The Coming Guaranteed 48% Real Estate Crash

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For the last 18 or so months, I’ve been telling you why an epic real estate crash is almost guaranteed AND on the near horizon.  I now think that it’s very likely that it could happen this year, possibly shortly after Labor Day.  Here’s why…

Most people buy a house based on the down payment that they can afford and the monthly payment they can afford.

As an example, if someone has $1,000 a month to spend on the principal and interest portion of a mortgage, they can get roughly $222,000 of house at 3.5% interest.

Right now, 30 year mortgages are being advertised at 3.5% or less. Meanwhile, real inflation, according to the St. Louis Fed, the American Institute for Economic Research and ShadowStats.com is in the 8-8.5% range. To explain why this is a problem, we need to look at banks quickly.

Some businesses are easy to understand. A hardware store buys a wrench for $1, sells it for $3, and if they sell it in a short enough period of time, and cover all of their expenses, they make 30-60 cents apiece. Do that enough times with enough items, and they stay in business.

The bank version of a wrench is cash. They buy dollars from customers in the form of CDs at a low interest rate, and they sell those dollars to other customers in the form of loans, like mortgages with a higher interest rate. So, a bank might offer 2% interest on CDs, turnaround and loan it out at 5%, and if the borrower pays on time, the bank makes 3% before expenses.  Historically, the spread has been about 2.7%, but it tends to get smaller as rates go lower and get bigger as rates go higher. There’s a whole extra layer of complexity when you include fractional reserve banking, but it’s not necessary to talk about that right now.

With proper underwriting, this is a fairly stable system. Banks compete for CD money and usually have to pay customers close to the rate of inflation, or even a little more.

In recent years, this system has been turned upside down. Instead of borrowing money from customers in the form of CDs, banks are increasingly borrowing money from foreign nations and the Federal Reserve at incredibly low rates that have driven CD rates and mortgage rates down to unrealistic and unsustainable rates. In simplified terms, we’re both creating money out of thin air and borrowing money from China and other countries at rates that are lower than the rate of inflation, and that cheap, plentiful money is propping up the real estate market.

At some point, China, other Treasury buyers, and CD buyers are going to demand a return on their money that is at or above the rate of inflation in the US. So, let’s see what would happen if banks started offering CDs at 8%, or slightly below our current 8.5% inflation rate, and they loaned it out at 10%.

That $1,000 payment that currently buys a $222,000 house at 3.5% only buys $114,000 worth of house at 10% interest. This is HUGE. That’s a 48% drop in value, and in my mind it’s not a matter of if it happens, it’s how soon and how quickly it happens once it starts.  In addition to propping up OUR banking system, the Fed is currently pumping hundreds of billions of (fiat) dollars into foreign banks to try to prop them up and keep the global financial collapse from hitting us.

To add to the problem, banks are still estimated to be holding a “shadow inventory” of 2 MILLION houses that they aren’t putting on the market and have an untold number of additional houses in default that they aren’t foreclosing on.

Why?

Because if banks would actively foreclose on houses in default and sell all of the houses they have in their REO inventory, it would look bad on their books for their next FDIC stress test.  As it is, if they don’t foreclose and don’t try to sell their foreclosed houses, they can claim that their market value is much higher than it actually is.  If you’ve ever heard people like Billionaire Kyle Bass from Hayman Capital talking about “mark to market”, this is one of the applications.  It’s the process of re-stating corporate balance sheets with the actual market value of their assets, rather than their inflated value.  Mark to market is both necessary for long term stability AND it would be a crushing blow to the stock market and banking system.

Houses have historically gone up in value due to inflation and rising wages, more demand than supply, low interest rates, and poor underwriting. In most parts of the country, low interest rates is the only one of those factors that’s still having a positive effect on housing. Inflation without rising wages doesn’t necessarily help housing. More restrictive underwriting and higher down payment requirements have squeezed many buyers out of the market and made supply higher than demand. All in all, we’re starting to pay the piper for the artificial increases in real estate prices since 2001.

Many people don’t realize that the crash we’re about to experience right now actually started with the shutdown of the sub-prime market in 2001.  Ironically, the 9/11 attacks are what “saved” us from having a crash in late 2001/early 2002.  In response to the 9/11 attacks, Bush encouraged a policy of low mortgage rates, lax underwriting, and the benefits of home ownership.  These policies went counter to market forces and have simply amplified and postponed the eventual crash that we’ll experience.

Wind Loaded Snow Cornice

The situation is similar to a wind loaded cornice.  If you’re not familiar, it’s a situation where you’ve got a mountain ridge that gets a lot of snowfall and has a prevailing wind.  Over the course of a winter, big overhangs of ice and snow form.

Many years ago, I did both back country guiding and ski patrol and wind loaded cornices are a BIG danger in the back country.  From the top, it may look like you’re safely standing on a ridge, but in reality you’re standing 10 feet out from the ridge with nothing but a snow cornice below you.

The crazy thing about cornices is that they look and feel stable…until they’re not, and then you’re hosed.

