Is the US Housing Market Making a Comeback?

Buenos Aires is beautiful. We have been blessed with good weather.

The city is booming, too. Strong agricultural prices have done what they always do in Argentina – they’ve set off a boom.

“Property prices are up about 30% over the last 3 years,” says our BA-based colleague, Rob Marstrand. “But this is such a funny place. I love living here, because you see everything. If not in the present, certainly in the past…or the future. Booms, busts, corruption, inflation – everything.

“Only about 6% of properties are sold with mortgages. So this is a real boom – where people are paying cash. But, where does this cash come from? Much of it comes from the bull market in farm products. Argentina is one of the world’s top producers of cereals, for example. But there is probably a lot of money coming from the government too. The inflation rate is about 25%.

“Now, you’d think that a country with a 25% inflation rate would have a currency that is falling through the floorboards. But no. The authorities have been supporting the peso; it actually went up 4% against the dollar. Put the dollar’s drop and Argentine inflation together, and you get a loss of dollar purchasing power of 30%.

“People want to protect themselves. And here, they do it by buying real estate.

“Americans might want to think about it too.”

Prices are down 30% nationwide in the US. In Florida, Nevada, and most of California, they’re half off. Even if they might go down a bit more, there are some very good deals available now. A friend of ours is able to buy apartment buildings for little more than 5 times rent income. If upkeep and taxes take half of that, that still gives him a 10% return. But it could be much better. Suppose he takes out a 30-year, fixed rate mortgage. Now, suppose inflation goes up. Every percentage point that consumer prices rise is another percentage point of yield for a fully-mortgaged investor.

Rob also is in charge of our Family Office investments.

“I don’t see any way that they can unwind all this debt and spending without causing even more problems,” he says. Investors might get some protection from real estate or stocks. But the best protection is gold.

“But we’re still in a correction,” Rob continued. “It wouldn’t be surprising to see gold fall when this round of quantitative easing ends. Take away the money-printing and gold could sell off along with everything else. But people are now catching on. When the economy worsens, they expect the feds to add more stimulus…or lower rates…or more QE. So, they know that over the long run, the effect will probably be to undermine the dollar. I wouldn’t be at all surprised to see gold down 15% in the next sell-off.

“But when the feds step in with more spending, gold will be the clear winner. We already own a lot of gold. I feel like I want to buy more of it…”


Bill Bonner,
for The Daily Reckoning

The Daily Reckoning