Saturday, March 25, 2023

Credit Suisse, A Canary In A Special Type Of Coal Mine

Credit Suisse is much more likely to lead to contagion than Silicone valley bank because it was in a completely different business. Credit Suisse was deeply involved in derivatives and the sort of trading that creeps into "everything." Credit Suisse may prove to be the proverbial canary in the coal mine or the thing that acts as an indicator and early warning of possible danger ahead.

When it comes to the issue of failing banks, backstop, ring-fence, and a slew of other words are used to describe the tactics being used to halt the growing risk the financial system could collapse. A lot of these words are being pitched out there by people that want to avoid using the term bailout. Most banks are illiquid but solvent, thus assuring their depositors their money is safe, should not be considered a bailout.

This is where it is important to understand small community banks are not in the same business as the big boys with their trading desks and such. These banks are far more rooted in the economy of Main Street. The challenge for the Fed is how to reassure depositors and support the banking system while continuing its battle against inflation. In many ways, the current liquidity issue is a situation the Fed created. This is especially true when it comes to the smaller banks. 

Smaller Banks Tend To Work More With Local Businesses

Silicon Valley Bank was by no means a small community bank. Before its collapse, it was America’s 16th largest commercial bank. With operations in Canada, China, Denmark, Germany, Ireland, Israel, Sweden, and the United Kingdom, it provided banking services to roughly half of all US venture-backed technology companies. Fueled by ultra-low borrowing costs and the pandemic-induced boom in demand for digital services, SVB benefited from the tech sector’s explosive growth.

This article is more about the huge number of smaller banks scattered across America that many people and businesses deal with on a day-to-day basis. In reaction to the new scrutiny environment smaller banks face expect them to rapidly pull in their horns when it comes to loaning money. They will be more risk-averse and not inclined to make loans. This will result in a massive reduction in liquidity add drag the economy lower.  

While some people focus on the huge amount of money the Fed will have to put out there to assure depositors that they can pull their savings out of banks at any time, this will not expand the money supply. That is because it is just sitting there, it is not flowing through the economy. 

All in all, the latest bank scare here in America is being handled. While a great deal of the recent attention is centered on America's banks, it should be noted that in other countries the banks may be far weaker. Powell has by the way he has handled this situation put some space between the banking sector in America and other countries. This "decoupling" may prove very important if economies come under a lot of pressure over the next few months. 

(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

Friday, March 24, 2023

As We Sell Off Our Strategic Oil Reserves, Ponder This

One of Biden's answers to combating higher gas prices has been to tap into America's oil reserves. While I was never a fan of the U.S. Strategic Petroleum Reserve (SPR) program, it does have a place in our toolbox of weapons. We can use the reserve to keep the country running if outside oil supplies are cut off. Still, considering how out of touch with reality Washington has become, we can only imagine the insane types of services it would deem essential next time an oil shortage occurs.

Sadly, some of these reserves found their way into the export market and ended up in China. We now have proof that the President's son Hunter had a Chinese Communist Party member as his assistant while dealing with the Chinese. Apparently, he played a role in the shipping of American natural gas to China in 2017. It seems the Biden family was promising business associates that they would be rewarded once Biden became president. Biden's actions could be viewed as those of a traitor or at least disqualify him from being President.

The following information was contained in a letter from House Oversight Committee ranking member James Comer, R-Ky. to Treasury Secretary Janet Yellen dated Sept. 20. "The President has not only misled the American public about his past foreign business transactions, but he also failed to disclose that he played a critical role in arranging a business deal to sell American natural resources to the Chinese while planning to run for President.”

Joe Biden, Comer said, was a business partner in the arrangement and had office space to work on the deal, and a firm he managed received millions from his Chinese partners ahead of the anticipated venture. While part of what Comer stated had previously been reported in the news, the letter, cited whistleblower testimonies, as well as emails, a corporate PowerPoint presentation, and a screenshot of encrypted messages. These as well as  bank documents that committee Republicans obtained suggest Biden’s knowledge and involvement in the plan dated back to at least 2017.

The big point here is;

  • The Strategic Petroleum Reserve, which was established in 1975 due to the 1973 oil embargo, is now at its lowest level since December 1984.

In December 1975, with memories of gas lines fresh on the minds of Americans following the 1973 OPEC oil embargo, Congress established the Strategic Petroleum Reserve (SPR). It was designed “to reduce the impact of severe energy supply interruptions.” What are the implications of depleting the SPR and is it still important?

The U.S. government began to fill the reserve and it hit its high point in 2010 at around 726.6 million barrels. Since December 1984, this is the first time the level has been lower than 450 million barrels. Draining the SPR has been a powerful tool for the administration in its effort to tame the price of gasoline. It also signaled a "new era" of intervention on the part of the White House. 

This brings front-and-center questions concerning the motivation of those behind this action. One of the implications of Biden's war on high oil prices is that it has short-circuited the fossil investment/supply development process.  Capital expenditures among the five largest oil and gas companies have fallen as the price of oil has come under fire. The current under-investment in this sector is one of the reasons oil prices are likely to take a big jump in a few years. Production from existing wells is expected to rapidly fall.