Cornices are one of the things that avalanche crews focus on breaking free to keep skiers safe at resorts.  Blowing cornices loose and letting them fall is the only way to create a safe, stable mountain for skiers.  As long as there are cornices above or below skiers, it’s only a matter of time until the cornice(s) break free and take people out.

The parallels to our current situation are extensive.  Our current economy is built WAY out on a fragile cornice and the only ways to stabilize things are to prop up the cornice or for it to fall and for us to ride out the resulting avalanche.

I see this playing out in one of two ways. Either prices will suddenly and catastrophically drop due to an event, or China and other Treasury buyers will pressure the Fed to start raising rates gradually but consistently over the next several years.

3 other factors:

1.  The Fed says they’re keeping rates low through 2014, but they also have to keep the IMF, OPEC, credit reporting agencies, and Treasury buyers happy, so there’s no telling what will happen.

2.  Japan has been in “dead man walking” mode for most of the last 22 years and there are new signs showing that they’re about to fall.  They’re the 3rd largest economy in the world, they’re printing and injecting their economy with more money than we are (comparatively) and it’s having no effect.

3.  Believe it or not, a lot of the major market traders take the summer off.  (Wouldn’t that be nice?)  As a result, there’s a good chance that the Fed will wait until these guys are back from vacation (Labor Day) to make major announcements.

Enough of the doom and gloom…what can you do to put yourself in a good position if this happens?

The first thing is to not worry about it happening. You have control over the decisions you make, but there isn’t anything that you can do as an individual to keep food inflation, higher interest rates, or market crashes from happening.

If you have a home that you intend on staying in long term, enjoy it and don’t worry about the value.

If you just bought a home at “historically low” interest rates and don’t plan on staying there long term, you may want to reevaluate your plans with a trusted and competent financial adviser. As a former stock broker, I’d suggest finding someone who understands and enjoys macro and micro economics and real estate. This isn’t a conversation to have with someone who only understands insurance or only understands stocks. Forward this article to them, have them look at it, and get their thoughts. HOPEFULLY, I’m all wet and there’s no basis at all for my concerns.  This is a case where I’d absolutely love to be wrong and to get hundreds of emails telling me how wrong my analysis is.

If you are looking to buy a home in the near future, get to know the major players in the real estate investor community in your local area and try to buy a house that’s significantly under market value. There are incredible deals (25%-50% below retail) across the country right now that will give you some cushion if interest rates shoot up and prices drop.

If you’re currently living in an urban area and looking to buy a piece of rural land that you could use as a retreat location and grow food on, don’t waste any time but don’t make any rash decisions. Specifically, don’t pay too much for a bad piece of property. Also, look in non-conventional places to find properties for sale. As an example, if EVERYONE in your area looks in the MLS, Craigslist, and the newspaper to find properties, then make sure you’re also looking in the Thrifty Nickel and on Ebay.

Also keep in mind that the increase in farm prices, the drop in inventory, and increase in demand make it more likely that if a disaster happens in the near future that you’ll need to survive right where you currently live. Remember, the workable plan that you have in place will ALWAYS beat the perfect plan that you haven’t taken action on. Keep making daily forward progress in improving the survivability of your current living situation. And if you haven’t checked out the www.SurviveInPlace.com Urban Survival Course lately, I encourage you to head over to www.SurviveInPlace.com and check it out.

Two other resources I want to encourage you to consider the following:

1.  Gold, silver, and other precious metals.  Specifically, Tom Cloud from Cloud Hard Assets.  I did an interview with him a few weeks ago that you can read here:

2.  The Elevation Group.  This is a VERY alternative investing newsletter run by a couple of good friends of mine.  What they have done is team up with some of the very best financial advisers in the country (including “Rich Dad, Poor Dad” author, Robert Kiyosaki’s advisors) to be able to share many of the “black box” investing secrets of the ultra rich that allow them to make money regardless of what happens with the markets.

How good of friends are they?  I’ve actually stayed at both Robert and Mike’s houses within the last 2 weeks and helped Mike get one of his newborn goats his first colostrum from his mother and start sucking.  They’re good guys and The Elevation Group is definitely worth checking out.

What are your thoughts on my analysis of the real estate market?  I’d actually love to have it shot full of holes.  How about other factors in the market that you’re seeing?  Share your thoughts by commenting below:

About David Morris

David Morris is the creator of the Survive In Place Urban Survival Course, the Fastest Way To Prepare Course, Urban Survival Playing Cards, Tactical Firearms Training Secrets, and other books, courses, and articles on preparedness, survival, firearms, and other tactical topics. He lives with his wife, 2 boys, and 2 dogs.

Comments

  1. Hi David, thanks for your analysis. What happens if you buy properties for rental purposes? The value may drop but you still get income for longer terms. Same thing with farm land. Thanks.

  2. B. Moore says:

    I’m also interested in demand, given that while more households are forming, I would have to believe most of those are immigrant households, who will work minimum wage jobs. Yes, they will need housing, but they won’t be buyers. Also, as the Boomers kick off and either sell or deed their homes, including vacation homes and investment properties, how does that affect supply? I agree with the author’s monetary argument for a collapse in pricing, but feel demographics are also going to conspire against current values.

