Demographics and economic distortions support US housing prices and rents

The Major Challenge of Inadequate US Housing Supply

I came across a research report from Freddie Mac titled, The Major Challenge of Inadequate US Housing Supply, and wanted to pass along some of its findings. I think its analysis effectively illustrates the current issues and dilemmas that are plaguing the residential housing market in the United States. While my analysis will concentrate on the domestic residential market, I believe that these conclusions can apply to many areas around the globe.

Keep in mind that the burgeoning and growing distortions and factors affecting the housing market in the United States are without precedent. Thus, it is naive to simply look at the Case-Shiller indexes and conclude that prices are doomed to fall. My contention with most of the housing market analysis (especially in the alt-financial media) lies with their failure to properly recognize these secular changes and how they are affecting the equilibrium price levels in many areas of the nation. Moreover, many will cherry-pick their data to demonstrate a bearish case. Indeed, I do not see any viable long-term solutions on the horizon, and for most renters and prospective home buyers the case is bearish; for them.

Many prognosticators look to the stock prices of the home builders as well as the new and existing home sales numbers to make claims that show that prices movements will repeat the swoon of last decade.  They make the direct connection between these observations and the prices of our houses. Take a look at some of the numbers from last month’s Freddie Mac’s research.

After nearly a decade of low levels of building, new housing stock is well short of what is needed. This has supported rents and house prices. This trend will not reverse any time soon.

Despite the calls from policy makers on the local, state, and federal levels for more affordable housing, the situation grows more dire each year. The planning, build-out, environmental, and construction costs as well as the local zoning restrictions have permanently driven up the costs of home construction.

Home building costs encompass the cost of land and regulatory costs. Since 2010, the cost of land has averaged about 23 percent of total home building expenses. But in some markets like San Jose, Santa Ana, Oakland, and Los Angeles, land can cost upward of 70 percent of the cost of building a home.

Laws and regulations such as local zoning restrictions on lot sizes and building height and open space designations also increase the cost of building a home, in turn reducing the supply of new homes. Regulatory costs increased 29 percent between 2011 and 2016, the National Association of Home Builders (NAHB) estimates.

The Major Challenge of Inadequate US Housing Supply – Freddie Mac (December 5, 2018)

As home prices continue to escalate, the government responds by subsidizing the mortgage market, which just creates higher demand along every price point.

Moreover, existing homeowners tend not to support expansionary home building projects. The bottom line is that these economic distortions will make it increasingly difficult for demand and supply to find a long-term equilibrium. In a managed economy, supply is restricted and prices are continually moving higher. Thus, home builders find it profitable to restrict supply and only sell higher-priced homes.

370,000 additional new housing units are needed each year
In 2017, the United States added 1.25 million additional housing units (homes, apartments, and manufactured homes). Economists with Freddie Mac estimate that current demand is about 1.62 million housing units per year—370,000 units more than the current rate of supply

Freddie Mac estimates that 1.62 million units are needed annually to meet the housing demand: 1.1 million to accommodate household growth; 300,000 units to replace depreciated existing stock; 100,000 to meet the demand for second homes; and 120,000 units to provide enough vacant homes to maintain an efficient marketplace. While the true level of long-run housing demand is uncertain, even Freddie’s low estimate  of 1.30 million units per year exceeds the current rate of housing construction (1.25 million units in 2017). Although the Freddie Mac report did not display the data for 2018, it is similar to 2017’s numbers. Thus, the gap between supply and demand still persists.

The lack of new supply is causing rents to rise as well.

This graph shows the price/rent ratio (Jan. 2000 = 1.0). On a price/rent basis, the Case-Shiller National index is back to Feb. 2004 levels, and the Composite 20 index is back to Nov. 2003 levels.

Freddie Mac points out the three primary factors that are driving the need for housing construction: growing demand from a growing population; the need to replenish existing stock; and the need for vacant units in a well-functioning market.

As long as these marketplace distortions persist (and I do not see how they can reverse) The majority of the population will continue to be surprised how high home prices and rents climb over the long-term.

Rents nationwide have increased 79% since January 2000. Rents continue to increase and many will be permanently shut out of homeownership.

