This is an edited down version of 30 Reasons To Get Out Of Real Estate And Into REAL Assets by “Don’t Tread on Me” at businessinsider.com.
The shift from paper assets to real assets is driven by money/debt creation. Since our dollar IS debt, it is necessary for more debt to be created every year in excess of the debt AND interest accrued the year before. The majority of this debt was created during boom times when no one feared debt. When the inevitable slow down came, the Elite created more money/debt to keep the system going.
This cycle has been successfully managed by the Elite in the past with the creation of Bretton Woods, the closing of the gold window, the Petro Dollar, Paul Volker slaying the inflation dragon in the 80s with 22% interest rates, the banker bailout and QE 1 & 2.
This time around, there is no way out except for a default. How that default plays out is still up in the air. I believe that we will get another deflationary shock to scare Congress and us into more money creation.
One of the most common misconceptions of real tangible assets is that Real Estate is a real tangible asset. After all, it is called REAL Estate. But it’s more of a paper asset since the bank owns your part of your home until you pay it off. We are on the verge of another leg down in Real Estate and the name of the game is wealth preservation. Beyond wealth preservation, I believe that those that hold their wealth in real assets will see a massive increase in their real purchasing power.
1. Real Estate is not a tangible asset. Yes, the property is real and tangible, but its value is dramatically affected by the paper/debt market. Almost all Real Estate is bought with mortgages/debt paper and leverage. Even if a property is paid in full with cash, its value was affected by competing bidders using leveraged debt. Ask yourself how “real” it is if interest rates were at 10% instead of 4%. What is the cash value of your property if there is no credit market at all? That’s what happens in a big deflationary crash. Prices keep going down, so people don’t buy anything, so prices go down further. What is the value of your property if/when the dollar collapses? The answer should show that the value of Real Estate is much more determined by paper/debt market than its real tangible value.
2. Most of your Real Estate is not an asset at all because it produces no income. If your property isn’t a positive cash flow asset, it’s a liability. Factor in taxes, interest, maintenance and upgrades, and it can even be a negative asset. Yes it has value, but it’s not an asset.
3. Even in a hyper inflationary environment owning property is not a “no brainer.” In a hyperinflation the value of the mortgage debt would essentially become worthless. That is great for owning your property outright. The reality is that there are going to be other factors that will dramatically affect the real value of the property. In a hyper-inflation the food in your freezer drawer will be worth more than you mortgage. The cost on running your home will become exorbitant. What if you cannot afford the higher water, electricity and gas bills? What is property worth if these utilities are not even working or available?
4. Real Estate is an illiquid asset/liability. What if you are in the “wrong” area when this goes down? Having a better part of your wealth tied to an asset that cannot move is highly disadvantageous during a period of social upheaval. We’ve all seen pictures of refugees leaving their homes with the few possessions they own. What if you are in an area going to go through massive social upheaval or has low carrying capacity?
5. If you have the majority of your fortune tied to an area that is essentially a war zone, you are putting your life and fortune at risk unnecessarily. This is magnified by the fact that if the dollar collapses there will be NO market what so ever for selling.
6. You never truly own Real Estate. Even if you own your home outright you still have to pay taxes on it. If you do not pay the taxes you will see who has the real ownership of your property.
7. Taxes will be raised as local governments get more desperate. During the boom, few people saw or cared about their property taxes. They figured as long as the asset went up the taxes were sure to follow. Many figured if the property value fell, the taxes would naturally go down. Wrong. Local governments either kept taxes the same when property values fell or worse raised the rate or taxable property valuation to steal more money from you. The sad thing is we have not seen anything yet. When the dollar collapses governments will become more desperate and take extraordinary actions to maintain their power. For a local government the best place to steal money is the property owner. (For a Federal government the best place to steal is your retirement funds.) The local government can raise rates and there is nothing you can do about it. If you don’t pay they will simply take your property and sell it at a tax sale. Or what if they create a massive sales tax on the sale of Real Estate?
8. What they can’t tax, they will take. Governments have many other tools in their pocket to steal your property, like zoning. What if they mandate that your home must be energy neutral before you can sell it? What if they use eminent domain to give your property to corporate pirates? What if there is a new zoning law that says you cannot build with in 500 feet of any water source or endangered species?
