Bill Bonner

Not much action in the markets yesterday. The Dow lost 5. Gold gained 4.

So far the markets have not seemed to notice, but there are not one…but two bulls in this china shop.

First, the US government is going broke.

Second, we’re at the beginning of a Great Correction.

As to the second item, here’s this update from Bloomberg:

Sales of new homes in the US unexpectedly fell in February to a record low as blizzards, unemployment and foreclosures depressed the market.

Purchases decreased 2.2% to an annual pace of 308,000, figures from the Commerce Department showed today in Washington. The median sales price climbed by the most in more than two years.

The new-home market is vying with foreclosure-induced declines in prices for existing homes in an economy where unemployment is forecast to average 9.6% this year, close to a 26-year high. Treasury Secretary Timothy F. Geithner yesterday said it would take a “long time” to repair the housing market as the administration takes steps to overhaul real-estate financing and regulation.

“It’s going to be a long, slow slog and the lagging sector will be new home sales because they have to compete with existing sales and foreclosures,” Bill Hampel, chief economist at the Credit Union National Association in Washington, said before the report. “New home sales probably have until the fourth quarter until they start recovering.”

What happens in the 4th quarter that makes the housing market recover? A sudden influx of immigrants? A sudden increase in employment?

We don’t think there will be a recovery…not in the 4th quarter…not this year…not next year…not for 10 years.

Instead, housing prices are probably going to sink. Why? Because they’re a consumer item, not an investment. For 100 years, a house was a place to live in…and housing prices more or less kept pace with inflation. Then, beginning in the mid-’90s people came to see a house as “the best investment you can make.” They began buying houses as a way to make money…and as a way to save for retirement. It made sense. What would you rather have, a mutual fund growing at 10% per year…or a house that goes up by 10% per year? The house! Because you can live in it…and show it off. So you leverage up…you buy twice the house you can afford. You live better. And you make more money.

Those days are over. But, not everyone realizes it. Some wait for the housing market to ‘recover.’ Some may imagine that they will once again see profits from their houses. Others just hold on…waiting for an up-tick so they can get out.

There are still millions of people living in houses they can’t really afford…and millions of others who are “underwater” and running out of air. That’s why the number of houses facing foreclosure rose in the last quarter of last year. And it’s why the inventory of unsold houses continues to rise.

Gradually, people are coming to see houses in a new light. Soon, they’ll see them as money-pits…as expensive follies…and as a pain in the neck. Instead of being proud to have a McMansion…they’ll be embarrassed…like having a car with tail fins in 1985…or wearing a mullet in 2010.

Not only that, it will also be seen as a big waste of money. As the Great Correction continues, unemployment will remain at high levels…savings will increase…and people will want to cut expenses. Among other things, they’ll want smaller, cheaper houses. They’ll want to dump their suburban castles and walk away from their country palaces.

Houses will be losers.

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.

  • Kevin

    It’s an amazing transformation.

    I have my house on the market, but it hasn’t gone well. Today, I watched a segment on Tech Ticker at Yahoo finance with the chief economist from Zillow.com.

    At the end of his interview, he said that Zillow expects 3-5 years before seeing more normal appreciation on homes in the US due to all of the foreclosures and other inventory.

    If you look through the euphemisms, he’s saying we will have up to 5 years of deflating prices.

    Other than the Daily Reckoning, I haven’t seen many people willing to say it outright like that – 5 years of dropping or stagnant prices on US real estate.

    And some of those places, as Bill has said before, will be like Babylon of old: no recovery, ever.

    And still economists say we are in a recovery.

  • Rick Halsen

    “First, the US government is going broke.

    Second, we’re at the beginning of a Great Correction.”

    Sorry BB, your catch phrase isn’t going to catch on and become recognizably meaningful except perhaps in your own mind. You’re just confusing yourself and hence confusing others. Except me of course.

    Give it up already. This is no ‘correction’ – no matter how much you try to change reality. lol

    RH

  • richard largepants

    BB opens new chain of>>>
    chicken and waffles.
    what is this place? a meander down a flim flam maze of whacky tangents?
    what happened to ” food stamps are the soup lines of today” and all that? You call AIG, lehman, fanny, freddy etc. a correction? sheesh.