You and I know that the US Fed and the other central banks will have to embark on unconventional monetary policy programs soon in response to the growing economic problems. I do not see how the housing market will not be affected. If the Fed opens the spigots and works to lower interest rates across all points of the yield curve, house prices will receive support regardless of what happens to the economy; even if most can no longer afford to buy.

Despite the increasing percentage of the population who think house prices will correct soon and that it may be a poor time to buy and a good time to sell, I think many prospective homeowners could be surprised and shut out.

Look on the bright side; If you teach in San Francisco, you can sign up for government housing and massive rent subsidies. Of course, somebody bears the costs of these programs. The people who are the most adversely affected are those who do not qualify for subsidized rent and government housing. They are cast out into the open market to fight for the ever shrinking supply that resulted from the housing stock that was taken off the market and devoted to the subsidized programs.

January 20th Market Update – Stocks and bonds respond to stimulus; Trading thoughts; Loose money will shut out more real estate buyers

I have uploaded a January 20th Update. Click here to go to the show archives page to listen or you can listen on the link below.

To download the podcast – Right mouse click here

The elites achieved their objective and took out the 50-day mva. I suspect we need a rest and the 50-day will be the first test of support.
Look at all those nice green candles that took out the 50-day mva. We said this was done by design to deliver a statement.
The Nasdaq has been above the 50-day mva longer. All the problems with AAPL have not yet affected the rest of the Nasdaq. AAPL earnings come out on 1/29. When it comes to Buffett and tech, bet against him.

-Unless the stock market rolls back over, which I doubt, US Treasury yields will retest their moving averages. The yield curve is managed, so serious conversation on yield curve inversions is pointless.
-I received an email asking me to discuss BREXIT and what I think will happen. My analysis on how power is consolidated. Once the consolidation is achieved it is NEVER relinquished. All power continues to consolidate.
-The NWO is built on a wall of worry. All this upcoming chaos is generated. Global Economic Policy Uncertainty Reaches Record High
More people think that real estate has topped out. I see this as a contrarian indicator. When the central banks begin to engage in more unconventional monetary policy look for house prices to continue to move higher. More people will be priced out.
-Rents are 37% higher nationwide than at the height of the last real estate bubble (1/01/2006).

Rents are much higher this time around. While prices may seem as high, or higher, than in 2006, cap rates and IRRs are more attractive.
Despite the talk of doom many of the housing numbers do not point to calamity
The demand in real estate is greater than what most are claiming

January 19th Update – As society decays, the teachings of the Talmud are spreading worldwide

I have uploaded a January 19th Update. Click here to go to the show archives page to listen or you can listen on the link below.

Note: I will put out a separate market update later this weekend.

To download the podcast – Right mouse click here

-A reader sent in an email about a January 16th podcast from Trunews.com, discussing the Talmud and how those who aspire to be rich are embracing its teachings
THE ART OF TALMUD: CHINESE COMMIES SEEK ISRAEL’S BABYLONIAN SECRET KNOWLEDGE
Talmud-inspired learning craze sweeps South Korea
Inside China’s Bizarre Obsession With Jews
-The alt-financial media get it wrong over and over again. The control of the Synagogue of Satan was on full display last month.
-What would the elites have to gain from collapsing their system? None, except to leverage the manufactured chaos to consolidate their wealth, power, and control
-Instead of calling it the “Great Recession,” perhaps we should call the manufactured 2008 financial crisis as “The Great Buying Opportunity.”
-Why do the alt-financial media fail over and over? They cannot accept that these elites are in control. They are like people who grow up in religious families and know the truth, but reject it. The alt-financial media and their followers will never accept the truth and based on these lethal confirmation biases, they will make the worst financial decisions over and over. Their followers grow more helpless and hopeless.
-Imagine if we shorted these markets in December? I begged you not to short these markets. Once the Fed came out and the plunge protection team intervened, I loaded up my trading account with a bunch of stinker stocks and rode them up. I have been peeling them off and have about 25% of the original position left.

Teachers are judged more strictly

Why do I get upset with many in the alt-financial media?

My brethren, be not many masters, knowing that we shall receive the greater condemnation.