9. Income producing property is at risk also. The value of income producing property is directly tied to the economy. If the economy cannot support businesses, the value of all of the underlying property is worth less. Overnight the property turns from an income producing asset into a cash sucking liability. I have seen franchises go broke and once prime property losses 50% of its value overnight. With so many empty properties on the market it acts a drain to your ability to hold rents up.
10. When the economy deteriorates, domestic violence and drunken disorderly conduct rises. People steal air conditioners and strip homes clean. If people don’t have jobs, they cannot pay for their rent. Towns may enact laws to prevent you from getting rid of non-paying renters. People stop caring about the upkeep of a property. Even if you do get rent, the real value of that rent is falling as things get tougher. If things get really bad, people will be paying more for food and heat and may not have the money to pay the rent. Finally, they may also look at you as the cause of all of their problems. You probably look like a Rothschild or Rockefeller to most of these renters, and they may take out their frustrations on the guy taking money from them.
11. Renters have no buffer. Half of all Americans cannot come up with $2,000 in one month for an emergency. Rent is often the easiest expense to skip out on.
12. The Existing Homes inventory is going back up. Wait until after the next financial crisis. Many people simply cannot afford to sell because they owe too much on their house. (May 2014, New York Times, “What Housing Recovery?” One-fifth of homes are still underwater, 9.8 million homes, are at risk of joining the 5 million households that have had foreclosures).
13. Flippers make up a huge portion of those sales. The sales numbers are skewed because there are a lot of homes that are bought and then sold. So the real buyers that are actually moving into new homes is much lower than we are lead to believe.
14. The Shadow Inventory. On top of the homes on the market there are MILLIONS of homes not on the market. These are homes that have been foreclosed upon by the banks and they are not even attempting to sell these homes. They know that if they dump these homes on the market it will crush all of their performing mortgages as homes prices sink further and more people just stop paying.
15. Millions more beyond the Shadow Inventory. Even if we somehow get past the gut of existing and shadow inventory there are millions more beyond even that. There are homeowners that have simply stopped paying their mortgages and they have not been foreclosed upon, even though they should. They pay their property taxes and utilities. These homes tend to be on the lower end in undesirable areas. These people also draw strength away from the renter market. If they are not evicted they don’t need to rent your property. There are also the Strategic Defaulters that purposely don’t pay their mortgages even though they can.
16. We still have another year of mortgage resets. We are not done yet…Beyond the existing…Beyond the Shadow…Beyond the as of yet to be foreclosed, we have millions more that will fall into default as their mortgages reset or they lose their job in a ever worsening economy. You might remember that this housing mess all got going because people got in over their heads not only with the Real Estate but also the mortgages. People with no jobs or income now had exploding mortgages that reset at double the payments. The adjustable ARMs and Alt As are coming due and the properties are worth a lot less and peoples financial and job situation are much worse. This coupled with stricter lending is a potent combination.
17. The MERS monster. Mortgage Electronic Registration Systems is a scheme cooked up by the banksters to slice and dice huge pools of mortgages into tranches, so that they can then resell the pools of mortgages all over the world. This is a huge problem since there is now no clear owner of the title of the properties, banks cannot foreclose on properties in default. Would you feel comfortable buying a property from a bank knowing that millions of mortgages are involved in this mess. You may wake up only to find that the property you thought was a steal is actually someone else’s property. Much of the paper work that was done, was done very wrong.
18. Tougher lending standards mean fewer buyers. Credit requirements are tougher as banks seek to sober up their balance sheets. They require more money down and are much more stringent in their lending. Nearly 27% of all mortgage applications are rejected now.
19. The boomers have lost a great deal to the paper stock and the paper housing bubble, and it seems like it is too late for a second chance. Without this generational demand it is going to take years to fill the massive glut of homes we have built. We are going to see American Ghost towns again.
20. My comment: when people retire, they often downsize to smaller homes and use the profit to help fund their retirement. This is partly what popped the Japanese asset price bubble 22 years ago and Japan has had deflation since then. But they were in much better shape than we are, because everyone had a lot of savings. And the younger generations can’t even pay off their student loans, let alone pay high prices for boomer homes. Don’t be fooled by the rising stock market — it just means the next crash will be even worse since there have been no meaningful reforms, and the level of debt and corruption is unprecedented in history – and can’t be “fixed” anyhow, except with enough market crashes to the point where we start over.
