America’s Biggest Asset Class Is in Terrible Shape

For decades, home ownership was considered the foundation of middle class prosperity. Now that foundation’s crumbling…

Americas Biggest Asset Class Is in Terrible Shape

From Peter Reagan for Birch Gold Group

Reading time: 5 minutes

According to one index, U.S. consumers are suffering through historically bad home buying conditions.

This fact was recently summarized in a somber post by Kobeissi Letter on X:

A chart prepared by the University of Michigan illustrated the historically-low home buying conditions that Kobeissi described:

Home buying conditions index

Via University of Michigan surveys of consumers. Red arrow added to highlight 2021-present decline.

An update from FOXBusiness summarized a few more relevant details about the historically bad housing market:

Housing demand has ground to a halt as rates move higher. Applications for a mortgage to purchase a home dropped 5% from the previous week. Application volume is down 12% compared with the same time last year.

Demand for refinancing also fell last week, declining 7% from the previous week, according to the survey. Compared with the same time last year, refinance applications are down 1%.

Part of the reason for that decreased demand could be the fact that average mortgage rates have remained above 6% since September 2022. They have also hovered persistently close to 7% since August 2023.

You can see that reflected on the official line graph below:

An article from the Mortgage Bankers Association summarized a wish-list of conditions that would be necessary for the market to improve for home buyers:

In addition to lower mortgage rates, more housing inventory is desperately needed in markets throughout the country this summer to alleviate these tough affordability conditions,” said Edward Seiler, associate vice president of housing economics at MBA and executive director of Research Institute for Housing America.

Unfortunately, those conditions aren’t likely to develop any time soon.

Here’s why: If the Fed were to cut rates now, then the inflation rate would likely start heating up even further than it has already (right on the heels of the historic period of Bidenflation).

Higher inflation could make home building more expensive (like it did in 2022), and as a result, would certainly put a damper on efforts to increase available inventory.

The bottom line is this: The housing market is in the dumps and there are no easy solutions.

Your home may not be as safe an investment as you thought

Most people think of their homes as a good investment. That’s because of the misguided notion that the value of your home will “always” increase.

But once you factor inflation into the picture, you can see how the idea goes up in smoke. (Recessions amplify this impact.)

Nobel Prize-winning economist Robert Shiller proved this 15 years ago in his book Irrational Exuberance. Adjusted for inflation, the long-term historical average home value grows about 0.1% per year.

The orange line on the graph below illustrates this point more clearly:

Also take note of the blue line in the graph above. It shows home prices in dollars, without adjusting for inflation.

One way to think about both lines on the graph above: You might sell your home for a lot of nominal dollars, but if those dollars aren’t buying much when adjusted for inflation, then you’re losing buying power after the sale. "Nominal" price doesn't take inflation into account.

When we talk about "real" or "inflation-adjusted" prices, that's when you can really see the difference.

After February 2012 on the graph above, you can see how this could mean your home is an even worse investment than it was before. And, of course, things have gone downhill quite a bit in the last three years.

You can see how the buying power of those dollars has evaporated since 2020 on the official line graph below:

Essentially, we're seeing three powerful economic forces collide:

  1. The wealth-destroying power of inflation doesn't just push prices of food and gasoline up. Inflation pushes up asset prices, too. For example, the median U.S. home just hit an all-time high price of $434,000 (roughly 30% higher since the pandemic started). Today, first-time buyers need a household income of nearly $120,000 just to afford a median-priced home. But the median household income in the U.S. is about $76,000... So the average family can no longer afford the average home.
  2. The Federal Reserve's attempts to crush inflation have the side effect of making mortgages significantly more expensive. Since no one who locked in a 3% mortgage is willing to trade up when that means their mortgage rate doubles (and their monthly payment rises 80%), the housing market has frozen up.
  3. The Biden administration's pandemic-era policies prohibiting evictions and waiving mortgage payments have punished landlords and other real estate investors. For example, in Seattle, it now takes two years for a landlord to legally evict a tenant in default... The result is higher risk, and obviously lower appetite for housing as an investment even among those who can still afford it.

So if you're planning on financing your retirement with your home, you'd be smart to consider diversifying with something safer than real estate.

Especially if you want your retirement dollars to last longer.

Putting your financial future on a stable foundation

Based on everything presented above, let’s assume that real estate isn’t an optimal asset to diversify into right now. That means it could be a good time to learn about your alternatives.

Among the various types of inflation-resistant investments, physical precious metals like gold and silver are good assets to consider.

Taken as a long-term investment over time, physical gold has historically been proven to outperform the meager annual return on real estate. As for silver, it is currently proving to be severely undervalued.

With all of that in mind, I hope you’ll take a few minutes to learn more about the benefits of owning physical precious metals. That way, you could put yourself in a better financial position for the future through proper diversification of your hard-earned assets.

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