James 3:1 (KJV)

God more strictly judges the teachers and pastors. Those who pose as an expert or an authority figure in any realm must be certain that they are qualified to teach.

James warns about taking on the title of “teacher,” and in this regard many who claim to be experts should not aspire to be labelled as one. Those who claim the mantle of a teacher will face stricter judgment or “will be judged with greater strictness.” The more one claims to know, the more accountable they are held for what they do with that knowledge.

Why is this? Contemplate a scenario where a person claims to be an expert in economics and finance, but is either unskilled and unaware of it or is disingenuous and attempting to manipulate the follower. What happens when the public follow his advice and lose a lot of money? How will this person be judged? According to James, these people are judged more strictly.

With this preface out of the way, I want to categorize the three types of people who dominate as the authorities in the alt-financial media:

  • The unskilled who pose as teachers and dispense advice. Many of these individuals actually think they are skilled. However, a simple analysis can determine if someone has an objective mastery of the subject. If he or she continually makes wrong predictions,  exhibits flawed logic, or demonstrates only rudimentary acumen, perhaps this person should find another line of work (or overcome his biases, which preclude him from reaching better results).
  • The skilled or unskilled who are also good at selling something. These are the people with conflicts of interest. They pose as our allies, but are disingenuous in their teachings as they have something to upsell the follower. Some are gold or crypto shills, but many also are dependent on social media where they can ensnare the simple with monetized click bait articles and YouTube videos. These media are designed to cater to the fearful or ignorant. They may also have expensive services to sell you and need to convince you that they are vital to your financial well-being. The followers make the wrong financial decisions or spend large sums of money and end up living lives of poverty.
  • The skilled who have nothing to gain, except to help out others while they can. They make no money from their advice and only hope that his or her readers/listeners can take the best course of action to make their lives easier. These people continually reassess their skill levels and make certain that they have attained a certain level of mastery. Their predictions and observations are more correct and they can relay it in a way that makes sense to the objective person.

I have been criticized in the past for my views with regards to many of the personalities in the alt-financial media. But understand, my conclusions are only based on their accuracy and track records. If they are continually incorrect, I believe that for the greater good of the remnant they need to pursue another line of work. This isn’t just for the benefit of those who lost money listening to them, but for their benefit at judgement.

January 16th Market Update – Expanding central bank balance sheets fuel asset prices; Falling oil prices too much for central banks to take; The alt-media is short on knowledge, but long on showmanship

I have uploaded a January 16th Market Update. Click here to go to the show archives page to listen or you can listen on the link below.

To download the podcast – Right mouse click here

The S&P futures are right near 50-day mva. The central banks and US Treasury are hoping the index retakes the moving averages
The Nasdaq took out the 50-day mva today
The Down needs to move up some more before the 50-day mva is taken out. It is vital that we retake the 50-day mva and the elites are hoping for this to happen.

The central bank balance sheets are once again expanding in aggregate. The latest research shows that the central banks have begun to add to their balance sheets once the the major stock averages began their precipitous free fall late last month.

A sustained drop in oil prices would have been calamitous to the credit markets. The $30 drop was too much for the central banks to take. They acted accordingly.

-There are still decent real estate prices and some fair deals in the United States. So what if prices took out their 2005 highs? Rents are up about 30% over that time. Camparatively, residential real estate can still provide predictable returns. Just stay away from the overpriced areas. Simple math can determine this.
-Mortgage rates are down about 50 bps. Subsidized mortgages are doubleplusgood.
-I look for the 10-year UST yield to touch the 50-day mva.
-There is so much dishonesty and showmanship in the alt-financial media.
X22 Report has about 350k YouTube subscribers, but virtually all his predictions have been incorrect. But that doesn’t matter. He’s short on financial market skill, but long on showmanship. He must make a lot of money on his monetized channel. He just keeps shoveling the crap to the unwashed masses who have convinced themselves that collapse is right around the corner for the past decade.
-For people who listen to and follow the X22 Report or the other charlatans in the alt-financial media, their lives have already collapsed. These dumbed-down patriots are now unable to free themselves from their confirmation bias and the shackles of calamity fears, while these dispensers of collapse porn sink their followers further into the abyss.