21. The Generation below is broke. If the Boomers are scared and downsizing there must be a generation below that will pick up the slack as they grow, right? My generation is destroyed. There is now an unprecedented $1.2 Trillion dollars in student loan debt chained to my generation. And thanks to Bush, that debt can NEVER be gotten rid of through bankruptcy. So here you have a generation with $20,000 to $250,000 dollars of debt before they even earn one penny in the real world. Never mind the credit card, auto and home debt. This debt is keeping my generation from starting families and having any disposable income. They are just getting by now, wait until the next shock comes. If this debt is holding back families from having kids, this acts as a further throttle to the growth in long term housing trends.
22. Multi-generational housing is coming back. Not only does this make sense financially, it makes sense emotionally. We are going to be going through very tough times and we need to have a strong family to rely upon. This trend will leave a lot of unnecessary homes on the market, as sons, daughters, and grand parents live together once again.
23. Obsolete housing. Many huge homes will simply become abandoned. [My comment: especially as energy prices rise, McMansions will be too big to heat affordably].
24. Obsolete towns. The value of properties in areas has a lot to do with the companies that provides jobs. I am in Cleveland and I can tell you first hand that the amount of jobs that has left the area has been huge. If cities and towns cannot keep their businesses they are doomed. All along the rust belt you can see this very clearly. Now the towns that went up with the housing boom are the ones that are the biggest bust.
25. Possible Illegal Immigrant exodus. History has shown that foreigners tend to take the brunt of the frustration of the populace during extreme economic collapses. When the economy heads south again, the illegals may head south of the border as opportunities get slim and social pressure mounts.
26. Political, financial and eventually military power is shifting to Asia. This shift of power will affect property values as real money would rather be in Hong Kong or Shanghai rather than New York or London.
27. The most important factor in the housing market is JOBS. We are on a death spiral for jobs. Our manufacturing was gutted and sold overseas by the Elite to make a bonus. Do you remember Ross Perot and his “Giant Sucking Sound?” He said that until the price of labor here is on par with the slave labor in other countries, jobs will never come back. The other factor is 70% of the economy is part of the consumer economy.
28. I recommend people buy in a safe area near water and food. Owning a home is much more desirable to renting during a financial crisis. Most rentals are near other desperate people. Having a “castle” to defend is vital to surviving a collapse. You need to have a place to safely stages your preps. Being evicted during a collapse is a very dangerous experience. Just remember the 3 most important rules of Real Estate, location, location, location.
29. My comment: because of the net energy cliff (2015-2020 according to experts), the economy will never grow again, but shrink until we are back to pre-fossil fuel carrying capacity, about 1 billion people world-wide, 100-150 million people in the United States. Therefore, if you buy a house now for $200,000 with mostly borrowed money, and the value drops to whatever people can afford to pay in cash (say $25,000) when deflation strikes again after the next crash (due to credit vanishing, again), then the Banksters are going to take your house back. Even if you’re renting it out, you can’t count on the renters to still have jobs to pay rent so you can pay the mortgage. Better to buy real goods now (tools, grain mills, emergency food supplies, etc.) and wait to buy a home free and clear with cash after the next crash. But if you’ve got $500,000 then buy the house now so you don’t end up without a chair when the music stops. If you can’t buy a home now free and clear, don’t wait too long after the crash, because although home prices may keep dropping, your cash will be worthless if the dollar fails in a sovereign default, or currency is re-issued, or people realize how dire the situation is and don’t sell to make sure they have a roof over their heads, or you’re in a safe area and are outbid by the wealthy 10% fleeing large cities once peak oil awareness is commonplace knowledge, which will crash stock markets world-wide according the German Military peak oil study.
Bottom Line: Have cash under your mattress since you won’t be able to get it out of the banks for a while (I could be wrong about that though, there’s a good chance of nationalization this time around). Regardless, be ready to buy real estate after the next downturn, which may not be the bottom of the market, but who cares, once the net energy cliff begins, and the money/energy transition begins in earnest, money will mean nothing, and living in an area under carrying capacity with real goods (many of which won’t be available anymore as businesses fail) will mean everything. And you’d better have the skills to continue to pay property taxes so that you don’t lose your home. Also, a modest home so that it’s not a target of gangs, mafias, or local government officials when social disorder occurs.