I saw two very good interviews this morning, one with George Soros on CNBC, and the other with Marc Faber on Bloomberg.
Soros of course has a keen sense of the world and world economies. As he commented on impending bubbles, he said that markets do not react to bubbles right away; instead they are very complacent, kind of like people on the Titanic. People aboard the Titanic were on deck having a good time just before disaster struck.
Faber was interviewed in Barrons a few weeks ago as a roundtable expert. He is a tried and true contrarian, and believes in the philosophy that "many shall be restored that are now fallen and many shall fall that are now in honor."
This brings us to the Real Estate bubble that so many are complacent about. Sticking with Soros and Fabers view of bubbles and manias, I will once again try and pinpoint some events taking place before our very eyes.
Many believe that weakness in real estate markets and the economy will be rescued by Fed Chairman Bernake. This would be a huge mistake. Sometimes you just need to let recessions take their course, or risk hyper inflating the economy.
Gold and Commodity prices have been the only honest indicators of whats really going on in the world economies.
Gold has been rising in fear that the Fed will not go far enough to head off the real inflation that consumers are feeling everyday. The fed pause that everyone is anticipating in the next few months may cause a huge relief rally in the stock market, but eventually a further decline in the dollar will occur.
If the fed decides to lower rates rescue the real estate market, the stock market will celebrate the news, but then the economy is at risk of hyper inflating in a similar fashion to the 1970s. For the foreseeable future, I think the only people who will make money in the market will be investors with a short term time horizon.
Why Im Bearish on Real Estate:
1) Over Supply- As I reported a few days ago, loan applications have fallen to a 3 ｽ year low. Many real estate investors are already locked in to wacky loans like interest only, and adjustable rate mortgages. Now that short term rates have risen dramatically, and prices of homes are still high, many new home buyers have been priced out of the market. This will eventually lead to a glut or oversupply of homes on the market.
Believe it or not, home builders are still scrambling to build homes and get them on the market. The only difference now is incentives to buy are coming with the price tag.
2) Too Many Speculators- I dont have the exact statistic, but I read where over 25% of all home sales over the past three years were for investors purchasing second homes. Many of these investors bought for price appreciation, and when these properties are no longer increasing in value, or declining, a rush to sell will follow.
3) Consumers are Tapped Out- How many people have you spoken to that have bragged about how much money (on paper) they have made on real estate? A large number of investors have borrowed money on the appreciation of their homes to fuel their manic spending habits.
Now that short term interest rates have risen, consumers have less disposable income, and it has been this income that fueled the economy for the last five years.
Keep an eye on the number of for sale signs you begin to see in the months ahead. When you begin to see reduced added to the signs, you know the real decline is getting ready to take place.