Want to see true monetary inflation? Look at the costs of these items

Items that cannot be imported show the true monetary inflation
This charts illustrates the price inflation of a few items that cannot be imported and which reflect the truer rate of the monetary inflation. The government seeks to control these sectors in an attempt to hide their profligate ways.

A reader asked the following question:

Why does the costs of rent continue to rise more than inflation?

Here is my answer:

There are a number of items that cannot be imported or exported freely. There are certain factors of life and production that cannot move freely across borders from high-cost to low-cost countries. Obviously, the price of rent cannot be arbitraged. Moreover, the price of rent cannot be arbitraged between less expensive areas of a nation and more expensive areas. Imagine if we could pay the rent of Columbus, OH, while living in New York City.

We can take this further. While technology is assisting in keeping the costs of healthcare down (some healthcare jobs have been off-shored to low-cost nations and some operations and dental work can be performed in Mexico), for the most part the costs of healthcare are generally isolated to each country.

House prices reflect this sad reality and so do the costs of higher education.

Thus, the government tends to subsidize these sectors heavily in an attempt to hide their transgressions of hyper monetary printing. It is the government and the central banks that are directly to blame and it does not matter who is in office. As the printing spirals further, the government seeks to control more and more aspects of our lives. This will continue until the government controls just about every factor of life.

To make matters worse, whenever the government subsidizes a sector such as healthcare, it distorts the supply/demand equation. This only helps to restrict supply, stimulate demand, and drive up costs further. Just look at the chart. Even if a nation has universal healthcare, the costs bleed out somewhere else. They almost always result in higher taxes and real estate prices.

Contemplate what the heavily subsidized mortgage market in the U.S. has done to house prices. This is the government’s attempt to help keep the true costs of real estate down. There are nothing but market distortions. Before long, we become addicted to these mortgages and their low interest rates.

Indeed, the government is our worst enemy, but we allow it to happen. We freely embrace these government “benefits,” which only helps in accelerating the process. Before long, we become hopelessly dependent on the government for a sundry list of services. It seems like one huge case of the Stockholm Syndrome.

Those who still cling to the traditional mindset of pursuing a college degree and finding a well-paying job will fall further behind. This is not the “American dream,” this is the American myth.

Reconciling propaganda with reality; Those who cannot fall further behind

What was so important about the early 1970s?

In response to my January 11th podcast titled, Getting ahead in rural America; Prosper during desperate times, I received an email from a reader in Ontario. He has observed many of the same phenomena north of the border as I see here in middle America.

It’s sad how the elites gutted the manufacturing here [Canada] since the 70s. We got the same drug problem here, especially fentanyl and weed. Its pretty bad in the small towns. I went to a rock festival here in London, Ontario. It was like Zombie-land downtown.

Great point about rentals and section 8 housing. I drove through the Scranton area many moons ago. Pretty run down. Reminded me of Hamilton, Ontario here.

I was watching a video a while ago about the suicide epidemic of men in the central N. American states and provinces. Sad. The destruction of N. America started back in the early 70s and is still continuing now. Almost all the wealth is concentrated in a few urban centres. George Carlin said it best.

Here was my email response to the reader:

The irreversible trends started shortly after Kissinger went to China in 1971; the same year the Feds shut the gold window. The US was chosen to be the world financial hub and spread its dollar to all four corners of the world. This would standardize global trade and benefit the international corporations.

Thus, the Feds would export the inflationary money printing and import the deflation to hide what they were doing to the citizens. The globalist media has been running cover to lie to the people ever since. That’s how the US dollar became the reserve currency. No other country wants to have the reserve currency. Only the gold shills say this. The US fell on the sword as that meant it needed to gut its industry. That was the end. That was the time to begin buying assets and quitting our jobs.

Why are people tuning out with drugs? Cognitive dissonance. These people cannot reconcile with what the media and government says to do and what they see in reality. We know better. We have no illusions on my blog.

Now the corporations have arbitraged between all low-cost and high-cost countries. Like you said, Canada is in similar circumstances. It is a high-cost nation.

it’s been a slow slide ever since. Year in and year out. There is no hope for anyone holding on to the old paradigm of going to college and getting a job. That’s a myth that dies hard.