  3. Chemechie says:

    One thing you don’t mention is the local variability in real estate – every market is different and there are always some going up and some going down. Yes, financing availability will affect most people, but even now there are significant local variations in interest rates, terms, and ease of approval.
    I have noticed that a number of people, myself included, are using ‘non-traditional’ financing that isn’t eligible for Fanny/ Freddie standards. These are used for properties that do not qualify or for which it isn’t worth qualifying. These methods often have higher interest rates in the 4 to 6% range and simpler (or no) closing costs. I don’t think rates of 5 to 7% are going to be a hit national hit on the market; I think that will take 10 to 12% rates.

    • Very good point…I didn’t mention it in the article, but I touched on it when I was talking about North Dakota vs. Detroit.

      • Joe Boylan says:

        Hi Dave,
        I don’t use social networks; I find them time-wasting and intrusive.
        But I have a house I want to sell (for ten years now) because I live rented in another part of the country; which is Romania, East Europe. I bought it cash, for around $10,000 and did a lot to it. I have it on the market, still, for a reasonable $45,000 which is just about right. I don’t have any loan on it. Trouble is I want a house in this part of the country but their prices are at least double. I can’t get a mortgage even if I wanted one because of my age. The house is rented out currently at a local rate which gives me about 25% return on the money I have *recently* (i.e. in the last year) invested in it for major refurbishment.
        Can you suggest a strategy which would get me out with enough capital to get me a house locally? Romania is as financially healthy as anywhere else in Europe (!!!) right now. The trouble (or advantage) is that it has a way low cost of living and a comparison factor of 12 with the UK and I suppose with the USA. What I mean by that is a salary in UK is 12 times what a salary in Romania is; a house costs 12 times what a house will cost in this country; and so on. So I see it as a ‘micro’ version of the West.
        [By the way I totally indemnify you where financial advice is concerned. This is only an academic discussion for me.]
        Best,
        Joe Boylan

  4. Andy C. says:

    >> Houses have historically gone up in value due to inflation and rising wages, more demand than supply, low interest rates, and poor underwriting.

    A more likely scenario from my armchair is the value of real estate remains propped up, while the rest of the economy inflates around it. Your shadow inventory assessment seems reasonable; the banks have more to lose at this point by foreclosing and selling than by simply letting the occupants continue staying without paying. Besides, a tennant is good security. The present situation is only manageable if it doesn’t unwind too quickly. Both higher interest rates and declining real estate prices will unravel it. The only option is to maintain the status quo at all costs.
    My most likely scenario is sustained current or higher real inflation. Cash buyers will make or lose money based on the buy price, renovation costs, and their success renting it, but the aggregate will be zero sum (meaning plenty of losers as well). The real estate losers will cut their losses, and gradually the banks will clear their backlog. The defaulters will come out ahead, but in the information society their ghosts will haunt them in ways presently unimaginable. For example, who ever thought that your credit score would have an impact on auto insurance rates?
    Stagflation will be the norm for lower skill jobs, and the only wage growth will be in those jobs that eliminate the lower skill jobs (tech, automation, shared services). It’s a great time to be an entrepreneur with these goals in mind.
    TLDR: status quo facade will be maintained at all costs. No drop in real estate, no hyperinflation (only garden variety), no wage growth either.

  5. Don Ruane says:

    I cannot argue with your numbers, time-frame or predictions.
    There one thing that could alter the results of you prediction is the enactment of the Fair Tax.
    The problem really is that the people continue to reelect the same people to the same offices and yes, this time expect different results.
    A second solutions to all our problem is to put you head between you legs and kiss you butt goodbye.
    Sadly we are the problem and not the politicians.

  6. I am curious to know how the author thinks it is “Bush’s Fault” instead of Congress and the Community Reinvestment Act. Barney Frank, Maxine Waters, and their ilk had a big hand in the mortgage meltdown fiasco and dismissing the Administrations concerns regarding this BEFORE it actually occurred, so I think this small part of the article is disengenous and misleading at best. In any event, I do enjoy the offerings provided and rarely disagree. Thanks for the information and keeping everyone engaged in this crazy world we are in today.

    • davidmobile says:

      The community reinvestment act was enacted under Clinton, and not Bush’s fault. But even though I’m not in the “blame Bush” crowd, his patriotic consumerism on credit and patriotic house buying message after 9/11 was short-sighted and simply loaded the cornice. His pressure to lower interest rates and relax underwriting loaded it even more.

      Bush didn’t start the fire by any stretch of the imagination, but he DID add a lot of fuel.

      • Community reinvestment act actually started under Jimma Carter

        • davidmobile says:

          Yes, you’re correct. As an investor who started in the late 90s, I mostly saw the effects and consequences of the changes Clinton made.

    • Bush is as guilty as Water’s, Frank, or Hank Paulson. Who signed the ban on Incandescent light bulbs? Bush, and his dad banned high flow toilets. Wake up! These people are all working for the same master, Lord Rothschild. There is no choice in elections here anymore. One Rothschild candidate pitted against another.

