Must the citizen ever for a moment, or in the least degree, resign his conscience to the legislator? Why has every man a conscience then? I think that we should be men first, and subjects afterward. It is not desirable to cultivate a respect for the law, so much as for the right. The only obligation which I have a right to assume is to do at any time what I think right.
– Henry David Thoreau in Civil Disobedience (1849)
I would rather live my life as if there is a God and die to find out there isn’t, than live my life as if there isn’t and die to find out there is.
– Albert Camus
Why the Residential Housing Market Doesn’t Stand a Chance
Before I proceed I want to make it clear that I am no expert on the housing market and no doubt many may read this and say this guy has no idea what he is talking about. That being said, there is one area in which I have had a pretty solid track record and that is in macro trend forecasting. So whenever I see the sands shifting in a major way in a particular area based on new secular factors that the “experts” always tend to overlook in their models I try to share it. What I am about to point out is something that I have been thinking about for a very long time and is one of the main reasons I believe residential real estate in the United States generally will remain depressed for a long time.
In the fall of 1998 I spent a “study abroad” semester in Madrid, Spain. Culturally, Spain is extraordinarily distinct from the United States in a multitude of unique and charming ways but it is a difference in one area in particular that is relevant to the topic at hand. Right off the bat it was clear that everyone essentially lived at home with their families until they got married and started a family of their own. Of course this was not purely an economic phenomenon as tight-knit family units are clearly culturally emphasized in Spain, but some of it certainly was related to high unemployment and other economic concerns. My point here is that when most housing experts use their “models” to predict some sort of big new boom in housing the question you have to ask yourself is how have they tweaked this model to adjust for the enormous challenges faced by recent and current college graduates. I personally haven’t seen evidence of deflation in college tuitions (or in insurance premiums, commodity prices, financial assets, etc) which seemingly continue to push higher everywhere. So we are faced with a young generation of Americans that will be saddled with enormous amounts of student loans and no jobs. This is precisely where the new crop of home buyers is supposed to come from. If the historic run rate let’s say over the last 20 years assumed that X% of college graduates would start a family and look to buy a home say five years after graduation what do you think X% is today? And what will it be the trend going forward? I seriously question whether those experts talking about a housing recovery understand the major structural shift in the secular demand for home purchases by this key segment. In my mind not only are we facing a tremendous glut of supply but the demand curve has shifted lower in a secular manner for the reasons described. Kids are going to live with their parents! Or they will rent and marry later in life. To be clear, I do not have the time nor ability to dig into all of the numbers but the purpose of this is to get people thinking more outside the box on these issues so that you can make sure you ask the experts the correct questions when you speak to them. I find that the biggest problem with the experts is that their models work just fine, it’s just that their assumptions are often preposterously robotic.
The other point on housing I would like to make very quickly relates to the other area of the housing demand curve. Not the future potential demand from the younger generation that our leadership is completely selling out, but the current demand pool. As we all know, home ownership rates spiked to a record high according to data released by the U.S. Census at 69.2% in December, 2004. The latest data shows a decline to 67.2% but this is still very high relative to historic rates. For example, from around 1985-1995 the rate was basically flat at roughly 64% before the major spike higher. The point is everyone that had the means and desire (and many, many that didn’t) already made their purchase during the boom. Many people bought two homes. For those that waited it out, many came into the market in the last year or so as the government used gimmicks to get them involved and through the FHA and tax-credit system encouraged 0% down purchases again. So where is the marginal buyer? I just don’t see it. In fact, given the changed attitudes about debt in the population I think housing is dead unless Banana Ben creates Zimbabwe style hyper-inflation in which case people will just buy homes to get rid of their worthless paper. Other real goods will perform far better than housing however even in this environment.
Quick Comment on the Macro Trade
Nothing I have said for the last year or so has changed and in fact everything has gotten much, much worse. I don’t even worry so much about the economy anymore because I have already resigned myself to the fact that a debacle is coming that will make 2008 look like a cake-walk. These days I worry far more about social stability and indeed whether or not the United States will be able to hold it together as a Union. In any event, I do want to make a brief comment on the macro trade and how it is progressing. One of the major warnings I provided repeatedly last year was that by putting on the inevitable macro trade you are essentially shorting the governments and central banks of the world. Make no mistake about it, that is what you are doing and that is also the correct trade to win in the end. That said, such governments and central banks have all the power in the near-term and they will use every tactic in their “tool-kit” to preserve the status quo. Sometimes they will work together behind the scenes and you won’t even know about it but for the action in the tape. Governments make the laws and Central Banks print the money and distribute credit. They seem to have all the cards but they do not. They are on the wrong side of economic law and economic law always prevails. By using witchdoctor Keynesian economics they are fighting the tide and a major renaissance of the Austrian school and indeed it is true what Victor Hugo said: “All the forces in the world are not so powerful as an idea whose time has come.” I think we have already seen a major flush out of many macro positions in 2010 to date. As I have said before, for those that understand what inevitably needs to occur you must be prepared for the attacks and manipulations and use them to add to positions and always expect the financial, political and monetary establishment to fight back. Never use margin and I would avoid the some of the more popular precious metals ETFs. Look to buy physical and find a way to store it. If you can’t do this in you fund, do it personally.
Mike
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