Gold, interest rates and real estate: How will this unwind?

coinvet · May 12, 2005 4:27AM

Gold has stalled out, interest rates head up and the RE market is softening.

What are your predictions for real estate? How will it impact gold?

I feel we are in massive real estate bubble, not only in the US but almost worldwide. Million dollar homes are common in European capitals, major Austrailian and Canadian cities and throughout Asian business hubs like Singapore. Many people domestically have refi to the max with adjustable loans, how long can they hold out if rates go up 2%? Who can afford to buy when they cannot qualify unless they get a weird adjustable with prepayment penalties and high fees?

It's not a question of if the bubble will burst but when and how? Next year in a huge blowout? How will gold be affected if at all?

I am no expert and am confused by the lack of interest in gold given all the financial problems [unfunded pensions, social security, budget deficits, medicare, etc] we have and none of them are going to go away soon. You would think gold would be at 600/oz.

My prediction is a significant decline in US RE prices headed south by 5-8%/month for a few months and then steady declines of 2% for about 2 years. Which translates to a 40-50% drop over a 3 yrs period. Happened back in the 1990s but it was different then I believe. I don't recall what started it.

What will be the catalyst to burst the RE bubble? What will catapult gold $100/oz higher?

Your thoughts?

mrearlygold · May 12, 2005 4:36AM

We're having those discussions here Predictions

Enjoy

Tom

coinvet · May 12, 2005 4:43AM

Thanks I saw that thread but it appears to be lots of cut and paste of questionable sources and stock/bond related material.

I am seeking opinions on real estate and how specifically gold will behave in a RE meltdown.

mrearlygold · May 12, 2005 4:48AM

Sorry, hmm maybe your right, we're all wasting our time in that near 600 post thread. How ignorant of me.

cladking · May 12, 2005 4:59AM

Not all the real estate prices have had dramatic increases. Those which have gotten
ahead of themselves are likely to unwind quickly and the fed will have to "push the string"
to get more money in circulation. They didn't learn their lesson with the tech stock bubble
and they won't learn it this time either. People have a tendency to want to do the same
things since they'd rather look foolish in a group rather than singly. It's difficult for the fed
to adapt to this behavior. On the plus side it won't be so very much longer until everyone
wants to get back into stocks so at least things will get back to normal. There are still im-
balances to be worked off and profits to be made before stocks are solid again but it has
been time to start dabbling in them again for a year now.

Go slow, keep your powder dry. There are always opportunities.

edited to add the other thread is a great thread even if you don't agree with much of it, but this is a little different topic.

mhammerman · May 12, 2005 5:21AM

Oh Yes coinvet...didn't you know. Gold is going to be at $500 by now and silver should already be well past $8. Yes, there is a good bit of cut and paste in there. One poster asked if this was appropriate to put in newsletters and the like and the response from the thread is OK, we don't have to read it if we don't want to and if we do want to read it then we can. Take a look at the thread and glean what you can if you are really interested. Certainly anyone that says he knows how gold is going to affect realestate is prognosticating.

But just for drill, here is some input from that thread. The general feeling from this thread is that realestate is on the edge of a bubble and most people agree that in some areas, this is true. People are kinda waiting on the effects of all those that got a couple of rental properties with their retirement money (boomers getting estates from their parents) and have ARM's. They will get bit and it is just a matter of when. On the other hand, the sunbelt states and particularly Florida are experiencing double digit growth in realestate, some areas have increased in price to the tune of 38% last year. So where the realestate is is more of an issue than if it will rise, kind of a duh. For gold, the concensus is that you should have some (up to 10%) for long term holdings but if you are playing it short term get a fresh bar of soap and a washcloth because the price could be all over the place depending on the events of the day. General feeling is that it should be in the low $400 range, right where it is right now, but it has shown steady growth over time. Of course tomorrow it could be $300 or $500 but the price support seems to be right where it is at right now, also a duh.

ziggy29 · May 12, 2005 5:23AM

The complicating factor, IMO, is that *long* interest rates (which drive mortgage rates and, to a significant degree, the real estate market) are stubbornly staying low. Every time long rates start to rise, and mortgage rates start to hover at or near the 6% level, the buyers come back in. I think it says something about the financial markets' low expectations about long-term prospects in the stock market. (As a contrarian, I think that's a bullish indicator for stocks -- there's enough people cashing out and staying in the "safe haven" of bonds that there's a LOT of money to propel stocks higher when sentiment changes a bit.)