  7. Dianne Finnegan says:

    As a new widow getting ready to close on my first home within the next 12 days, this isn’t wonderful news I want to read. HOWEVER, kowing that I am buying a home I can afford for LESS than what I pay in rent, and which will leave me enough money to cover monthly expenses even if I loose my kid’s income (SSDI) , I feel secure. I get SSD and I just started a small business as well. Hoping and praying it will take off, and trusting God is all I can do. I have two kids to take care of, and getting into something that is more affordable, despite the fact that there are major repairs that need to be taken care of, still makes me feel better than knowing I am paying someone else’s mortgage. I may not have my dream of a homestead, but I have a lovely house for way under what the market value is and I feel blessed. I found the house by accident, it’s a HUD property with lots of extra room. My sister bought it with me and between us I know this will end up being the home I leave feet first – unless my business really takes off, then someday I will have my rural property.

    I think one of the most important things I can do is cut up all the credit cards so I don’t let myself get back into debt. My husband left me a little money, which I used to pay off ALL debt, I am not going to get into that trap again. My goals are to get into my home and KEEP IT!!

    Thanks for your timely articles and advice!

  8. I don’t know what to say? I have been in this merry-go-round since the ’50′s and went through all those past “cornices”, Made alot but lost some and now too late, age wise, to make any up…Your scenerio is what has happened all too many times in the past. This last 2008 one was the one that has really set the pace and I am afraid that what is happening World wide, as well as the fiat economy that we are under now can not overcome what is going to happen, when the majority of the Tax Payer can’t pay, and the inflation continues into double digits. All the Government Employees and the $250.000 + earners try to make ends meet by passing the way under value Dollar back and forth. Sorry for the depressive pessimisim but my history seems to be the trend. Born in the 1930 depression and looks like I’ll die in a depression, unless there is a WW3…then it’s every one on their own..

  9. sure hope the market does not fall apart yet. putting our house for sale next month
    so really hope that everything will hold steady for alittle while.
    wishing all of you the best and again I thank you david and diva very, very much for your
    fantastic site and sharing your knowledge along with all the others so folks like myself
    can learn and apply the advise.
    take care, GB.
    ron

  10. I am a renter at this point & think that is a good thing because when prices do fall I feel that is the time to buy. Rates may be up at that time, but, rates are known to fall. So I figure if I buy low, & it may be at a high interest rate, that rate will fall soon enough & I will refi into a lower rate, & have gotten my home at a steal…I would like others thoughts on this? I am trying to get my kids to hold off on buying at this time, but, they are first time home buyers & are excited so they are going to buy I hope we can find a great deal as you have stated above.
    I am fearful gas prices will explode in the fall and as a renter I am also fearful the landlords can ask us to move at anytime, I have considered that in and of itself a good reason to buy!

    • meyer stahls says:

      I would not expect interest rates to come down in the future,but continue going up and up. If you cannot afford the rates today, I would hold off and save as much as you can and buy later.

  11. David:

    I agree with your general anlysis for the most part, but your only support for why it will likely happen soon after labor day is the fact that traders are on vacation in the summer. That’s just a bit too thin for me. Traders have leptops, these days, nd they never go anywhere without them. Also, predicting a time point when a more or less manipulated crash will happen is extremely difficult. It has a lot to do with what fits the supposed manipulators’ own best interest (both on an institutional as well as a personal level). These things are just too hard to gauge. We all know from experience that their ability to delay the inevitable can be considerable.

    • :) Whether or not the summer recess theory proves out in this case, it’s definitely not “thin.” It is historically accurate and all signs point to a summer recess again this year. It doesn’t have to make sense…it’s just the way things are.

      And, the sequence of events that I was laying out aren’t based on manipulation…it’s simple human nature.

      Again, I don’t want it to happen after Labor Day, later this year, or next year. But at some point the cornice gets so loaded that it can’t sustain it’s own weight and it appears as if that point is VERY close.

      If I thought it was based on manipulation, I’d guess that it would happen immediately after either the mid-term elections or immediately after the next Presidential election.

      • Most of the economies of Europe, Japan, and even the USA are over leveraged and in deep trouble. We are beyond taxing our way out of the problem and issuing a new currency is just a band aid on a broken leg.

        I see no workable solution for the problems we face but do see similarities with the world of the thirties. We could easily be in the beginning stages of World War Three. Being able to produce your own food, water, and medicines will prove very valuable regardless of our future events.

        Many will not see the coming events in time to prepare…and, dammit, they have been told.

        • The cornice is large, the weight heavy. Something huge is going to break this summer (at some point). There is nothing to lose and absolutely everything to gain from being prepared as you say. But I see the financial avalanche quivering and it’s getting way too quiet.

  12. This is a great example of the wisdom of old king Solomon. His advice was very wise and humble. Since you don’t really know the future, diversify into seven or eight areas. People get in trouble whem they become so sure that they know what’s coming that they bet the farm. Instead, build such a diverse portfolio that, regardless of what happens, you have a good chance of doing ok. Not doing this is risking everything you own and your family’s security.

