Macro Economics
Down the Real Estate Rabbit Hole

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By sonnypage
October 5, 2009

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My wife and I are Realtors and associate brokers who live and practice real estate north of Atlanta, north of the Chattahoochee River up in Roswell and Alpharetta. Most of you know of real estate's seasonality, how activity normally ebbs and flows around the seasons. Here in Atlanta, our spring market, weather permitting and in better years, would often start as early as January. Then by July it would always slow down, grind to an almost complete halt in August, only to crank up for a final burst, an "Indian summer", right after Labor Day and into early November. The winter months, which are also the holiday months, are always slow.

So here we are, just past the first weekend in October, in what I have just described as real estate's traditional "Indian summer", with six listings, four of which I would describe as prime listings. Most "showings", for many reasons, occur on weekends. Normally far more showings occur on Saturday and Sunday than the weekdays combined. Normally, starting on Friday afternoon, our cell phones start ringing with "checking availability" calls from other agents, who just want to confirm that such and such a listing is "still available" before "courtesy calling" our homeowners. Our cell phones were almost completely silent this weekend; our six listings, in total, received two showings.

If you are to believe some of the talking heads in the media, then you have heard that "the real estate market is bottoming" or "we are bouncing along the bottom because activity has been picking up". Unfortunately, all of that activity, as much as I can tell, is a direct result of the tax credit for lower end first time buyers. This past spring, we saw extremely low levels for what I would describe as "normal business". Just as "cash for clunkers" created the perception of a pick up in consumer activity, the first time home buyer's tax credit created a perception of a pick up in real estate activity. Both of those signals were false signals. Barring a renewal of those tax credits, that's it, all done.

Our six listings are becoming increasingly desperate, for their own various reasons, they all need to sell. The few showings we are getting are from buyers whose agents tell us their clients need to sell in Dallas or Chicago or Boston or wherever before they can buy here. Our sellers, of course, need to sell here before they can buy "there", wherever there is. The system is totally locked up. A sign of the times if you are a Realtor is the "continuing education" course my wife and I took last week. The topic was "short sales" and we were informed that short sales will be "a significant part of our business for some time to come".

We are told that "officially" unemployment is 9.8%; many of us think it is surely higher when considering "discouraged" job seekers or the underemployed. But here is a take on the employment picture I have never heard discussed. Saturday night my wife and I went to an outdoor dinner concert with three other couples; it was one of those concerts where everyone brings a dish and you all share. As we sat there, it occurred to me that with two of those other couples, one of the spouses had earlier in the year lost their jobs. That means, of course, that those families are now getting by on one income rather than the two they are accustomed to. Family budgets, by and large, are made or broken at the margins. If a two income family loses one of its two incomes, it's pretty much impossible to cut spending by 30%...50%...or more, without a drastic reduction in life style. Instead I suspect, it's a combination of cutting spending and drawing down savings as they wait and hope for better times. Is the percentage of "income impaired" families in America by now at 30%, or even somewhat higher, and still growing?

Real estate in America would seem to be, in my words at least, trapped in a death spiral. As sellers who must sell for whatever reason do indeed sell, they extract ever less equity. Couple that with more stringent credit requirements and higher down payment requirements, and those sellers now turned buyers must buy their next home at an ever lower price level. Other sellers who are forced to short sell or let their home go in foreclosure may no longer be potential buyers at all. The sum of it all is that the pool of potential buyers shrinks day by day and the price level at which those who can still buy also drops day by day. Add to that the reality that average family incomes continue to slip lower day by day and the picture becomes drearier still. What we face is a continuing slide in the number of American homeowners and a continuing increase in new American renters, while all the while what those renters can afford to rent also continues to slide.

Our government's choices would appear to be quite bleak. Either extend and probably expand consumer subsidizing programs like cash for clunkers and the first time home buyer's tax credit, at ever increasing expense, in an attempt to reverse the fall of the American middle class, or stand back and do less or nothing at potentially great political consequences. Our country has never experienced a Bastille or winter palace moment but we clearly continue to sail into uncharted waters. Another choice would be the overnight restoration of fifteen million American jobs by having China and other emerging market nations agree to an immediate overnight 30% devaluation of the dollar. Would that also overnight transfer much of our unemployment problem to those countries? Let's take a quick count of all here thinking that solution is on the table? It may well happen agreed to or not, there is much uncertainty.

If I am pessimistic about the prospects for housing and for our economy in general, then when it comes to investing, I continue to believe that what might appear to be down is up and what must surely be up is really down. We make our way down a rabbit hole into a time and place more bizarre than anything even Alice ever encountered. I noted last week when Doubtit posted the latest results of the METaR stock picking contest that my selection of Silver Wheaton (SLW) was at sixth. Many of you know that Silver Wheaton (SLW) is more than just my contest pick. Since this past December, it has been by far my largest real portfolio position. Other selections in my all mining and metals portfolio such as Freeport McMoran Copper and Gold (FCX), Eldorado Gold (EGO) and Hecla Mining (HL) are all doing equally well. Although I have recently raised somewhat more cash than usual for me, in anticipation of a possible "Red October", I am still very long precious metals. Gold, over the past ten years, has outperformed ALL other asset classes. That will not, in my opinion, be changing any time soon.