Because the long end is remaining very range-bound and the short end rises with each Fed action, I think the yield curve will invert before too long, especially if the Fed continues its clockwork quarter-point rate hikes that affect the short end of the yield curve. Real estate may look bubblicious now, and it may well be in some markets, but until long interest rates rise considerably, nothing will pop. ARMs being readjusted upward and interest-only loans suffering negative amortization will hurt a bit, but it will take a rise in long-term, conventional interest rates to really trigger a fall.

Short term, as long as inflation is in check, this could strengthen the dollar (which has rebounded considerably in 2005 so far) and make gold fall even more. The XAU is near its 52-week low (down 4% today).

TommyType · May 12, 2005 5:26AM

Can't speak to gold, but I agree there's a housing bubble just waiting for the right nudge to push it down the hill.

Some people are trying REALLY hard to convince us that it isn't so....but when an average buyer with average income can't buy a house, how can we believe there isn't a bubble?!?

My house has TRIPLED in value since I bought in 1997....and it's just an average, run of the mill house.

I'm starting to think it would be very smart to sell, rent for awhile, and buy back at a lower price a couple of years down the road. (Problem is, I don't have the guts.)

Peaceman · May 12, 2005 5:35AM

Risk, reward and level of comfort. Uneasy about risk in the gold market, sell. Uneasy in the coin market, sell. Uneasy about the value of your home, then sell it and go rent...

Not comfortable, then get yourself comfortable......

I had 85, 1928 Peace $ about 6 months ago. I now have 3... If the market crashes 80% right now, I lose nothing.... I cherrypick Peace $ VAM's for $ 8 -$ 20. They usually have a value between $ 200 - $ 400. Market goes down 80%, I can still sell my coins to get my $ back easy.

I feel sorry for those poor soles who are financing "interest only" houses. IE, buying a 800,000 home and just paying the interest on the loan so they can afford it.... Just think if the market took the price down to 500k..... ouch...

streeter · May 12, 2005 5:43AM

Tommy type--sounds like you are in OC.

The time to get out in some areas of CAL is rapidly coming to a roaring halt. OC may have crested but unless you have another place to hang your hat, you can't sell. What is the median price right now in CA...something like $448,000. That can only be supported if Long term rates stay at or around 6%. Lot of people living large in CA right now but there are also a lot of people WAY behind on their bills.

ziggy29 · May 12, 2005 5:45AM

<< Risk, reward and level of comfort. Uneasy about risk in the gold market, sell. Uneasy in the coin market, sell. Uneasy about the value of your home, then sell it and go rent... >>

It is weird right now. The financial markets -- just about all of them -- are looking for reasons to put a negative/bearish spin on just about *anything*.

Strong economic data? Sell -- higher inflation and interest rates are coming.
Weak economic data? Sell -- lower earnings are coming.

Even today, with oil plummeting (which was supposed to be the achilles' heel of this market), everything is cratering.

There's enough conflicting economic data and earnings trends that buyers are paralyzed by uncertainty. Yet nothing horrible seems to be happening, either with a recession *or* inflation. The only way we reach a recession from here is if the Fed keeps raising rates and inverts the yield curve (which is a nearly foolproof indicator of a recession coming in the next 12-18 months at most).

VAMs4U2BuyHere · May 12, 2005 7:41AM

Living in the Ft. Lauderdale area of Florida I can say that real estate here has skyrocketed in the last few years. I purchased my 2/1 co-op in 1999 for $38,000.

Two same size units sold for $100,000 last year. The unit next to me just sold yesterday for $149,000. That's a 50% increase in a single year. Mind you these are co-ops. Should the board elect to make the transition into condominium, it is expected that our property values will increase another 25-30%.

The cost of the average single family home here in Broward county currently exceeds $336,000. That's the average home.

ziggy29 · May 12, 2005 7:58AM

<< The cost of the average single family home here in Broward county currently exceeds $336,000. That's the average home. >>

In the San Francisco Bay Area, where I lived until two years ago, the median home price is over $650,000. San Diego and Orange County aren't far behind.