    Oh, and I mean REAL diversification, not seven different types of stocks and a few gold coins. Or mountains of emergency supplies and a farm. Or a business alone. None of these are safe. None of them cover all the major scenarios. After you are homeless because you lost the farm due to oppressive property taxes or a government snatch and grab of all farms, and your investment is kaput.

    Other areas to possibly diversify into could include physical things like fishing poles, machines and supplies that are useful in a disaster, foreign currency, cash, commercial real estate, non-commercial real estate (i.e. your home or homes), bonds, legal partnerships and skill development (for example if the economy crashes, knowing how to keep old cars from dying becomes a huge bargaining chip).

    Be wise, not overly sure of what the future holds. That is one reason I appreciate this website, it gives info on one avenue of preparation for the unknown future,

    • Here–EXCELLENT point, and I’d like to add a caveat to it. If you start out diverse, you risk never becoming highly skilled at any one thing. If on the other hand, you become a serial expert and give laserlike focus to becoming an expert at one skill/discipline at a time, you will end up with a single marketable skill quicker and you’ll end up with a deeper knowledge about multiple areas.

  13. What is your recommendation for someone who is underwater at this time on their home. Owes more than it’s currently worth from the last crash?

    • That’s a tough one, and I can’t really give individual advice. Here are some general guidelines, but you’d want to contact the appropriate professionals before taking any action.

      We were in the same situation a couple of years ago and chose to go ahead and sell it and pay the difference between what we owed and what our house was worth. It sucked, and it was painful.

      A few other options that may or may not be obvious:

      1. Stay there and keep paying what you agreed to pay. (this sucks too…especially since many people can buy a better house than the one that they’re in less than block from where they are for less than what they currently owe.)

      2. If you don’t have the means to pay the negative equity, you could contact your bank and try to get them to agree to a short sale, where they’d accept less than what you owe. If you do this, the bank may or may not end up with a charging order against you for the negative equity, interest, legal fees, and penalties. They might also 1099 you for the difference and you’d have to pay taxes on it.

      3. You could contact a local mortgage company and see if they have any negative equity refinance programs available that would lower your payments and/or the amount that you owe.

      There are other, more creative and involved, options that you could pursue, but they are beyond the scope of this reply to even begin the conversation. I’d suggest trying to hunt down a local real estate investor who is active in the market and who has been in business for several years and ask them for creative ideas that work in your particular state/area.

  14. joseph L M says:

    Hello DAVID
    I read your article this and went to the different links .Good read , had get a dictionary out , call a couple of friends, finally understand most of what you were talking about. This possible disaster in part has already happen here .
    I live in a city with a huge number of home held by banks , mortgage company’s , investors of all sorts. They are boarded up and most just sit until vandal break in them ,or they get firer bombed. I have seen investors trying to sell some of these homes they are getting penny’s on the dollar right now. We haven’t seen a economies recover here.
    Please keep the articles coming.

  15. So … I was looking at rural land and possibly a small lake house near the land … so would you simply wait to see what happens after labor day?

    • (This question actually came from the best man from my wedding by email and I decided to anonymize it and post it and most of my reply)

      There’s no hard and fast answer to that question.

      I’ve been writing about this vulnerability for 18 months and we bought a house last year, fully aware of the risk we were taking.

      My view on things is that the values of sustainable property will PROBABLY be buoyed by cash buyers. Suburban homes away from resources and jobs aren’t very sustainable and will PROBABLY be hit the hardest.

      Think of it this way…if you’ve got a group of 10 people, 9 of which live in urban areas and #10 lives on several acres in the country with soil (not dirt) and water and all 10 lose their jobs and they decide to move in with each other, which of the 10 properties do you think they’ll decide to move to and call their “Alamo.”

      Taking it from another angle, if you get the property, things tank, and you get to a point where you can only afford the city property or the rural property, which would you choose? If you think you’d choose the rural property, then it may not be a bad idea to get it.

      Looking at it from still another angle, what if everything continues along, as normal, through the end of the year? or longer? I try to make big decisions that I’ll be able to live with both if everything collapses or if things never collapse. That way, I am continually improving my family’s survivability but I’m also having FUN and enjoying life. I want to be aware of dangers on the horizon and be prepared, but I don’t want to let threats and danger dictate my life or to become a prisoner to my preparations.

      I know it’s not a clear cut answer, but I don’t think there IS a clear cut answer.

  16. Good analysis. The only issue I have is with the assumptions. In normal housing recovery unemployment goes down, people start making more money, then buy first house or larger house. This housing recovery has been almost exclusively driven by investors-not typical families. Investors are cash rich, they have benefited from QE, and they are switching their investment vehicles from bonds (where they expect rates to rise) to residential real estate. I don’t expect a crash or even a downturn for another year or two. Most of the current buying is from strong hands, hedge funds, wealthy investors, and wealthy foreign individuals i.e. fleeing Europe and china where problems are percieved to be larger than here.
    The non traditional nature of this recovery is also reflected in the type of real estate being bought and funded. There is much more multi-family construction now. The real downturn in real estate should be drawn out and only occur when confidence is lost in the dollar, rates rise despite attempts to suppress them, and there is an acknowledgement that the economy will not improve with any amount of stimulus. If this happens soon after Labor Day, I will be impressed. Good luck to you and thanks for the work you do.

