The housing market is as weak as weʼve ever seen it. Yes, we are aware of bidding wars, 100% government funded loans, and light inventory, but the underlying housing market is like a zombie…Itʼs moving, but itʼs dead, and anyone who touches it could be seriously injured financially.

Beware of Shadow Inventory

Shadow inventory are foreclosed homes and mortgages delinquent for 90 days or more. These homes do not have for sale or rent signs on them though, the banks are purposely keeping them off the market for two reasons.

  1. Reduce supply, helping drive prices back up so they can sell them at a later time.
  2. To prevent real write downs and losses, the banks continue to keep on their books the original appraisals of these homes, giving window dressing to investors.

In a normal market, we have about 500,000 to 650,000 of these in the U.S. Today, we have about 2 million.

Your editor in chief lives between two of them, both of my neighborsʼ houses were foreclosed on in early 2013, yet one sits vacant and the other has the former homeowner squatting in their own home.

This is in Southern California where buyers are now getting 97% FHA loans, with a complimentary 3% down payment from the California government (taxpayers). California, in order to keep the party going, is back to 100% financing, loaning money to people who canʼt save, and will once again have no skin in the game when itʼs time to hit the bid on the next housing decline.

Housing Trend Update

On May 28th, we forecasted the top in housing to take place sometime in 2014 or 2015 at the latest. We are not predicting a crash until interest rates rise, however, we are fully expecting a plateau in pricing with small percentage declines in places like California and Arizona by the summer of 2015.

People living in the Southwest are experiencing the top right now, which is why it doesnʼt feel like there are any problems and that this will just continue to go on, all bubbles feel like this.

Here are the latest confirmation numbers from the National Association of Realtors that confirm our own findings, real estate is in bubble 2.0 fueled by low interest rates from the FED and government backed loans, including even your down payment if you live in California.

Percent Change in Sales from a Year Ago by Price Range
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  • $0-100k is down 14.5%
  • $100-250k is down 6.6%
  • $250-500k is down 2.5%

Sales from a year ago are down in every price range, except for $1 million plus. These numbers have been deteriorating for the past few months showing that the middle class just canʼt keep up with this new FED induced housing bubble.

The $0-250k price range makes up 60% of all real estate sales; if we include $0-500k, then we are talking about 88%.

Real estate is local, so places like Oklahoma, Kansas, North Dakota, Texas, Tennessee, Georgia, Florida, and Wyoming should continue to trend up despite housing bubble 2.0.

Nevada is without a doubt in a bubble, however, itʼs still in its infancy, and is currently being flooded with speculators, much like Arizona was 3 years ago. Arizonaʼs bubble is aging and this seems to be the highest risk market we see in the U.S.

Our Recommendation Regarding Real Estate Investments

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  • Sell residential real estate in California and the northeast in 2014 and avoid Arizona and Nevada which have become saturated with speculators and cash buyers.
  • When buying rental property, buy up to a P/E of 8. Take the annual gross rents, multiply them by 8, this shoudl be the most you are willing to pay.
  • Take a small speculative position in the Daily Real Estate Bear ETF, using symbol DRV. Make sure to set a 25% trailing stop loss.
  • Or just watch this market implode for the entertainment value as the FED has yet again created another housing bubble.

Best Regards,
Daniel Ameduri