  • Michele

    Great article. I have my house on the market and once sold — I am buying gold and silver and renting. I believe we are only in the beginning stages of a depression.

    Another great source of info is Bob Chapman. I get his newsletter, The International Forecaster as well as listening to him on youtube.

    I just had a guy come over today to fix my refrigerator from GE and he said that 20% of the workers that repair appliances had been laid off and he was worried about his job. He said he was also buying gold. I guess some people are waking up.

  • Rick Halsen

    Oh, almost forgot. It’s a good article, Bill.

    I’m not a complete Pain in the A ya know. I can give kudos where kudos is deserved. lol

    RH

  • Ann

    I will hang on to my home as long as I can, since living in a government one with an overbearing landlord who lets the property decay would be much worse.

  • MrWooHoo

    As always, great article.

  • Chris

    Bill,

    I’m okay with letting the process unwind. I have about a 3200 square feet home not including a finished basement (they were giving em away…sort of anyway) and an unfinished attic space with steps up and framed out. I’ve got a huge family and we really live in this house – 24 hours a day, 7 days a week.

    Anyway, since the house is unbelievably tight (new construction 2 by 6, R19, etc), my dual zone 90+ efficiency gas heat costs my no more than my last house of 2300 square feet with crap windows.

    So, what’s my point? What is my biggest expense on this house (as I rolled the equity over and nearly own it outright)? The biggest expense is TAXES!!! What is going to happen in 5 years when the market sets the average sales price 50 – 100K less (and I believe this will happen without a doubt, including the house I live in)? I’m going to challenge my tax assessment and win and this yearly stranglehold on me will be reduced, so bring on the lower prices and I’ll take the lemons and make lemonade.

  • Bubba

    Did Tim G ever unload his house? Last I heard he was waaaaaaay underwater. Great, and that tool is supposed to be an economic leader? Sheesh.

  • jack9958

    This is pretty easy… obviously going down our current road will produce more and more debt and a slow if ever recovery. No one will argue that – I hope.
    But we won’t stay on this path – this regime will be half gone in november and a bad in memory after 2012. Given they could of had it all – lower taxes, bounce back, put in healthcare, raise taxes, etc, they blew the opportunity like republicans did.
    We’ve been down this road before – patience and hard work will perservere.

  • Riccardo

    There are some castles and antique villas here in Italy that I would not be ashamed of owning.

  • ricko

    I can’t tell you how many times I’ve heard this same dire forecast for the housing market. A little History , my friend like 40 to 50 years will do. Housing markets are local for starters, you can’t take Florida, Arizona , Nevada and S. Cal. and extrapolate out for the whole country. Housing “Bubbles” are not new, their called cycles and corrections and have been with us many times since the 60s. Try the Savings loan crisis of early 90s, or late 70s and read the same predictions.

  • Roland

    Another factor that will conspire to depress the prices of these houses is how ridiculously far a lot of them are from any center of useful economic activity. Suburban sprawl is dependent on people being able to afford the gas to drive there. Once “corrected,” what is a legitimate price for a suburban house 30 miles away from a supermarket let’s say?

  • ALWAYS RighT

    Homes are tools and nothing more, the shelter they provide + storage and security are all you should EXPECT from you’r beloved meal ticket.. I too know that the housing prices currently are artificial and heavily manipulated and are no where near what reality deems them to be worth… Not to mention the hoops your required to jump threw just to own one IMO it all boils down the the giant circus that came to town and put down roots, expanded, employed, and kept growing to the point of “PRESENT DAY AMERICAN SOCIETY”. In essence its all a game distracting you from your own life in which you probably can no longer distinguish the line that formerly separated the 2…. IF you want to be right all the time then do the opposite of popular opinion hint:(trade dollars for silver)

  • Leo

    Where’s Harry???

  • Leo

    Economists live in their own theoretical world and know nothing about reality…that’s why they’re economists–a pretty good contrarian indicator, isn’t it?

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