    • There’s also a complete decoupling between mortgage buyers and cash buyers.

      There are highly desirable areas of the country where most of the buyers are paying cash, houses rarely stay on the market for more than a few hours, and an increase in interest rates won’t affect them as much.

  17. Glenn Evans says:

    David,

    I recommend you check out the work of Mike “Mish” Shedlock. He’s a libertarian thinking economist, who has a blog at globaleconomicanalysis.blogspot .com/. He talks alot about the damage that’s been caused by fractional reserve lending, and liberal idiot monetary policy in general. He also makes a strong case why we will see major DE-flation before we will see hyper IN-flation. He has apps both for iPhone and android that allow you to follow his blog on mobile devices.
    I enjoy your work immensely, keep it up!
    Glenn

  18. I think you’ve understated the complex situation of the Fed Reserve Board, especially as regards to other nations using the US dollar as international reserve. As more attractive options become available, other nations will decrease their purchase and holding of US dollars, greatly reducing the Fed’s options. Therefore, I think the international monetary situation will have a larger effect on the US economy than the internal market and political considerations. Having said that, I hope someone else has a grasp of the possible scenarios and implications for interest rates, housing prices and the price of potatoes in Chicago.

    • You’re right on…add in the BRICS (Brazil, Russia, India, China, South America) and their plan to create an alternative to the IMF and World Bank, and we’ve got another layer.

      Add in the layer that most oil trades are settled in Dollars and OPEC wants that to change, and we’ve added another card to the house of cards.

      Right now, we have “mutually assured destruction” working in our favor, but as soon as the rest of the world has decoupled from the dollar, they’ll happily let us swing and plunder the US’ assets as soon as they can.

      Which will happen first? I don’t think there’s a definitive answer to that question.

      • marxbites says:

        FYI OPEC:

        In 1951 Iran nationalised its oil industry, then controlled by the Anglo-Iranian Oil Company (now BP), and Iranian oil was subjected to an international embargo. In an effort to bring Iranian oil production back to international markets, the U.S. State Department suggested the creation of a “Consortium” of major oil companies.[6] The “Consortium for Iran” was subsequently formed by the following companies:

        Anglo-Persian Oil Company (United Kingdom) : This subsequently became Anglo-Iranian Oil Company and then British Petroleum.

        Following the amalgamation of Amoco (which in turn was formerly Standard Oil of Indiana) and Atlantic Richfield into British Petroleum, the name was shortened to BP in 2000.

        Gulf Oil (United States) : In 1984 most of Gulf was acquired by SoCal and enlarged SoCal entity became Chevron.[7] The smaller parts of Gulf Oil was acquired by BP and Cumberland Farms. A network of service stations in the northeastern United States still bears the Gulf name.

        Royal Dutch Shell (Netherlands/United Kingdom)

        Standard Oil of California (SoCal) (United States) : This subsequently became Chevron in 1984 when SoCal acquired Gulf Oil.

        Standard Oil of New Jersey (Esso) (United States) : This subsequently became Exxon, which renamed itself ExxonMobil following the acquisition of Mobil in 1999.

        Standard Oil Co. of New York (Socony) (United States) : This subsequently became Mobil, which was acquired by Exxon in 1999 to form ExxonMobil
        Texaco (United States) : This was acquired by Chevron in 2001.

        The head of the Italian state oil company, Enrico Mattei sought membership for the Italian oil company Eni, but was rejected by what he dubbed the “Seven Sisters” – the Anglo-Saxon companies which largely controlled the Middle East’s oil production after World War II.[1][8] British writer Anthony Sampson took over the term when he wrote the book The Seven Sisters in 1975, to describe the shadowy oil cartel, which tried to eliminate competitors and control the world’s oil resource.[9]

        Being well-organized and able to negotiate as a cartel, the Seven Sisters were initially able to exert considerable power over Third World oil producers. However, in recent decades the dominance of the Seven Sisters and their successor companies has been challenged by the following trends:[1] the increasing influence of the OPEC cartel (formed in 1960),
        a declining share of world oil & gas reserves held by OECD countries and
        the emergence of powerful state-owned oil companies in emerging-market economies. [note: challenged does NOT mean inferior or superceded imo -mb]

        As of 2010, the surviving companies from the Seven Sisters are BP, Chevron, ExxonMobil and Royal Dutch Shell, which form four members of the “supermajors” group.

        en.wikipedia. org/wiki/Seven_Sisters_(oil_companies)

        Some history of the global cartelist cabal recommended to all. Just search em.

        Jackson’s 2nd BankUS veto address.

        Rothbard “Wall Street, Banks and Foreign Policy”

        Spooner’s 1867 essay “No Treason….” particularly Section XVIII on the banksters he pegs to a fare-thee-well (gave me goose bumps, no kidding} @ lysanderspooner.org

        Louis Dembitz Brandeis’ “Other People’s Money…..” avail in text and audiobook several places.