It's amazing what some people will pay to avoid winter. Personally, I'd rather avoid long, hot and humid summers like we have here in Houston.

Proofquarter · May 12, 2005 8:13AM

Real Estate prices don't always go down. Many times prices stay the same for years until wages catch up with the prices.

mrearlygold · May 12, 2005 8:24AM

<< Living in the Ft. Lauderdale area of Florida I can say that real estate here has skyrocketed in the last few years. I purchased my 2/1 co-op in 1999 for $38,000.
The cost of the average single family home here in Broward county currently exceeds $336,000. That's the average home. >>

I sold my house in lauderdale about 8 years ago and bought in Boca Raton. Then Boca started getting really crowded and so I bought in Paddock Park I, Wellington. That's over a million now and crowded outside of paddock park.

So we went to the west coast upon returning from Asia after a couple of years and after Hurricane Charley wiped us out here in Port Charlotte, we all figured that was it for the speculators on housing only to find it just begining here.

We leave saturnday morning for North Carolina. I really have an adversion to moving to a state that has an income tax but this place is already under my skin too deep to care.

Tom

streeter · May 12, 2005 8:32AM

Tom,

I have never had to deal with bugs. How does one get used to them? When I visit Carolina-I just cannot get used to the amount of critters.

TommyType · May 12, 2005 9:32AM

<< Tommy type--sounds like you are in OC. >>

Nope....I live where the people who can't afford "The OC" go to die. Riverside county.

mrearlygold · May 12, 2005 10:11AM

<< Tom,

I have never had to deal with bugs. How does one get used to them? When I visit Carolina-I just cannot get used to the amount of critters. >>

I have never heard that before. Did you live outdoors in the Carolina's?

mrearlygold · May 12, 2005 10:18AM

<< 

<< Tommy type--sounds like you are in OC. >>

Nope....I live where the people who can't afford "The OC" go to die. Riverside county.

>>

Well well well and now the developers are targeting the Everglades.

roadrunner · May 12, 2005 10:35AM

Gold has stalled out, interest rates head up and the RE market is softening....It's not a question of if the bubble will burst but when and how? Next year in a huge blowout? How will gold be affected if at all?

The bubble will burst and soon enough. As people scramble to protect their money they will be looking for safe havens: high interest rate money markets, govt bonds, cash, etc.....hey, maybe even gold. If anything gold should hold even or go up if real estate )(and right behind it stocks).

I am no expert and am confused by the lack of interest in gold given all the financial problems [unfunded pensions, social security, budget deficits, medicare, etc] we have and none of them are going to go away soon. You would think gold would be at 600/oz.

No one here has all the answers either. The lack of interest in gold seems to be from the deer in the headlights syndrome. Most investors are sort of in shock....except those playing in bonds and the final days of the interest rate carry trade. They don't know what to do as everything they go into seems to be stagnating or losing money. Gold may soften for a while more....it could even fall to $350 for all we know. But it will be back, unlike stocks and real estate. Once people know the full extent of all the problems (as you listed) and that the govt has been sugar-coating all the data fed to us, then sh*t will hit the fan. The end of the real estate boom around 1988-1990 was basically a recession coming to roost. It killed the coin market too.

What will be the catalyst to burst the RE bubble? What will catapult gold $100/oz higher?

The real estate bubble will start to deflate as it runs out of steam.
Gold will go higher once people realize how badly they have been duped by all the rosy FED and govt forecasts. Gold may have to go through one final massive shake out from here to forge ahead to $500. It would take gold at $1600/0z to balance our current account deficit. Gold's high price in 1980 at $875/oz equates to around $1600 today in 1980 adjusted dollars.

roadrunner

northcoin · May 12, 2005 11:43AM

For what it is worth, when the Japanese investors pulled out of Hawaii when forced to do so by their own depressed economy, housing prices stagnated, but did not fall. INstead what happened is that there just were no sales until the economy in Hawaii found its own recovery a year or two later. This was especially true for Mauii where a lot of the speculative real estate buying had been directed.

ozzie101 · May 12, 2005 9:16PM

A few comments about real estate where I have lived in the past to include Japan and Australia, and also about Hawaii where I used to own a condo.

