Martin Armstrong: Advice on Real Estate

[Lucille]

Our local market has followed his model exactly.

Real Estate & The Business Cycle
http://armstrongeconomics.com/2015/02/26/real-estate-the-business-cycle/

[...]
From this paper you wrote over five years ago (see here: http://armstrongeconomics.com/wp-content/uploads/2012/03/a-forecast-for-real-estate-111509.pdf ) you predicted a bump up into 2015 with a drop thereafter for years. It worked out perfectly so far – a 2012 low to a 2015 high.

How bad will it get for the average mortgage payer? How bad will it get for residential real estate? I own several paid down/paid off rental houses in Maryland, across the Potomac that generate a ton of cash flow. What should I do? I kind of have become dependent on the free cash flow. What will happen with rents? They have gone way up over the past several years, as the foreclosures have displaced (continue to displace) so many wage earners.

ANSWER: Yes, 2007 was the broad market peak. The 2015 high is the higher-end market that has been driven primarily by capital inflows which people trying to get off the grid. The concern here is that property taxes will now rise and the real net value of property may decline relative to everything else. Parking money in real estate at this time may produce the equivalent of negative interest rates when all is said and done. There are advertisements in Asia and Europe as well as Russia offering real estate in New York City for a little as $10,000. This is speculation once again.

The majority of mortgages are conventional with 20% down so this is not the same type of high as took place in 2007. Banks are transactional now so they will write the mortgage and resell it. With interest rates negative and mortgages at least offer collateral, they are still better to invest in compared to sovereign debt where you will get nothing.

Our problem is what Rome faced. The greater the economic turmoil in government, the more aggressive they become in taxation. In this regard, real estate is not a movable asset and it can cross the bell curve and decline due to taxation and the lack of mobility. Romans just began to walk away from their property. Therefore, property in North America will tend to be the safest only because it is extremely difficult to invade with troops and tanks. Blow it up with a nuke – sure, but then nothing matters anyway. So staying within the realm of reality, the greatest threat will be taxation.

Those interested in real estate, run out now and take the longest possible mortgage at a FIXED rate in the domestic currency of where the property is located and/or you wealth with rates this low. If you use a cross-currency, then you better pay attention to hedging. This is a hedge so if it ever gets that bad, you can just walk away as did the Romans. DO NOT assume real estate is a store of value. That depends on the taxation level of the local government and the location.

Real Estate – To Buy or Not To Buy – That is the Question
http://armstrongeconomics.com/2015/02/27/real-estate-to-buy-or-not-to-buy-that-is-the-question/

Two questions about real estate have been asked by many people:

1. Do you think it is wise now to buy a house and get hooked on a mortgage knowing that 2015.75 is around the corner?
2. Do you think residential real estate valuations and interest rates will collapse on the other side of 2015.75 and should I wait until around 2016.8 to buy?

Mortgage rates are going into a major low. When the economy turns, the availability of mortgages will decline as always with the cycle. If you have cash and want to buy real estate cheap, yes it is wise to wait. If you want to play the game, then you can buy now and hedge this with shorts/puts on bonds. It depends on your expertise.

Depending on the area, those that have seen the sharpest advances will drop the most. There should be some stabilization as foreign capital will still flow into the USA and real estate plotted in dollars may decline while it is still rising in Euros or Yuan.

 

[Zippyjuan]

There are advertisements in Asia and Europe as well as Russia offering real estate in New York City for a little as $10,000.

Where can you find $10,000 real estate in New York City? Or is he talking about dollars per square foot? That is probably luxury units per square foot advertising to rich foreign buyers. I do see rentals at $10,000 a month: http://www.nakedapartments.com/nyc/manhattan-luxury-apartments

Sales: (2012 article): http://www.nytimes.com/2012/05/18/r...-at-one57-sells-for-new-york-record.html?_r=0

While Mr. Barnett would not reveal the exact amount the buyer agreed to pay for the penthouse, citing a confidentiality agreement, he said it was less than $100 million. The price nevertheless tops the $88 million that a trust benefiting the daughter of a Russian billionaire, Dmitry Rybolovlev, paid this year for a penthouse at 15 Central Park West owned by the former Citigroup chairman Sanford I. Weill. Besides being a record sale for an apartment in Manhattan, that purchase also drew gasps for the record price paid per square foot: more than $13,000.

The One57 penthouse, which features 23-foot ceilings in a grand salon, traded for about $8,000 per square foot, Mr. Barnett said. He called the purchase by the Rybolovlevs, agreed to late last year, “not a good deal,” saying the market for superluxury properties in New York should be closer to $10,000 per square foot.

Historically, housing prices have followed the overall rate of inflation. Is his chart saying prices will be zero by 2033 or that nobody will own a home by 2033? (Neither of which is realistic). His chart does not offer a scale of what it is really showing. Unit sales? Ownership? Prices? Total value of all real estate?

 

[Lucille]

Is his chart saying prices will be zero by 2033 or that nobody will own a home by 2033? (Neither of which is realistic). His chart does not offer a scale of what it is really showing. Unit sales? Ownership? Prices? Total value of all real estate?

LOL No, that's not what the chart says. You are still clueless about the ECM. As I said in my rep, RTFA, all of it including the hyperlinks, for once in your life.

 

[Zippyjuan]

There are no hyperlinks in the article. Can you tell us what the chart is actually showing? Thanks!

 

[Lucille]

I see I had a little hyperlink snafu. Fixed:

From this paper you wrote over five years ago (see here: http://armstrongeconomics.com/wp-content/uploads/2012/03/a-forecast-for-real-estate-111509.pdf ) you predicted a bump up into 2015 with a drop thereafter for years. It worked out perfectly so far – a 2012 low to a 2015 high.

Is that chart really so hard to figure out? And do you really think it says no one owned a home in 1955? Really?

 

[Zippyjuan]

Thanks for the link.

And do you really think it says no one owned a home in 1955? Really?

Which is why I found the chart confusing.

In the article you link, he says Obama will be a one term president due to the economic contraction. (Paper is from 2009)

 

[Lucille]

It was a pretty easy fix, even if you had bothered to click it, snafu or no. I guess it's easier for some to just made demands rather than DIY.

You never did say. Do you really think no one owned a home in 1955?

 

[Zippyjuan]

No, I don't think nobody owned a home in 1955 which is why I was curious just what the chart was trying to show (the link didn't really say either but it does discuss real estate prices). Thanks again.

 

[Lucille]

No, I don't think nobody owned a home in 1955 which is why I was curious just what the chart was trying to show (the link didn't really say either but it does discuss real estate prices).

You don't see 1955 on this chart?

Which link? You mean the 13 pager that you obviously haven't read yet? Or the other two that not only discuss prices, but property taxes and credit deflation?

We'll have to continue with your little game next week, Zippy. I'm outta here.

 

[oyarde]

Nearly all of the homes I have lived in were built before 1955 if that helps .