Published April 29, 2017

“The Great Post-WW2 Real Estate Bull Market Is Over”—Part II

Justin’s note: Today, we're sharing part two of Doug Casey and E.B. Tucker's essay on the real estate market—and the scary direction in which it's headed. If you missed part one, you can catch up here.


By Doug Casey and E.B. Tucker

As I (E.B.) told you yesterday, the once-in-a-lifetime opportunity to buy real estate is over.

The lowest borrowing rates in history, tight supply, and amnesia related to the last crash are a perfect storm for real estate.

This type of situation feeds on itself.

Doug Casey: And that’s not all. Many municipal governments, and the pension funds that are supposed to pay their retired employees, are on the ragged edge of bankruptcy. And that’s when stock, bond, and real estate markets are at all time highs—in both absolute and relative terms. When they revert to the mean—forget about a real crash—local governments are going to be desperate for more tax revenue. But sales taxes have already gone from near zero to about 10% in a lot of places over the last couple of generations. Property taxes are about 2% of assessed value in many places. That’s a major carrying cost; you may think you own the property, but you’re really just renting it from the government. Add in local income taxes and various fees. They’re all going up. That’s going to put huge additional pressure on the property market. If you don’t keep your property taxes current—it doesn’t matter if your income is down—you’ll find out who really owns your property.


The Wall Street Journal recently featured a piece on the home shortage plaguing Minneapolis. Buyers described homes selling for above listing price in as little as three hours after being listed.

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In Toronto, one of the world’s hottest property markets, many buyers now skip home inspections. Bloomberg reported a local inspection company saw a 30% decline compared to last year. That’s in the face of surging prices.

The reason? Demand is so high, buyers will miss their chance if they wait even a day or two for a home inspection.

We see peak conditions in urban rental markets, too. Take the website Rentberry, for example. It allows would-be tenants to bid on rental property. Competition for rentals is fierce. Landlords list an apartment and then sort through the offers, accepting the highest.

Everyone wants to own real estate. They don’t realize that real estate is a sticky asset. Meaning, it’s not easy to unload. That’s in addition to high selling commissions of 6%.

Owners have to sell if they get a new job, fall in love, or expand their family. All of these things just happen in life from time to time. When the real estate market slows down, most people are stuck. That’s not a concern today. People assume they will always be able to sell real estate. They’re wrong…

According to Bloomberg and Bankrate, a 30-year fixed mortgage costs 3.95%. That’s close to the lowest rate in history.

Doug Casey: Although low interest rates are a root cause of today’s bubble prices, there is another side to the coin. Ultimately, the dollar will reach its intrinsic value. If you have a large mortgage at a low (defined as “less than the current inflation rate”) and fixed rate of interest, then it could eventually work out well. Your mortgage will be inflated out of existence as the government creates massive amounts of new dollars. You just need to be sure you can keep it serviced. And, of course, there’s always a danger of a deflationary collapse—which is always a possibility with the huge amount of debt out there. Especially as rates go up.

I sincerely doubt anyone at the conference has thought about the possibility of a deflationary collapse.


Most buyers use credit to help them buy a home. In fact, for many people, paying off a 30-year mortgage over time ends up being their only savings.

At 3.95%, a $300,000 loan costs the borrower less than $1,000 per month in interest. If borrowing rates returned to a mere 4.95%, interest on the same loan would be $1,238 per month.

Doug Casey: I know this seems like ancient history, but in the early ‘80s even the US Government (which was far less insolvent than it is today) was paying 15% to borrow. Rates have gone down for 35 years. I believe they’re headed up, for many reasons. Higher interest rates are actually a good thing. Since that will encourage people to save, and discourage everyone from living above their means. That’s the good news. The bad news is that it’s going to put real pressure on those who have floating rate debt, or who need to borrow, or refinance.


Since most buyers stretch as far as they can when home shopping, new buyers would be able to borrow less. They’d only be able to pay $240,000 for the same home.

Higher rates would mean lower home prices.

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Millennials Have This All Figured Out

Not everyone is after a traditional house this time around. After all, the average person is not making much more money than they were a decade ago. The rise of the tiny house fad is proof.

This movement fascinates me. So much so, I went to a tiny-house workshop to learn more about them.

A tiny house is essentially a miniature house.

It has almost everything that a traditional house would offer, just a lot less of it.

Most of the tiny houses I saw had wheels. This way, you can move the tiny house if the neighborhood goes to hell.

I also sat through a presentation on the concept. Jeremiah and his girlfriend described how city leaders are too dense to see that this movement isn’t going away. He says it’s more than just a small house… It’s a way of life. He described it as an inclusive community, sharing resources as needed.

Doug Casey: Jeremiah may be right on this one. Many of the McMansions built in recent years may be abandoned, the way castles and chateaux were in Europe, or Gatsbyesque mansions built in the ‘20s were in the ‘30s. They could simply be too expensive to maintain—the upkeep, the utilities, the taxes, the mortgage—will make it wise just to walk away.


This movement is a sign of the times. It reminds me of the food truck craze. Nobody seems to notice the food truck is an economic consequence of excessive building codes, regulatory hurdles, and labor costs. What used to occupy a building now fits into a truck.

Tiny houses are not a novelty. People actually live in these things. They take offense to the notion of property taxes, zoning laws, and city ordinances. They want freedom. They don’t mind sticking traditional property owners with the bill.

I talked to lots of people at the event. Tiny-house fans have a lot to say about the movement.

Doug Casey: Going to a seminar such as the one E.B. just attended has got to be a laugh riot. Huge people living in tiny houses. And the same morbidly obese people sporting XXXL T-Shirts proclaiming a love for Tony. No doubt they’re planning to attend his seminar on physical fitness next.



Tiny-house enthusiasts

I don’t know if tiny houses will be the way of the future. Millennials seem to think they’re great. Generation Z is so poorly socialized, its members may live in isolated pods 20 years from now.

What I do know is this: Today is not generally a good time to buy real estate. If you’re expecting a child, not planning on moving for decades, or just run across a sweetheart deal, it may be a good time. However, that’s not the case for most people.

Real estate is hard to get rid of. It depreciates constantly. If you don’t believe it, ask someone who owns a lot of it.

It’s also not an investment. It’s a consumption item. You have to live somewhere…and you might as well enjoy being there.

Doug Casey: This is a very important point that very few people understand. Houses are consumables, albeit ones with long lifespans. They’re in a class with toothbrushes (very short lifespans), clothes (fairly short), and cars (medium). Houses fall apart slowly, they weather, they depreciate. It’s only since the end of WW2 that people have started to see them as appreciating assets. Why? Here are three major reasons, but there are lots of others: 1) Trillions of dollars of mortgage money the government injected to make them “affordable” has caused property to go up much more than the CPI. But the debt bubble this has created is near bursting. 2) Population growth has created a lot of natural demand. But, ex-immigration, the US population (like that of all developed countries) now isn’t growing, it’s going into reverse. 3) I’ll remind you we’re on the cusp of The Greater Depression.

Let me stick my neck out and make a big prediction. The great post-WW2 real estate bull market is over.


We’re not finished looking into this topic. We didn’t even discuss the storm clouds that got us worried about the real estate market earlier this year.

This will be much different than the last crash—and it will still be bad.

Regards,

Doug Casey and E.B. Tucker

P.S. As I said, today is not a once-in-a-lifetime opportunity to buy property. In fact, if you think you might need to unload property in the next few years, today might be a good time to do it.

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