Buy or Sell - Homegamers Edition

 Buy or Sell - U S Residential Homes. We here at Mytwocent$ will weigh the facts, one at a time as they relate to the big picture & let the chips fall where they may. The way bagholder sees it, these are the most relevant facts in no particular order:

1. Nominal dollar price -This seems a logical place to start. According to these US census bureau NUMBERS, the median nominal price of US homes has risen every decade. This has held true for the last 8 decades. Its not so much that housing has gone up in value - it hasn't.  Its because the dollars purchasing power is being systematically destroyed. Since Our leaders are spending $$ we don't have like drunken sailors, the printing (devaluing) will not be stopping anytime soon. Throw in the fact that housing prices today are a fraction of prices just five years ago, it seems reasonable to expect higher nominal prices ahead. BUY

2. Gold price - The reason we include the ounces of Gold required to purchase a home is to remove the distortion created by measuring the homes value in depreciating Dollars. Because dollars can be counterfeited & Gold can't; the price in ounces of Gold should give us a more accurate reflection of whether homes are - historically speaking - a buy. Looking again at the US Census Bureau NUMBERS, we see in 1940 & 1980 about 80 ounces of Gold were required to purchase a home. What is interesting about those two years is they both came on the heels of decades with massive dollar devaluations.  The pattern suggests the next bottom will be in 2020 following a decade of massive dollar dilution. Today, it takes 146 ounces to buy a home & its trending lower.  With Gold in a Secular Bull, and homes in a Secular Bear - it seems reasonable to expect the ratio to contract further. SELL

3. Supply/Demand - There is currently an 8 month supply of homes on the market, with many more sitting on the balance sheets of US Banks - just waiting for the market to turn-around. The fact there is a noticeable supply overhang could only mean the real $$ value is lower than todays trading price. On the Demand side, there are millions of people who have been removed as buyers from the housing market, thanks to foreclosures & short sales. Millions more are out of work. It is safe to say, demand is falling. Economic law states, in order to balance excess supply with falling demand - price must go down.  SELL

4. Trend - the recent trend in housing prices is clearly down. We here at Mytwocent$ are big believers in "a trend remains a trend, until proven otherwise". It is very difficult to see anything on the horizon, especially when you consider the supply/demand issues addressed above, that will change this down trend. The only plausible possibility would be massive dollar devaluation. This is the only real card Gman has to play if he wishes to reverse the recent down trend - in nominal terms anyway.  Since trends tend to run longer than anyone believes possible - and the peak of 2005-06 home valuations has all the earmarks of a popped bubble, this points to lower prices ahead. SELL

5. Cost to build - US residential homes are trading today at a fraction of what it cost to build them. On the face of it, that fact seems absurd. Logic would suggest homes should never trade that low.  At a minimum you would expect homes to sell for at least what they cost to build. Yet, here we are today with homes trading at substantial discounts to building costs. Bagholder has been told by his insurance company he has to carry 200k worth of Insurance even though his house at todays market value might be 120k. The reason is the cost to rebuild. It is simply not reasonable to expect this condition to be a permanent one. We will see the day again when homes trade at a premium to building costs. That portends higher prices ahead. BUY

6. Rental income - The amount of $$ a property will produce in Rent has historically gone a long way towards determining the market value of the house. If the spread between what it cost to buy the house & what it can be rented out for gets wide enough - then well capitalized investors will step in and bid up the property price to help close the gap. Arbitrage 101. Five years ago in Phoenix a 200k house would cost you $1100/month to buy & would rent for about the same. Today, that same house cost 100k (or $550/month). The rent that place will bring has increased slightly thanks to the large quantity of people who have been foreclosed on & thrown into the rental market (because they don't have the credit to buy). The spread between current rental income & buying price is as wide today as bagholder has ever seen. This too portends higher home prices ahead. BUY

7.  Taxes - While property taxes are an afterthought to most folks purchasing a house, they shouldn't be. Do you ever really own the property if you have to pay Gman 2-3-4-5% of its value every year?  Bagholder has watched the value of his home get whacked in half the last few years, yet his property taxes only went down 9%. The problem is taxes are only going to go up over time. Raise them high enough, relative to the value of the property & nobody will want to buy them. Case in point, Detroit - where the median home cost only $6,000.  In many cases they cost less, all that is required is you getting current on the taxes. As municipalities struggle for revenue, its only a matter of time till they raise taxes - again and again. If they raise them high enough, like in Detroit, demand will be non-existent & home prices will fall. SELL

8. Median wage - while this might not seem relevant to median house price, there is a connection. It speaks to what working man can afford. In 2010 4.4 years median wage would get you one home. That is over double the time required to work to purchase a home in 1940, 1950, 1960, 1970, 1980, and 1990 - and 1/3rd higher than in 2000.  In terms of hours worked & wages paid, housing prices are the highest they have ever been. We have to work more hours than ever before just to afford a median home. It does not seem reasonable this trend could persist much longer. Which means either wages paid will be going up, or house prices going down. Since wages going up is not likely anytime soon that leaves house prices heading lower. SELL. 

9. Interest rates - This is the proverbial sword of Damocles. It hangs over the Real Estate market like impending doom. Eventually Interest rates will rise. When they do, the purchasing power of home buyers will evaporate. The effect will be a complete collapse of the bid underneath the residential home market.  The powers that be know this to be fact. This is one of the reasons why they have been holding down interest rates below true market levels (propping up the bond market is another). Like a beach ball held underwater, microscopic interest rates are not a permanent condition. When those rates turn up, and they will eventually - home prices will get crushed. SELL

10. Bankers Position. As far as financial savvy goes, Bankers are a crafty lot. They rarely lose. With that in mind - bankers are Long residential homes - like never before. Not only are they Long - they are withholding supply from the market. This behavior suggests they are looking for higher prices down the road. Of course, this logic is only sound if the Bankers intentionally built their Long position. What if bankers are victims of their own greed and they were trapped into their long positions. If thats the case, lower prices may lie ahead. You can make a case for both higher  & lower prices ahead, based on the the behavior of those in the financial know. This is a tough call, but Bagholder just can't see bankers as victims. He believes they built their position intentionally and this fact points to higher prices ahead. BUY 

    These are the 10 most important considerations Bagholder can come up with in determining the direction in which US house prices are heading. According to my math, there are 4 Buys & 6 Sells.  This certainly does not give us anything definitive, unless of course you weight some of these facts as worth considerably more than others. For instance, Bagholder believes Interest rates to be the strongest sell argument & Bankers position to be the most compelling Buy argument.  Also, had we looked at these 10 facts in 05-06,  9 of 10 were a sell. The recent pullback in price has turned four of these facts bullish.  Bottom line: even if residential homes are not a buy right now - they are certainly moving in that direction. Thoughts?