The Danger Of [Real Estate] Optimism

Dear Rich Lifer, 

Every month, I get a piece of glossy cardstock in the mail. It’s a “market mojo report” from a neighborhood realtor, with an editorial message and the latest sales numbers from our local real estate market.

As you can imagine, there is rarely any kind of pessimism. Market dips are always temporary. Our local area is always a diamond in the rough. Actual sales upticks and price gains are given much ink.

But even I was surprised by the latest headline, which characterized the current environment as “More Like a Medical Tornado Than an Economic Crash.”

The piece opens with the following …

“It’s tempting to think of this market like a traditional economic recession; this is a health crisis, not a recession. It will affect the economy more like a natural disaster, such as a tornado or the debris flow [that hit Montecito and Santa Barbara two years ago].”

After a couple paragraphs saying home prices won’t really drop in our area, the author goes on to say …

“This is not the climate of the 2006 economy that needed five years to recover from the popped bubble. In 2006-2007, people were borrowing as much as they possibly could and were only saving 3% of their income. Currently, household debt is historically low and households are saving 8% of their income. Consumers are in much better shape to pull through a brief slump.”

As someone with a million-dollar-plus house in the area, I would love to believe everything the local realtor is saying.

Too bad I can’t.

We’re Facing TWO Types of Crisis

First of all, this is both a health crisis AND a recession.

There is simply no other way to describe conditions like:

It is absolutely true that what we’re experiencing did not start in the usual way – an economic correction caused by cyclical psychology.

At the same time, it’s not fair to compare it to a highly-localized event like a tornado or a mudslide.

It’s like a tornado or mud slide hitting the entire country at once.

Meanwhile, household debt is NOT historically low.

It is actually at a historic high according the Fed’s latest Quarterly Report on Household Debt and Credit.

According to that report:

“Aggregate household debt balances increased by $155 billion in the first quarter of 2020, a 1.1% increase, and now stand at $14.30 trillion. Balances are $1.6 trillion higher, in nominal terms, than the previous peak (2008Q3) peak of $12.68 trillion and 28.2% above the 2013Q2 trough.

“Mortgage balances shown on consumer credit reports on March 31 stood at $9.71 trillion, a $156 billion increase from 2019Q4. Balances on home equity lines of credit (HELOC) saw a $4 billion decline, bringing the outstanding balance to $386 billion. Non-housing balances were roughly flat (+$3 billion) in the first quarter, with increases of $27 billion in student loans and $15 billion in auto loans being mostly offset by a $34 billion seasonal decline in credit card balances and a $5 billion decline in other balances. The credit card balance decline was notably larger than the same period last year, which may reflect the early signs of decreased consumer spending due to COVID-19.”

So American households have more debt than they ever have before — $1.6 trillion more than they did as the financial crisis was gathering steam back in the fall of 2008.

What’s more, 68% of that debt is concentrated in the housing market and consumers were already starting to see less spending on credit cards, a trend that has no doubt accelerated through the second quarter.

The most accurate part of the realtor’s report was that Americans are saving far more than they have at other times – with the personal saving rate jumping to 13.1% in March from 8.2% in February of 2020.

However, prior to March, the saving rate was merely trending back up to levels typically seen since 1990 …

Fred Graph

As you can see, the 2005-2010 time period was the real anomaly. If anything, even the spike happening right now is merely back to rates we saw prior to the mid-1990s.

Thus, the real economic backdrop is far different from the shiny report I just received in my mailbox.

And, no disrespect meant to realtors, but this is why you shouldn’t ask your local agent for macroeconomic forecasts.

Their window on the world is too small … their data too lagging … and their opinions too colored by personal hopes and beliefs.

My letter would go something more like this:

We are in a recession caused by a health crisis that is affecting the entire world and completely stalling the U.S. economy.

We Can’t Know How Bad This Will Get

We do not yet fully know the scope of the damage already done … the magnitude of the future fallout … or the duration of this ongoing event.

Using the analogy of a natural disaster, we are still feeling hurricane force winds and the mud is still sliding up against our doors.

So it is very possible we have seen the worst of things. And it is equally possible we haven’t.

I recommend investing and planning accordingly.

To a richer life,

Nilus Mattive

Nilus Mattive

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Nilus Mattive

Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

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