An oft-repeated moniker about investing is that the cure for high prices is high prices. Conversely, the cure for low prices is often low prices. What this essentially means is that when the price of something becomes unreasonably high, demand begins to decrease, which pulls the price lower. When the cost of something becomes unreasonably low, demand begins to increase, edging the price higher. This is where we find ourselves today with real estate, investment securities, and precious metals. Specifically, real estate and investment securities have become unsustainably high, while precious metals are unsustainably low, and poised for a comeback. We believe an opportunity exists for the astute among us to take advantage of this situation, and re-position accordingly into precious metals.
Across the country, the story is similar. Real estate prices have either become out of reach, slowed their advance, or have begun to decrease. In spite of the uptick in employment, the ability of many to purchase or rent has not kept pace with current prices. Residential real estate is often viewed as a barometer for other types of real estate, because everyone has to live somewhere. One indicator of how inaccessible housing has become, is the increase of homelessness in urban areas across the US. With the economy humming along, why would homelessness be on the rise? In NYC, for example, you can find an apartment for $950 per month, if you are willing to share a bathroom with strangers. That is for 68 square feet. Called the “least expensive apartment in NYC”, for the cost of owning a home in other places, you can live in 68 square feet.
In other areas, you can rent a bunkbed for $1,000 per month, while sharing living areas and bathrooms with strangers in what is called “Podsharing”. People who live in these environments are called “Podestrians”, and are moving in because the rent to have their own apartment has gotten out of reach. If that seems strange to you to pay $1,000 per month to rent a bunkbed, be grateful you live where you do. These conditions help explain why there has been an increase of homelessness, and people living on the streets today in many parts of America.
Mortgage Fraud on the Rise
In other regions of the country, the signs of real estate problems are more subtle. One of the signs that the real estate market might be topping, is the increasing amount of mortgage fraud beginning to bubble up. Hindsight is often 20/20. One of the factors contributing to the last major real estate crash was an increase in mortgage fraud. While things have not developed to that level yet, it appears to be moving in that direction.
Interest Rates on the Rise
One of the difficulties today has to do with the interest rate environment. Due to rising interest rates, the cost of money has gone up. This means that someone who bought property a few years ago might now be reluctant to sell, due to a concern about where they will move. If they sell their house for $300,000 for example, they might only be able to afford another house for $236,000, due to the increased interest expenses. The financing for their current home might be locked in at 3%, while the rate for a new purchase might be 5%, for example. With rates expected to rise further, this phenomenon is likely to continue pushing real estate prices lower.
There are also “leading indicators” showing that a further slowdown and/or markdown in real estate prices is likely. A “leading indicator” is an economic signal or condition that usually appears before something happens. One of the indicators leading right now is the decrease in home price growth. This indicator last began to appear in 2006, before the property bubble began to burst. While many ignored the signs in 2006, we don't have to make that same mistake today. Prior to 2007 there was a widely held false viewpoint that housing prices always went up. We know how that turned out then, and have the opportunity to make different decisions today.
Gold & Silver on the Rise
If real estate is preparing to enter a downturn (and in some areas already is), what else can we do? We can look for sectors that are already depressed and poised for a comeback. One of the best looking areas right now is precious metals. One of the common refrains you hear against precious metals is that rising interest rates are bad for gold and silver. The theory is why own gold or silver which pays no interest, when you can earn interest from funds on deposit. The answer is the purchasing power protection offered by gold and silver often far outweighs the interest that can be earned on deposit. We wrote about that earlier this in our article about gold and inflation, and an article onfuture interest rates.
It is certain that inflation is on the rise, and we know interest rates have been rising and are poised to rise further. Wages have not kept up with real estate inflation, as we have already discussed. Even anecdotal evidence from family members living in other areas indicates that it has gotten harder for them to maintain their current lifestyle and living arrangements with the income they have. While some are demanding that minimum wage be raised to $15 per hour, we have previously shown the comparison of being paid in silver vs paper. While it is usually not possible for us to be paid in gold or silver, we can put ourselves on a gold or silver standard by purchasing the metals directly ourselves.
The cost of materials to build a home has risen beyond the ability of many to afford the home. Some of this is related to tariffs and trade. Consequently, new housing construction and new loan origination has begun to slow down in many areas, though there are exceptions. For many who live in an area of high housing costs, there is no time like the present to protect your future purchasing power by buying gold and silver while they are on sale. The cure for high prices is high prices, while the end of low prices is marked by...low prices.