        Youtube of lend-lease materials Major, “Major Jordan’s Diaries” a true patriot.

        HISTORY: Alternative Views is a public affairs program that produced 563 one-hour TV shows between September, 1978, and April, 1998. It’s goal was to provide information and perspectives that either were not shown on the regular media or were greatly distorted by them. The show also provided a platform for other people to present their views and to play their documentaries that the Establishment media would not present. Alternative Views was distributed by mail to 85 cable systems that served over 250 cities and suburbs. [from JFK, Nam & Iran/Contra - Ron Paul & Rep Larry McDonald on the PTB]
        youtube. com/user/AlternativeViewTV

        Charlotte Iserbyt (daughter) – Skull and Bones, The Order at Yale Revealed (Full)
        youtube. com/watch?v=29QV_GNMt3Q

        Norman Dodd of the Reece Commission, ex-cia John Stockwell & Chip Tatum on YT

        • davidmobile says:

          Not sure about all of that, but I do know that a great book on the origins of the petro dollar is “Economic Hitman” and a great book on the current state of petro dollars is “Bankruptcy of our nation” by my friend, Jerry Robinson.

  19. Dr. Prepper says:

    I was with you till you mentioned Robert Kiyosaki and his “Advisors”. This guy is a BUM!!
    He has filed bankruptcy twice and can’t manage himself much less anybody else. Why you would listen to this charlatan is beyond me?
    This seriously casts doubt on your recommendations in this field and makes me wonder about your other teachings. I am seriously disappointed in your “Choice” of peers.

  20. I agree with your eval, but not sure values will drop as much as 48% (I believe over 25-33% is possible, especially if the banks actually went through the foreclosure process on all the “shadow NOD’s” they have and didn’t just sit on delinquent loans.
    My question is this; if values drop that much relatively quickly, wouldn’t this be another opportunity for an investor to then purchase the now lesser valued property? Or do you think the new lower values will sink even lower and/or not be going up any time soon after the initial drop in value? (When do you think values would rebound?)

    • I don’t have a magic ball. I was invested in stocks and saw the ’99 stock crash coming, pulled out, but was off on the dates. I was invested in real estate, saw the ’01 real estate crash coming and starting, pulled my money out, but was off on the dates. Same with ’08 and now. In every case, I have been invested in the market when it was going up, saw serious fundamental issues like many others, and pulled my money out too early.

      I started writing about this 18 months ago. We’ve bought a house since then, knowing that we could get rip-sawed. I really don’t want this to be right.

      As to your question on opportunity…the biggest plays that I see for investors is to 1. Look at properties that have intrinsic value, like proximity to water, growing ability, within walking/biking distance to jobs, etc. The more self-reliant or semi self-reliant a property allows someone to be, the more desirable that property will be and the more stable the price will be. As an example…oil field housing in North Dakota is probably going to be more stable than properties in suburban Detroit.

      2. Look at the cheapest (non-project) housing in your area. Many times, they can be bought for cash, the price doubled, and sold with owner financing at 10%+.

      3. Look at becoming a hard money lender. Hard money lenders use their own money or others’ money to make fast or non-traditional mortgage loans. The interest rates are normally high and the loan to value ratios may be 50% instead of 80-90%, but this low ratio gives the lender a cushion in the event of a drop in the market.

      With any of these, DON’T take action based on what I’m saying. Do your research and consult with professionals.

    • should a person wait until after the drop to buy a house or will interest rates go up and make it a worse time to buy. Im looking at buying anytime and would like to know if now or after is the best time to do it…

    • JR, I have no bona fides in this area of discourse, but I have been paying attention for a long time. A bounce would be nice, but would be predicated on some “overshooting” to the downside. Housing will not be the only sector to collapse. There are just too many warped social and financial structures that must be cleared away and replaced. I would not count on a bounce. I suspect we will have to reorganize our economy (and society) and build out from the ground up. I see great things coming after the crash, but I expect it to be hard and slow for some years to come.

  21. Robert LeFever says:

    Unfortunately, I have no ammo for your prediction. However I think you my be a little low at 48%, initially. Then maybe a level off around that number. And it might happen before labor day. There is a high probability that the Biblical prediction on Damascus,Syria is just around the corner. Maybe bigger world problems than a real estate bust… Bob L.

  22. I clicked on your Elevation Group link and began listening to the speaker go on and on about himself. Does anyone ever listen to these things? Anyone that has that much time should get a better hobby.

    • Rich,

      2 things…

      1. That format of selling is called a Video Sales Letter. I can’t stand them, but I use them myself because they work better than anything else and market forces dictate that I have to use them if I want to stay in business. In short, the masses have spoken and video is what they want.

      2. I’m constantly amazed that people will spend the majority of their non-working hours watching “The Voice”, “American Idol”, the latest bottom feeding reality shows, the nightly news, sports, and comedy/variety shows that have ZERO chance of improving their lives, but won’t take 20 minutes to watch a video on their computer that could change their lives and have a positive and profound multi-generational impact.