Indeed, the destruction of the middle class in the United States began in earnest during the early 1970s. It soon spread to all the developed nations. Notice how the media, from movies and TV to books and news, also saturate us with the ideation of recreational drug use. This is being done on purpose. As the need for us to remain alive diminishes, the elites want us to indulge in more drug use.

Never once think that the growing trend for marijuana legalization was grassroots. This agenda is centrally planned and it is the hope of the elites that we all consume marijuana, drink alcohol to excess, and take mind-altering drugs.

I wish I have better news for us, but I do not. At least we know our adversary and how this plan is unfolding. It transcends politics and the life we have been crafted to believe by the globalist media.

The talk of collapse creates learned helplessness. The alt-financial media have been proclaiming it for over 25 years, but we are still functioning. We need to move forward and not fall victim like so many others. Knowing the truth can be very powerful.

January 14th Market Update – Moving averages are important; The latest trade data point to problems; AMZN and AAPL analysis; Bitcoin, treasuries, and the dollar

I have uploaded a January 14th Market Update. Click here to go to the show archives page to listen or you can listen on the link below.

To download the podcast – Right mouse click here

-Domestic stock market analysis with some ideas.
-In this uncertain trading environment, a look at the moving averages is important
-Fed Vice-Chair, Richard Clarida, talks the party line
-I still think the Fed may unwind the balance sheet more than what some are hoping for.
-A retrace of 10-year UST yields to 50-day mva (2.93%) is in the cards.
-It is difficult to determine how gold and oil will do when we do not have the COT reports. The weakish US dollar should continue to support both as well as the commodity sector.
-The concerns over the flattening yield curve may be unwarranted. We live in a centrally-managed economy and financial system
The latest Chinese trade data do not help the trade negotiations and will continue to cause problems for the foreseeable future.
-AMZN and Jeff Bezos. Could we look back 10 years from now and say this was the beginning of the end for AMZN? Bezos is 54, will probably lose half his shares, and seems more concerned about chasing tail at this point. It is easy for him to take his eye off the ball. Some say he is interested in running for office. That is too many distractions. Bezos said that eventually all companies die of old age. Is he hinting at something?
-AAPL has its own set of problems. It doesn’t have Steve Jobs anymore and Tim Cook cannot seem to conjure up more novel ideas. Is he just squeezing out extra toothpaste from the tube? When Warren Buffett catches on to a tech company’s financial engineering, perhaps it’s too late. AAPL is not a banking firm.
-AMZN and AAPL problems don’t necessarily spell the end of the Nasdaq rally, but it can’t help.
Are the latest bitcoin stories believable? Any BTC bull should dip back into the game and pick up a small starter position. The returns are asymmetric.

Can the internet make us overconfident in our ability to make financial decisions?

So much information, so little time

Recall my November 7th article, Is the internet a wealth equalizer?, and how I presented the case that perhaps the internet was not the great information and wealth equalizer that many claimed.

Even the World Bank has said that the internet has been increasing income and wealth inequality. Those who know how to use the internet to their advantage have seen tremendous growth in their personal wealth.

Which means that for the vast majority of humanity, technological innovators such as the internet have actually helped to undermine their level of financial wealth, and I have an idea why. For people who invest and make financial decisions based on subconscious emotion, unrecognized biases, social media influences, or their favorite blogger, the internet has been a net negative. It makes it easy for them to indulge in their bad financial behavior.

Is the internet a wealth equalizer? – November 7th

Most people only unwittingly use the internet and social media to reaffirm their preexisting ideas and beliefs. While this may make us feel better with respect to the political divide, it can often be lethal with investment decisions.

The internet usually contains the proper data in some form for just about every subject and idea, but trying to locate it can be an arduous task. To make matters worse, our confirmation biases can preclude us incorporating the correct data points into our choices. Moreover, we need to figure out how much information is enough; when do we stop the search for data points and act?

Can More Information Lead to Worse Investment Decisions?

Expanding on my original research, a reader of my blog sent me an article today titled, Can More Information Lead to Worse Investment Decisions?, and it dovetails with my original theories. It’s author, Joe Wiggins, explains that having access to additional information can actually make us overconfident in our abilities to make proper decisions.

