Harry Dent | Friday, April 04, 2014 >>
I just had dinner with a major fund manager from Paris.
He’s in Florida, buying up the lowest priced homes out of foreclosure. He says this game will be over by the end of this year because the supply of such bargain homes won’t last.
He, like many Australians and Canadian real-estate investors, is using higher valued dollars to buy the cheap homes to rent them out at strong, positive cash flow returnrns.
So he’s snatching up homes as quickly as he can.
And he’s not alone.
The smart money and countless hedge funds are doing the same, with the view that prices will rise as less inventory is available.
They’re on to something…
Right now, higher-end homes are selling like hot cakes, so prices are bouncing strongly. I’m not surprised because the top 10% to 20% of households are just reaching their peak in spending… and they’re doing better than ever, thanks to quantitative easing and stimulus, which forced up financial asset prices, especially stocks, while pushing down yields on safer investments.
See for yourself…
Last year, home sales in the $0 to $100,000 range dropped 18%. Those in the $199,000 to $250,000 range dropped 7%. That’s Homer Simpson land for you.
These people are still struggling with falling real wages and higher underwater mortgages.
But the top 20% are doing better than ever. They’re enjoying low unemployment rates, rising incomes, and a peak in their spending (that’s set to top this year, thanks to later spending cycles for kids that were bornrn later, and got out of school later).
Home sales for these guys are doing well. In the $750,000 to $1 million range, sales increased by 12% in the last year. Sales of homes worth more than $1 million jumped 14%.
Except, it isn’t.
The fact that lower-end home sales are still languishing, shows how difficult it still is for the middle class and lower-end households… even in this “recovery.” For them, there’s been no recovery at all.
Interestingly, the decline in home sales under $100,000 was greatest in the West… where the drop was 45%! Given the larger bounce in prices in places like Californrnia, there aren’t as many bargain homes to be bought and rented out at strong positive cash flow.
That’s why that French investor I had dinner with is buying in places like the west coast of Florida. And that’s why hedge funds are buying in places like Atlanta, Phoenix, and Las Vegas, where prices are closer to pre-bubble levels.
And not surprisingly, the greatest increase in sales of higher-end homes has come in the West also, thanks to higher prices and appreciation there in the last year or two.
The Northeast saw a 6% decline in home sales in the $500,000 to $750,000 level because there aren’t as many homes available, given that they never corrected as much as in Californrnia.
All of this leads me to one critical point: The home sale numbers don’t bode well for the sustainability of the housing recovery.
Yes, declining mortgage applications have continued to forecast that fundamental demand for home sales is weak on the lower end. As more investors speculate in lower-end homes to rent, inventory will shrink and rents will become more competitive.
But the higher-end buyers are about to get their asses handed to them. They’ll suffer as they watch their wealth disappear on the back of the next great bubble burst in stocks, commodities, and housing.
Do yourself a favor: Don’t buy into this Fed-stimulated housing recovery.
The demographic trends that subtract dyers from peak buyers suggests that net demand for homes will decline again, and after the bounce we’ve seen during the last year, it’s going to catch many real estate investors and home owners by surprise.
Mark my words: Another major decline in home and commercial real estate is coming in the next several years.
Wait to buy.
We’ll advise you when the bubble finally seems to have reversed itself. For now, know that we’re not even close yet!
|Follow me on Twitter @HarryDentjr|