      Everyone has a choice to make on whether they consume pablum or meat. Give it another shot. You’ll see that it’s not only “meat,” but very worth your time.

  23. Duane Weber says:

    Fractional reserve is very important in this scenario. A $200k loan is an asset to the bank allowing them to loan out 9x or $1.8mil as an example. Now they are getting 3.5% on 1.8mil, 1.6mil of which was fabricated with only $200k of collateral. That amounts to $63,000 on a $200k investment of around 32% a year. Not bad. So what happens if the fractional reserve is increased to 15x or alternatively reduced to 8x? Now you have trouble brewing and the game is different. The fed controls what the fractional reserve is of their member banks. Your scenario could happen but it is likely to unfold differently and be caused using a more of a hidden mechanism. But they have a lot of room to play this game and still make money as long as loans are performing and the fed is lending.
    The fed wants to control and not own so they will want to keep the controls in place to somehow keep the house of cards propped up. Figure that scenario and that may help to understand the directions they will take.

    • Thanks, Duane. While I agree with you that fractional reserve banking is not necessarily a bad thing, it is the main reason why we can’t mark to market.

      Let’s say a bank has the $200,000 collateral that you mentioned and loans out $1.8mm in mortgages at the 9x multiple you mentioned.

      Let’s say that those mortgages go to 10 buyers who each put $20,000 down on $200,000 houses.

      Completely ignoring the cost to sell a house, closing costs, and the time value of money, the 10 houses are worth 2mm and there’s 1.8mm of debt on them.

      BUT, if there happened to be a market correction between when the houses were bought and now (like 2008) and the houses are 25% less than what they were originally worth, then the 1.8mm of loans is only balanced by 1.5mm of real estate and is $300,000 in the hole–which is more than the $200,000 that they are holding in fractional reserve. (Some might argue that the loans would have a lower balance because of 5+ years of payments…but in a best case scenario that would be eaten up by selling and closing costs. In a worst case scenario, the loans were interest only or reverse amortizing)

      Our current accounting allows banks to say that a $150,000 house is worth $200,000 if it was worth $200,000 at some point. It’s an illusion. Mark to market would fix the illusion, but it would completely chop off the cornice and cause an avalanche in the process. The end result would be a more stable market, but it would be incredibly painful to get there.

  24. DAVE WARREN says:

    I have read your foreacast and, whilst I am in the UK, it scares the s**t out of me because I am presently building flats for sale and cannot help but feel that what happens in the USA, sooneer or later happens here.

    At present the UK market is actually increasing steadily. What your thoughts on your imminent crash spreading to the UK. And when is Labor Day?

    Thanks. Dave Warren

  25. Goatherd says:

    Wow! This is one of the most interesting and informative articles I have read in a long time! Thank you so much for this insight and perspective .

  26. Good information and I for one believe that you do have your head on straight. I have worked as a missionary in several communist countries. I was in Russia when their currency tanked in the early 90s and in Ukraine when I walked around with 200,000 bills to pay for groceries and spent 3 billion of their currency to pay for a conference. I carried bags of money when I purchased larger priced items. Too many people think it could never happen in America BUT it will and smart people are getting prepared. Keep up the good work. Peter

  27. Ranchman says:

    Unfortunately, I think you’re right:( I was just telling my sister the other day that her buying a house right now wouldn’t be wise, the market hasn’t reached its bottom yet. But my level of political awareness is light years ahead of hers. I believe that’s the problem in America. So many don’t understand what’s coming that it’s going to hit them ultra hard-they’re not ready at all. They don’t know how to stick a twelve inch tomato plant in the ground let along how to get a baby goat to start feeding. I would love to get my entire family (extended family-the more people the more security for when the SHTF) on a secluded farm so we can survive. No time to waste here. But they, like so many others, think that everything will always be okay and the govt has all the answers. Truth is, govt is the problem. So much of this is intentional that you can’t help but ask why. That one question, for me anyway, opened up the need to start researching declines of empires and such. What a guy can learn if he does his due diligence is amazing. Like the X-Files used to say; The Truth Is Out There!

    • I share your experiences with relatives. Mine (wife included) think I’m nuts. They believe things will continue on as they have been. Truth is, they do not want to know. So, they do not read anything or desire to know anything that will upset their beliefs.

  28. John Cadigan says:

    Dave,
    I work as a contractor. I have several real estate agents as clients, so I’m doing the punch work to get houses ready to sell or to move in. In my area (Maryland), this year has seen an uptick in sales. The past 4 years have been slow. You have valid points, but I don’t see Labor Day as the possible date. Of course, I’ve been known to be wrong before and the Fed has been known to arbitarily and capriciously do things. A 2% increase in rates will have a domino effect and your prediction will come true. Hope you’re wrong, but if not I’ll buy you a cup of coffee with my wheelbarrow full of cash (if Starbucks stays in business)!
    John

  29. R. Tide says:

    David,
    If home prices collapse after labor day (or whenever the bubble pops), would it be a good opportunity to become first time home buyers. Im talking a “forever home” purchase, not investment or home equity loan trap.

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