This space was where I argued that real estate would suffer in the medium-term due to a number of factors. This trend will impact homebuyers, mortgage buyers and investors as well as banks and other financial institutions that have an interest in real estate. I’m a mortgage buyer and we need to be careful that our mortgage notes don’t suddenly become underwater. Fitch, an internationally recognized credit rating agency believes that real estate is now overvalued by at least 10% (per Housing Watch – 1/4/13). There are also good reasons why it is more than that.
Housing should perform well in the short-term. I consider this to be the next two year. Real estate values have improved in many areas during 2012 and I expect this trend to continue into 2014. Low interest rates, limited housing inventory and Wall Street have all contributed to the positive outlook for near-term prospects. We are still facing a steep drop in property values due to the Feds’ control of this situation.
The Federal Reserve has kept interest rates low and promised to continue keeping them low for a couple more years. The Federal Reserve has kept housing inventory in check by holding large amounts of shadow inventory and Wall Street firms purchasing huge portfolios. Many homeowners who are underwater are unable or unwilling to move. Housing will slide back if interest rates rise, Wall Street panics, or any other event. Housing recovery is doomed to fail because of high unemployment, higher taxes and economic uncertainty. Partisan bickering over debt and related policy decisions is the main reason for the current economic mess. It shows no signs of improvement. Politicians know that any changes in spending or programs will anger some special interest groups, which directly impacts their chances of being elected.
Both the President and Congress have not shown any interest in making spending cuts. They are likely to keep spending at the current level well into the future. Both the Republicans and the Democrats won’t agree to reduce entitlement spending, while the Republicans refuse to consider cutting defense spending. Both areas must be cut to significantly reduce debt. CNS News reported Social Security’s deficit of $47.8 million in fiscal 2012. In December, 8.8 million people received disability benefits. This is a record number. In 1999, the ratio of beneficiaries to workers was 2.93 to 1. It is now 2.36 to 1. Social security, just like Medicare, is experiencing an unsustainable exponential growth path that leads to misery.
From 2000 to 2012, the federal government has significantly increased its spending. These are just a few examples (per Mish 12/21/12).
Dept. Dept.
Dept. Dept.
Dept. Dept.
Dept. Dept.
In contrast, Medicare and Medicaid both grew by around 140% over that period. There are many opportunities to increase revenue, but the greatest problem is the increased costs and infrastructure of government.
Japan experienced a similar crisis to ours twenty years ago. It is still in a mess. Although they were slower to spend money on the problem than the U.S., their results are still bleak. 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 combined with a poor economy can do to you. The U.S. follows the same path. This is what economists and politicians will be referring to when they talk about how the government must spend more to make the economy healthier.