Federal Reserve & U.S. Homeownership – Our Overlord Landlords by Stephen Aust, MarketCycle Wealth Management
The above snippet was taken from a CNBC headline on April 28, 2016.
I’ve received several questions from readers (via the website’s contact page) asking the same question: “How can U.S. homeownership be at record LOW levels and yet there is a limited supply of homes for sale and prices are high?”
Homeownership Rate
The answer is simple although the financial reporters seem to have missed the importance of the story. Since 2009, hedge funds have purchased houses at record numbers and banks were still holding onto houses that they seized from delinquent owners and they both obtained these houses at ridiculously low prices and eventually turned many of them into REITS.
REITS are Real Estate Investment Trusts, investment vehicles that hold huge bundles of homes that have been converted into income generating rental properties and then rented out to the same people that lost these homes during the 2008 financial crisis. These REITS are offered as investment vehicles via hedge funds or on the major stock exchanges where investors can hope to reap both income and capital gains.
Individual homeownership is at record low levels because the homes are not owned by people, they are owned by hedge funds and banks and rented to people. So, people are still paying the mortgage but they are now paying it both FOR and TO the bank or hedge fund that took their house from them.
And an increasing number of people in the United States are homeless, especially in high cost areas such as New York City. The gap between the rich and the poor is widening and the big banks and financial institutions and sovereign wealth funds still control and exploit most of the planet’s tangible assets:
The fixed-rate REITS that were created by the financial institutions and hedge funds perform poorly when the Federal Reserve is raising rates in response to rising inflationary levels; almost all REITS are fixed-rate. (MarketCycle really, really wanted to like the only large floating-rate global commercial property REIT, BXMT, but traders insisted on treating it as if it were a fixed-rate REIT so the trade doesn’t work.) Currently interest rates are near 0% and inflation is low but rates WILL rise over the very long-term because of our non-stop increase in the money supply (and government debt) that will eventually cause hyper-inflation and high interest rates, just as money printing for the Vietnam War caused hyper-inflation and skyrocketing interest rates in the 1970s and early 1980s. It may take as much as another 15-20 years for the economy to reach these same dangerous high-inflation levels.
This next chart shows what happened the last time we entered a secular inflationary cycle; rates rose to astronomically high levels. Mortgage rates and interest rates in general should stay low in the near and intermediate-term but they are very likely to slowly form a second similar interest rate peak (interest rates, for the 10-year bond, are shown on the left hand side… chart courtesy of Mortgage-x.com):
The Federal Reserve monetary increase is shown below. Does this chart look like a bubble is already forming? Europe is a bit worse than the United States (and not yet done) and Japan is much worse (and it’s doing no good in Japan). We won’t begin to clear any of this out before the next recession begins; the next recession will involve adding even more monetary stimulus. (Chart of money-printing courtesy of the Federal Reserve).
This snippet was taken from a May subscriber article from (the very expensive but good) Yardeni Research:
The debt levels in the United States (and everywhere else on the globe) are already beyond shocking. Debt eventually has to be repaid or the ever increasing interest payments on the debt will crush the borrower. Even though higher inflation and resultant high interest rates are still far into the future, they are slowly and steadily heading this way. Interest rates may be very slowly increasing for the next 20 years… tiny moves now and big moves later on. Investors better get a handle on this concept and be able to exploit it because there is very little chance that we will be able to stop it! Deflation leads to inflation which will lead to high-inflation which will lead to deflation. The next deflation may resemble the depressionary era that occurred after the crash of 1929, but we are a long, long way from that occurrence and right now the stock market is still solidly bullish. (Chart of debt levels courtesy of Jeff Miron):
Now that you’re depressed, what if you live in the United States and want to BUY a home in the near-term, where is the sweet-spot? It is in buying an already existing home (dark blue line) rather than building your brand new dream home (light grey line below):
But if you have time on your side and you want to either build a new home or renovate an existing home, then you may want to wait until the U.S. Federal Reserve announces that we have “now entered into a recession” (they will do this many months after MarketCycle has already picked up this fact). The Fed will announce “recession” after we have already been in a recession for at least 3 months… they are always late to recognize what’s happening in current time. A recession is a bear market on steroids. The housing and construction sectors normally start to weaken well before the general stock market drops into a recessionary period and by the time that the Federal Reserve announces a recession, builders will have become willing to work for less and to lock in a fair and reasonable price for the potential homeowner.
Secularly, I expect housing to remain generally strong into the 2030s (but with a couple of prolonged dips along the way).
May 5, 2016 snippet taken from the CNBC financial website:
The market has been gyrating sideways for almost TWO YEARS. Below, the Financial Times shows why the stock market has moved sideways for so long. There have been record withdrawals of retail investor money, moving from stocks to cash… $11.2-billion just last month! This is all about to change and our expectation is for U.S. dividend paying stocks to lead the way out of this sideways trap, especially any dividend paying value ETF that concentrates into energy, material and consumer staple stocks.
CONCLUSION: The market is counter-intuitive, so rather than being bad, the two year flight from stocks will eventually become very bullish for stocks. Bull markets die when investors become euphoric, not when they are fearful and confused. We have just entered the late-cycle (which does not mean the very end of the market cycle!) and since investors are not yet euphoric, there is a good chance that this final ¼ of the total bull market cycle will last longer than normal BEFORE recession moves in (and this further means that the home price cycle is not yet ready to peak). It is likely that the next president inherits a recession and is unable to stop it but is blamed for it, regardless of whom s/he is.
During both the early and late parts of the total market cycle, active management solidly beats passive investing. The hurdle is now very low and easily jumped over and investors are fearful and this is what drives stock markets higher: reality exceeding lowered investor expectations and fears.
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