When we come into possession of more, seemingly relevant, information our belief that we are making the right decision can be emboldened even if there is no justification for this shift in confidence levels.

Can More Information Lead to Worse Investment Decisions? (Behavioral Investment, January 9th)

For many new investors, this overconfidence can often be lethal. Just look at those young investors who got caught up in the crypto craze. There’s a lot of information out there at our fingertips, but much of it is often irrelevant, even erroneous, or formulated by disingenuous promoters and shills.

There are so many data points and pieces of information available on the internet and many can easily become overwhelmed when attempting to decipher the necessary information. We face many potential drawbacks, most notably the challenge of disentangling signals from a blizzard of noise in order to make consistent decisions.

First, overconfidence is one of the largest and most ubiquitous of the many biases to which human judgment is vulnerable.

The second way overconfidence earns its title as the mother of all biases is by giving the other decision-making biases teeth.

Overconfidence – Psychology Today (January 22, 2018)

On many occasions, having additional evidence to support a decision may simply be a repetition of prior information (merely in a different guise) or be erroneous with no predictive power (a major problem in an environment marked by uncertainty and randomness where things that look like they matter, actually do not).

As we receive more information, therefore, we are prone to believe that we are more accurate in our decisions, when there is often no justification for this. This can create an anomalous situation where behavior consistent with being diligent and thorough, actually results in worse investment decisions being made.

Can More Information Lead to Worse Investment Decisions? (Behavioral Investment, January 9th)

Keep it simple

Over the years, I have developed a set of heuristics that assist in my data collection efforts. When it comes to making investment and trading decisions, very often my correct conclusions are the ones that are the easiest to explain to others. The research on my blog incorporates 34 years of financial education and a lot of trial and error. My heuristics are the culmination of all these experiences.

We need to be confident in our abilities without becoming overly confident. There is no substitute for experience; the more we are exposed to the outside world, the more wisdom we gain. With this wisdom, we will find the information overload more manageable as we can more successfully wade through the blizzard of endless data.

It may be fine to follow certain experts in a field, but if they are usually wrong, perhaps it’s time to look to others who have better track records.

January 11th Educational Update – Getting ahead in rural America; Prosper during desperate times

I have uploaded a January 11th Educational Update. Click here to go to the show archives page to listen or you can listen on the link below.

To download the podcast – Right mouse click here

Keep in mind that social proof is a very powerful force. It keeps the debt-slaves in their place and is a self-imposed internment camp of the mind. The Opioid crisis and degradation of the wage-base are pounded over our heads to promote hopelessness and despair. We can overcome.

Meet a person who works three jobs and cannot stay ahead; A perspective of life in Wilkes-Barrie, PA. But this can pertain to any rural or economically depressed area in the United States. It could pertain to Dayton, OH, or Huntington WV (two cities I have traveled to, my mother lived in Dayton as a child).
-In Wilkes-Barrie there are over 90 houses that sell below $50,000. Many of these homes can be bought with seller financing or with federally-subsidized loans, with little money out of pocket.
-Chris, the person in the interview, could borrow $20-30,000 from his or his wife’s parents to buy his first couple houses.
-He can learn how to work with the Section-8 housing voucher program, which assists with the rent payments of lower-income tenants. He can provide a valuable service to his community while making superior cash flow.
-In many working-class and lower-income areas, Section-8 housing vouchers will provide higher rents than non-subsidized rents.
-I have participated in the Section-8 voucher program in the past and observed that my subsidized tenants were often superior in many regards to my non-voucher tenants. They appreciated my efforts to provide them a great place to live. All it takes sometimes are stainless-steel appliances.
-If these voucher holders do not take care of the premises, abide by any of the terms of lease, or do not pay their stipend portion, they can lose their vouchers. You can be their last hope. Develop a good relationship with the county voucher case workers and you will be sought out by everyone, even other sellers.
-There is a lot of hope and we can move forward.
-Chris could easily acquire 8-10 homes over several years. He can eventually quit a couple of his jobs and have enough money for retirement. He could take vacations with his family and live a longer life.