Was really fun to watch the real estate prices in Japan take off. What was especially bad was since being a foreigner without permanent residence at that time, I couldn't get a loan and buy a place even though I had a cosigner and could put 60% down.

When I fianlly got the visa, prices had gone up so much that I would have been stuck paying a mortgage for the rest of my life and then the kid's as well. So no property in Japan - bought a condo in Hawaii instead!

The real estate market in Japan is really not a market at all with the high taxes on buying and then getting hit with huge capital gains taxes when selling or even when passing on property to your heirs. Also a myriad of tax minimization schemes to keep land off the market.

Prices of USED condos and houses usually FALL unlike the US. Also the turnover is very small compared to the US. During the bubble, near the in-laws' house there was a house with a vacant lot next to it. When the owner of the vacant lot died, the owner of the house bought the land and planned to combine them to build a multi-story condo building on it, sell them off, and get rich. Well the bubble burst, the owner lost his house because he couldn't pay for the lot, and the bank now owns both. Still for sale for the past five years and the house is vacant as well. The bank can not sell the property for the price they want which for both is less than what the house owner paid for the lot......(And as long as they don't sell, the bank can show the property at an inflated value on its balance sheet...)

I guess it was fun for some Japanese while it lasted. Seeing a 3.3 square meter piece of land being valued at US$37,500 at the in-laws was unreal - too bad I didn't get any of it!!!

What is strange about the market is that even AFTER the bubble burst, the price of NEW condos and houses hasn't really changed that much in the past decade and even some of the newer places are more expensive than before.

Hawaii:

Has had a huge bubble with the prices of cheap condos going through the roof over the past 18 months or so. Maui has gone absolutely nuts. I have no idea what the price of the place I sold is worth now, but the market in Hawaii moves like crazy.

The apartments in the building we used to rent when we visited Hawaii is typical of the swings in prices there. The price was about $87,000 when we first visited. Several years later the price had gone up to over $225,000. Several years later is was back down to the $120,000 level and then the last time I looked a couple of years ago it was around $180,000.... probably well into the low $300,000 now.

I wonder how much Hawaii will fall when the bubble bursts.

Australia:

I live in the suburbs of Melbourne, Australia and around here the price of land is nuts - crazy nuts. Considering that we are about an hour from the CBD via the highway, one would think prices would be reasonable.

A 1/6 acre piece (650 square meters) of land around here ranges from US$130,000 to around $190,000. Plus the state government tacks on a tax on the sale price of land and houses on the buyers. Around here IF you can find acre it will set you back well over US$250,000 and can NOT be subdivided. Houses with an acre with town services run well close to a million Australian.

Land further out into the country is just as bad. About another hour out from us the 'lifestyle' (I guess that is what they call a place with no town water and on a septic tank!!!) properties will cost anywhere from US$2300 to US$7500 an acre and are usually well over 30 acres (NO SUBDIVISION ALLOWED) .. Places with smaller acreage that have been grandfathered are very expensive. The land is similar to scrub that one would find in Western North Dakota - mostly useless as far as farming is concerned and only good for cattle....

Gross rents on residential property in Melbourne are very low with most places getting about 3 -4%. Most people bought to reduce their income taxes and hoped that the capital gains offset the negative cash flow when sold.

Prices have started to come down a little, but no crash yet. Austrlians have a lot of debt just like Americans and are mortgaged up the kazoo.

I'm afraid that it is all going to turn out very bad when the bubbles burst!!

Baley · May 13, 2005 1:34AM

You know what? Someone wise once told me not to worry about timing the market, just to stay diversified and balanced

My family's money is pretty much spread among 3 asset classes:

1/2 real estate, the home my wife and I live in and a rental condo] the home is 1/5 paid for, the condo is 4/5, both fixed and less than 6%

1/4 stocks, mutual funds, bonds, other "paper" (or, increasingly, electronic

] stocks mostly biotechs because that's the field I work in and received stock options, also know about investing in the field

1/4 hard assets including coins, cars, art, guns & ammo, tools, access to water and purifying equipment, a full deep freeze of good meat, a storeroom of canned goods and wine, well you get the idea..

