The US property market is worse than many people think. Consider the following chart by Credit Suisse.Basically it shows that we are half way through the financial foreclosure process. We have experienced the worst of the sub-prime crisis, but now we are about to be hit by ARM resets. These low-interest teaser loans will gradually reset at the variable interest rate. Over the next 2 years they will cause the same type of carnage as the sub-prime loans.
I say this not to give you any false hope, but so you might be better prepared for the future. The fact that the banking system will have worked its way through these loans is not meant to imply that we can see the light at the end of the tunnel. The market has to absorb these loans before we will see any restoration of economic activity that is not sponsored by government stimulus measures. But consider why the economy is where it is:
1. House prices are collapsing - this places a lot of people in a position of having negative equity. More than anything else this will cause consumer confidence to shrink. The most indebted will be walking away from their homes. Some people were really sucked in by the rhetoric and easy credit terms.
2. Home repayments are increasingly moving to a variable rate (i.e. ARM resets). This is hardly a problem as long as interest rates remain low (which is the case as long as the Fed keeps lowering the Fed rate) and inflation doesn't break out.
3. The unemployment rate does not plummet too much
You might wonder (given the downward spiral caused by a deterioration in unemployment) what it would take to restore confidence in the market. Clearly there is not going to be private sector lending as long as asset prices are collapsing. The government is going to some lengths to make up the difference, but government spending is no substitute for private spending and investment. How long before the US and other governments will be forced to print money to fund all sorts of stimulus measures. Does anyone believe this debt is going to be repaid? Well no doubt there will be some dilution in the value of the USD, as well as the prospect of higher interest rates when confidence is restored and asset prices stabilised. The first priority for the government is to stability or 'refloat' asset prices. When that occurs they can raise the Fed rate again to lift US savings. This might be tough medicine as its going to be accompanied by higher inflation. The message being....the pain of resets is just part of the story. In effect governments will be absorbing private sector debt with public debt. Wasteful expenditure with more wasteful expenditure. Their intent of course is to defer the problem rather than deal with it. Their solution is absorbing debt with more debt. Sounds kind of meaningless doesn't it.
So what do the ARM resets tell us about the US property market? Well we must remember that they are only a portion of the total credit outstanding. There are more secure loans with lenders who will also be struggling with unemployment and negative equity considerations. At some point however investors are going to re-enter the market. So we ought to be looking at yields on US property. If you are looking at capital growth properties, then you will need to wait longer, but for other areas there are buying opportunities now. We must remember that the US is not a single market; that property did not universally rise across the country. Some areas did not rise at all. The problem for many people is that they choose or cannot live where the reasonably priced properties are located. But I would suggest in the US there will be better buying opportunities ahead - even in rural areas. Just wait for the currency to collapse.
I am confident that equity markets have reached their bottom. I would expect them to tread sideways for the next 5 years in a series of rallies, so be prepared to trade your positions. For property, I would expect similar sideways movement with inflation undermining real property values in the city; so I don't necessarily see significant falls to come. The trends suggest capital growth properties are still falling but that rural property values have stabilised. For this reason, in countries like Australia and NZ where the currecy has already collapsed, you can start buying rural properties where value remains.
As long as they are not city lifestyle or tourist havens....since these forms of property are overvalued and going to remain a pariah for the next few years. Your best guide is yields and nominal prices. In any case. avoid the cities where there is going to be an overhang.
-------------------------------------------------I say this not to give you any false hope, but so you might be better prepared for the future. The fact that the banking system will have worked its way through these loans is not meant to imply that we can see the light at the end of the tunnel. The market has to absorb these loans before we will see any restoration of economic activity that is not sponsored by government stimulus measures. But consider why the economy is where it is:
1. House prices are collapsing - this places a lot of people in a position of having negative equity. More than anything else this will cause consumer confidence to shrink. The most indebted will be walking away from their homes. Some people were really sucked in by the rhetoric and easy credit terms.
2. Home repayments are increasingly moving to a variable rate (i.e. ARM resets). This is hardly a problem as long as interest rates remain low (which is the case as long as the Fed keeps lowering the Fed rate) and inflation doesn't break out.
3. The unemployment rate does not plummet too much
You might wonder (given the downward spiral caused by a deterioration in unemployment) what it would take to restore confidence in the market. Clearly there is not going to be private sector lending as long as asset prices are collapsing. The government is going to some lengths to make up the difference, but government spending is no substitute for private spending and investment. How long before the US and other governments will be forced to print money to fund all sorts of stimulus measures. Does anyone believe this debt is going to be repaid? Well no doubt there will be some dilution in the value of the USD, as well as the prospect of higher interest rates when confidence is restored and asset prices stabilised. The first priority for the government is to stability or 'refloat' asset prices. When that occurs they can raise the Fed rate again to lift US savings. This might be tough medicine as its going to be accompanied by higher inflation. The message being....the pain of resets is just part of the story. In effect governments will be absorbing private sector debt with public debt. Wasteful expenditure with more wasteful expenditure. Their intent of course is to defer the problem rather than deal with it. Their solution is absorbing debt with more debt. Sounds kind of meaningless doesn't it.
So what do the ARM resets tell us about the US property market? Well we must remember that they are only a portion of the total credit outstanding. There are more secure loans with lenders who will also be struggling with unemployment and negative equity considerations. At some point however investors are going to re-enter the market. So we ought to be looking at yields on US property. If you are looking at capital growth properties, then you will need to wait longer, but for other areas there are buying opportunities now. We must remember that the US is not a single market; that property did not universally rise across the country. Some areas did not rise at all. The problem for many people is that they choose or cannot live where the reasonably priced properties are located. But I would suggest in the US there will be better buying opportunities ahead - even in rural areas. Just wait for the currency to collapse.
I am confident that equity markets have reached their bottom. I would expect them to tread sideways for the next 5 years in a series of rallies, so be prepared to trade your positions. For property, I would expect similar sideways movement with inflation undermining real property values in the city; so I don't necessarily see significant falls to come. The trends suggest capital growth properties are still falling but that rural property values have stabilised. For this reason, in countries like Australia and NZ where the currecy has already collapsed, you can start buying rural properties where value remains.
As long as they are not city lifestyle or tourist havens....since these forms of property are overvalued and going to remain a pariah for the next few years. Your best guide is yields and nominal prices. In any case. avoid the cities where there is going to be an overhang.
Andrew Sheldon www.sheldonthinks.com
Posts
No comments:
Post a Comment