A few weeks ago in this space, I made the case for why real estate will perform poorly in the medium-term, driven by a variety of factors. This trend will affect homebuyers, mortgage buyers, investors, banks, and anyone else with a financial interest in real estate. Mortgage buyers like me need to be especially aware lest our mortgage notes go from having lots of equity to suddenly being underwater. Fitch, a well-known international credit rating agency, believes that real estate values are overvalued now by at least 10% (per Housing Watch, 1/4/13), and there are good arguments for why it is overvalued more than that.
However, in the short-term, which I define as the next two years, housing should do well. Certainly, real estate values improved significantly in many regions during 2012, and I expect the trend to continue through 2014. A combination of low interest rates, limited housing inventory, and Wall Street and an influx of foreigners jumping in as investors have made near-term prospects look good. Because the Feds have their mitts all over this change and have succeeded only in artificially propping up housing temporarily, another precipitous drop in property values is still in our future.
Interest rates have been kept low by the Federal Reserve, which has promised to keep them low for another couple of years. Housing inventory is constrained by banks still holding shadow inventory, by Wall Street firms buying huge portfolios of properties, and because many underwater homeowners are unable to move. Of course, once interest rates move up, Wall Street types get panicky, or any number of other events occurs, housing will return to its slide. High unemployment, higher taxes, and economic uncertainly all suggest that the housing recovery has no legs. The current economic mess is almost entirely caused by partisan bickering over the debt and related policy decisions, and shows no sign of changing. The politicians know that any changes to spending and programs will infuriate some special interest group, which directly affects their chances of being reelected.
Congress and the President have shown no inclination to make any spending cuts, so seem destined to continue deficit spending well into the future. The Democrats refuse to cut entitlement spending while the Republicans won’t consider reducing defense spending – both areas will need to be slashed to significantly reduce the debt. The entitlement side is especially pressing, as CNS News reported that Social Security ran a $47.8 billion deficit in fiscal year 2012. The number of workers collecting disability benefits hit a record of 8.8 million people in December – apparently, not having a job is quite detrimental to one’s health. The ratio of workers to beneficiaries peaked in 1999 at 2.93 to 1, and now stands at 2.36 to 1. Social security, like Medicare, is on an unsustainable exponential growth path of misery.
The federal government has greatly increased spending from 2000 to 2012. Here are just a few examples of the percentage increase during that time (per Mish, 12/21/12):
Dept. of Defense 194%
Dept. of Education 160%
Dept. of Energy 160%
Dept. of Health & Human Services 128%
Meanwhile, Medicare and Medicaid have each risen about 140% during that time. While there are certainly opportunities to increase revenues, by far the biggest problem is the greatly increased expenses and government infrastructure that goes with it.
Japan had a crisis with some similarities to ours over twenty years ago and is still a mess. They were slower to throw money at the problem than has been the U.S., but their results have still been dismal. The U.S. has a much larger economy than Japan and has certain advantages (like still having the world’s reserve currency) that will probably keep our fall from being as severe, but it is still interesting to see how Japanese real estate (per Dr. Housing Bubble) and its stock market (Nikkei 225 on the right, per tradingeconomics.com) did over the past few decades.
This is what unconstrained spending and a dismal economy will do for you, and the U.S. is following the same path. Keep this in mind when certain politicians and economists start yapping about how the government needs to spend more to get the economy healthy.