes from the state.As strange as it might sound to some people, growing crops indoors – with vertical watering and artificial lighting – may become more appealing if nature becomes more hostile to traditional farming. As Matt wrote in the May issue of MegaTrend Investor…With food production under pressure around the world, agricultural technology has become as important as ever…In last month’s issue, we talked about California and its ongoing drought. A month later, the situation is even worse. More than half the state is now in extreme drought conditions, and almost all of the rest is considered either “moderate” or “severe.”

The drought in California has gotten even worse in the past few weeks, with large regions in the middle of the state considered in “exceptional” drought territory as of June 2. Here’s more from the May issue of Matt’s MegaTrend Investor…One of the main sources of the state’s water supply – the Sierra Nevada snowpack – is down about 80% from its normal levels at this time of year.And as we’ve seen lately, crops are in short supply as well. The ongoing conflict between Russia and Ukraine has disrupted exports of crops like wheat, barley, sunflower oil, and more.These factors continue to push food prices higher – with the food component of the April Consumer Price Index jumping 9.4%. And that came after an 8.8% year-over-year (“YOY”) increase in March.You might have noticed Matt just mentioned the Consumer Price Index (“CPI”), a popular measure of inflation. So, yes, all of this is contributing to higher prices in the economy, too. In short, there’s a lot to this story…In April, Matt dedicated a full issue to the challenges facing the agriculture industry right now – from the uncertainty in Eastern Europe, to broken supply chains and changing growing conditions. If you haven’t already, you should give that issue a read.And if you aren’t already a subscriber to MegaTrend Investor, click here to learn how to get access to Matt’s recommendations.

Finally, if you are looking for a state that has some positive things going for it…

We have some good news for you, particularly if you are nearing or in retirement…We’ll end today by sharing the chance to access a brand-new 55-page report from our colleague and Retirement Millionaire editor Dr. David “Doc” Eifrig… It’s called the “Best States for Your Retirement.”Today we’ve explored how California – incidentally a place where Doc spends a lot of time for his wine business – is a land of nearly $10 per gallon gas and scarce water. Generally speaking, the state is also one of the more expensive to live in, as Doc shows in the report.California checked in as the second-most-expensive state for retirement, when you factor in taxes, according to Doc’s analysis. He said the average retiree should seek roughly $1.4 million in savings to retire comfortably there.There are better or certainly cheaper options, Doc says…

The best states for retirement…

Whether you’re willing to move across the country to make the most of your money, or you want to stay closer to home but find a state that fits your needs better, Doc and his team have got you covered.”Best States for Your Retirement” is a popular exercise that Doc and his research team typically update every couple of years… They crunch the numbers on a variety of factors, such as taxes, housing, health care, crime, climate, livability, and cost of living.Doc then gives a detailed breakdown of each category, which states rank the best in each of them… then shares the top 10 states for retirement to consider… and the five worst that you might want to avoid.For a taste of what you can find, and because we live here currently, I need to mention that Doc’s lowest-ranking state for retirement is Maryland. While it doesn’t rank worst in any one category, it was low enough across the board to rank last.Existing Retirement Millionaire subscribers and Stansberry Alliance members can access this new report here. And if you don’t subscribe to Doc’s signature publication, now is a great time to give it a try…

Give Doc’s Retirement Millionaire a try today…

Frankly, Doc’s “Best States for Your Retirement” report could be worth the modest subscription fee to his signature publication on its own…I’ve said before that a subscription to Doc’s excellent Retirement Millionaire service is a must-have for any investor… For a discounted price of only $49 a year, you’ll get 12 issues featuring monthly stock recommendations to protect and boost your retirement portfolio…The stock picks alone are worth the price of admission, but you get so much more, including health and wellness tips… plus a host of special reports and bonuses like the one we’ve mentioned today.Even better, you can give Doc’s service a try risk-free for 30 days to claim your digital copy of the “Best States” report… If you are not satisfied for any reasons, let us know and we’ll give you a full cash refund. It’s hard to beat that.Click here to learn more about how to get started with a Retirement Millionaire subscription today… and let Doc help you decide where to spend your retirement – ideally where the gas is cheaper and there’s at least a bit more water.

FAMILY SAFETY/CHINA: OUR ENEMY

GUN CONTROL

MILITARY

WOMEN & EDUCATION

VIOLENT LEFT

CRITICAL, CURRENT VIDEOS

PRESERVE YOUR FREEDOM STAND UP – TAKE ACTION

Link to previous major COVID shows:

September 11, 2021

September 18, 2021

September 25, 2021

Leave A Comment...

*

This site uses Akismet to reduce spam. Learn how your comment data is processed.