Dateline: Toronto, Canada
Ever since Canada shut down its Immigrant Investor Program several months ago, I’ve been predicting a dip in Canadian real estate prices.
Especially where I’ll be in Vancouver this weekend. You can’t shun capital and expect to grow your economy.
However, the situation is even more dire south of the border in The Land of the Free.
The May numbers for U.S. housing on the surface, look to be a positive sign for recovering prices. When the National Association of Realtors (NAR) declared that the price decline was over, they were right: in the category of homes $750,000 and up.
Just another example of government and media cherry picking.
For the rest of the country, the picture isn’t so pretty. As per the May 2014 numbers, here’s what we are looking at in percent change in sales from a year ago:
Houses under $100,000: down 12%.
Houses up to $250,000: down over 5%.
Houses up to half a million are also down on a smaller scale, and I expect this trend to continue.
It’s just another reason I urge you not to buy US real estate.
First-time buyers and those who are not paying in “all cash” are the majority of home buyers, and those categories are heading south.
Why staying clear from US housing will save you money in the long run
US housing is cyclical. When you look back at the past 15 years, you can see that booms last about 5-7 years, and busts last about half that time. It’s also regional. While states like California and Florida were skyrocketing around 2005-2006, Texas housing wasn’t changing much. In the short term, you may be just fine with holding your US real estate. Inventory is a key factor in price, and currently, inventory is low across the US:
Inventory is now up about 9.4% from the bottom. On a seasonally adjusted basis, inventory was up slightly in May compared to April. If you are in it for the short term, as in the next year or two, or the long term (like 30 years), you may be okay with your U.S. real estate investments. But if you’re thinking about the next 10 years, you may want to consider other investments. Here are a few reasons US real estate might be a bad idea:
1. Housing starts are down. June 17th numbers from the government show that housing starts and permits not only missed expectations, but tumbled from the previous month by the most since January.
2. The boom cycle is past the peak. Even if we go with a 7 year bull market in real estate, if we consider that this one likely started in mid-2010 after the 2008 recession shakeout was finally ending, we’re 4 years into the boom. Could this last 3 more years? Sure, but I’m not taking those odds.
3. Interest rates are likely to rise. Since the American economy is build on cheap credit, what do you think might happen when interest rates finally start to rise significantly? Yep, me too- again, the rich won’t be affected but the rest of the country will simply stop buying houses and the “American Dream” will no longer be en vogue.
4. The overall economy is not recovering, in reality. We’ve covered the US phony economic recovery here extensively. Essentially, there is no recovery. Without a real recovery, how will people keep trading houses with each other?
5. The election year cycle. The powers that be will prop things up as much as they can until November elections. This may cause problems in housing and other areas after that. “Propping up” can only work so many times. Will this be the time that a crash is on the other side? We don’t know, but it would seem foolish to bet on a house of cards.
So what can you do?
It’s wise to not be in the center of the storm, when it occurs. Will the turmoil in the US happen this year? The next? 2016? We really don’t know. It’s nearly impossible to predict a real estate market, as markets can often act irrationally. But overall, the sinking ship of the Land of the Free can only do so much, and for so long, to keep propping up markets, including housing.
That’s why I encourage you to explore international investments and places to put your money. Why invest in the U.S. when you have investment opportunities like:
- Real estate in Mexico
- Foreign currencies like the Indian Rupee or other undervalued assets
- Actually shorting U.S. real estate
- Commodities investments in Southeast Asia such as rice futures
- Land in rising parts of the world like South America
If you have a home in the US that you live in, consider it as your home, and not an investment.
You will always need a place to live – provided the increasingly militarized government doesn’t expropriate it – and you may not want to move for a variety of reasons.
But the idea that the market is recovering, that real estate is a sure-bet investment, or that you must fulfill the dream of politicians and bankers who want you to tie up your money for decades out of some kind of patriotism or obligation, is a sure way to stay stuck and mired in propaganda that will lead to draining your bank account.