I don't worry too much about the balances or relative performances of the asset classes, but if one overperforms IMO, I'll sell a little (stock, coins, etc) and spend the money or pay down a RE loan.

It was the best advice the old man gave me and it's worked so far, plus we don't have to sweat the market cycles. Sure it hurts when your assets decline in value, you win some bets you lose others, but if it's not "all or nothing" in that asset class, at least you can't get killed.

Higashiyama · May 13, 2005 1:54AM

Baley --

Yes, excellent advice. The other key point with respect to investing and security - invest in yourself -- your health, education, etc.

Regarding the real estate market, in spite of the remarkable increases in various (mainly coastal) markets, and in spite of the increase in home equity loans, in aggregate I don't think the situation is highly leveraged. The market in California could show a downward correction of 30 % without having a material impact on the overall US economy.

With respect to interest rates, it is fascinating that over the past year, as the Fed has raised short-term interest rates, the 10-year treasury has fluctuated but has not moved up. There is still a big demand for debt securities, and apparantly little inflationary expectations. If I were to be as imprudent as to try to predict the course of interest rates, I would guess that long-term rates will not increase dramatically during the next ten years. (eg - they may fluctuate between the current 4 + % and, say 6 - 7 % -- much higher than now, but not remarkably high). I believe this to be true because I believe the aging of the baby boom with (slightly) curb America's appetite for spending, and moderately increase savings rate. This savings will increasingly be put into fixed income obligations -- so demand for bonds will keep rates relatively low. Also, the economy has adjusted to low inflationary expectations and low interest rates -- my guess is that a 200 basis point rise in the 10-year treasury would put quite a brake on the economy.

I won't even try to guess gold, except to say that, like you, I keep some of the stuff and other hard assets as a hedge and for asset diversification. I don't yet have the guns and ammo, but as I'm now living in Oregon, in order to keep up with my neighbors, I guess this should be on my list!

ScarsdaleCoin · May 13, 2005 2:02AM

I have a very good client who is very big in real estate...the answer was that overseas investors are buying because are prices are so low....so even if americans cant buy they are.....interesting take

Neptune · May 13, 2005 2:39AM

I'm just glad I got out of the crowded rat race a few yrs. ago. Sold house to support 10-acre rural land purchase with our own water wells, fresh water springs, running stream and small pond. We threw up a small camphouse and taxes are less than $20 per yr. with farm exemption. No water bill, autos paid for, and 'try' to grow our own food, raising farm animals - and land will be pd. for this year.
Still have to pay electric - but don't need cable either. If everyone would go back to living the way our forefathers did, we may could all save this planet. Cityslickers, including my children, would not know how to survive should things get really bad. They are all caught up in the day-to-day hustle-bustle of city life, financing for life, paying with plastic, and don't have a clue how to plant seeds. It's really sad. One thing I would not want to do without tho - my AC and internet -so guess I am as spoiled as the next guy. Land is very reasonable out this way - altho has gone up a bit in past few yrs. I can get 10 acres for a 1/4 of what my son paid for just his very tiny city lot (doesn't include house) in the 'burbs. And we have bugs, coyotes, panthers, fox - but it's worth it. You just have to take control and show 'em whose boss even tho a hawk will still occasionally pick off one of my hens. OOPS! Wrong forum - guess I need to head over to the survival forum.

RedneckHB · May 13, 2005 2:54AM

Gold and real estate are different animals and are not dependant upon each other. You can not "predict" what will happen to one by the movement of the other.

Interest rates are headed up

Why does everyone keep saying this? While it is true the Fed has raised the Fed funds rate 2% over the last 2 years, that only affects money markets and savings accounts. And big deal at that, "WOW I now get 3% from the bank vs 1%. Who cares. You are still not keeping up with inflation. Enough rant.

The 10 year yield is the same as it was in 2002 and the 30 yr is lower. If I hear rates are going up again I'm gonna vomit

Proofquarter · May 13, 2005 4:55AM

CNBC has been talking all day about Real Estate and if there is a bubble. Good info from everyone on CNBC if you can watch it.

Gold, interest rates and real estate: How will this unwind?

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