The Supply Of Oil Is Far More Constant And Inelastic Than Demand

It is important to remember when it comes to oil, the supply is far more constant and inelastic than the demand. This means that it takes time and investment to bring new wells online while demand can rapidly change. This happened during the pandemic when countries locked down and told their populations and told them to stay at home. This resulted in the price of oil temporarily going negative because there was nowhere to store it.

Draining oil from the strategic reserve is a short-sighted and dangerous choice that will impact America's energy security at times of global uncertainty. In an effort to halt inflationary forces, Biden released a huge amount of crude oil from the SPR to artificially suppress fuel prices ahead of the midterm elections. 

To date, Biden has dumped more SPR on the market than all previous presidents combined reducing the reserves to levels not seen since the early 1980s. In spite of how I feel about the inefficiencies of this program, it does serve a vital role. It is difficult to underestimate the importance of a country's ability to rapidly increase its domestic flow of oil. This defensive action protects its economy and adds to its resilience. 

Biden's actions have put the whole country at risk. Critics of his policy pointed out the Strategic Petroleum Reserve was designed for use in an emergency not as a tool to manipulate elections. Another one of Biden's goals may be to bring about higher oil prices to reduce its use and accelerate the use of high-cost green energy. Either way, Biden's war on oil has not made America's energy policies more efficient or the country stronger. 

(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

Tuesday, March 21, 2023

Sam Zell Is A Smart Guy, And He Tells It Straight

Sam Zell is a smart guy and he tells it like it is. He is not part of the Nouveau riche created by easy credit and loose money. He is an old-school real estate mogul. Zell is an iconic figure in American real estate. In 1968, he started Equity Group Investments, which today invests in industries like energy, logistics, and healthcare. Many real estate investors consider him the forefather of modern real estate investment. If you want to know what is happening in the real estate market and the economy in general, listen to Zell.

I have admired Sam Zell for many years. He is unlikely to remember me but decades ago he backed me when I was in the middle of purchasing a large apartment complex that had fallen into bankruptcy. I was just about to turn 30 at the time and he sent one of his people, a fella by the name of Cody Engle, into town to look over the situation. He rapidly backed partnering with me with half a million dollars from Illinois Continental Bank. Back then, that was a lot of money. 

Considering my young age, completing that deal would have been a watershed life-changing event, however, it was not to be. After selling the property to me, the owner (in bankruptcy) also sold it to someone else leaving the bankruptcy court to sort things out. The mortgage holder siding with the other party swung things away from me even though I was in possession of the property and actively managing it. The complex was sold for 1.9 million dollars and resold for 3.7 million just six months later.

Back then, when all this went down, almost everyone considered a million dollars a lot of money. This requires a special "historic" note in wake of the recent bank failures;

Continental Illinois National Bank and Trust Company was at one time the seventh-largest commercial bank in the United States as measured by deposits, with approximately $40 billion in assets. In 1984, Continental Illinois became the largest-ever bank failure in U.S. history, when a run on the bank led to its seizure by the Federal Deposit Insurance Corporation (FDIC). Continental Illinois retained this dubious distinction until the failure of Washington Mutual in 2008 during the financial crisis of 2008, which ended up being over seven times larger than the failure of Continental Illinois.

Circling back to Zell, in an interview that lasted just short of ten minutes, Zell opined about America's tough path forward. His appraisal of the current economy is that we are about to run into some very serious problems. A big issue that Zell is quick to point out is that Americans face a huge reduction in living standards if eventually. the dollar loses its reserve currency status.

When Zell talks about the end of free money he notes that it appears to be just talk. The act of doing so continues to be kicked down the road. He was also asked what he would do if placed in charge of financial policy. Most of his answer is rooted in facing the economic problems we face rather than continuing to sidestep that reality. When all is said and done, Zell is a man worth listening to.


(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

Sunday, March 19, 2023

America's Slowing Economy Massively Impacts The World

It is amazing so many people simply don't understand the dire implications America's slowing economy will have on the world. Some market watchers look towards China coming out of its covid-19 lockdown to step into the role of becoming the global economic engine. Considering China's dependence on exports to the US, they are giving China far too much credit. Envisioning a slowdown in America, the world's largest economy, not spreading grief across the globe is difficult.

Other countries manufacture the goods Americans buy which makes America a key component in their economies. Without the American consumer, factories across the world will see orders slow. Any such slowing in orders reduces the need for raw goods from developing nations in both South America and Africa. This causes a lot of stress on their economies.

Following the 2008 financial crisis, China sidestepped a major slowdown by stimulating its economy. This resulted in runaway growth that built far more factories than it needed and resulted in a great deal of malinvestment. Currently, China is pumping money into its economy however, the law of diminishing return has taken hold. It is questionable whether China will be much help this time in elevating a global slowdown. 

It is difficult to underestimate the role of the American consumer in the overall scheme of things and we have the trade deficit to prove it. This highlights the flaw in a system based on people buying things they often really don't need. What is deemed as demand tends to be a squishy area made up of waste and poor judgment. This is the first place consumers cut their spending.

Not Much Has Changed Over The Years - America Is Addicted To Imported Goods

The fact is that America with its massive trade deficit is carrying much of the world on its shoulders.
This includes not only China and Mexico but countries such as Japan, Germany, South Korea, and even Germany. These countries are sucking the wealth right out of us. As noted in a prior article here on AdvancingTime, when you follow the money the United States' huge trade deficit with Mexico becomes even more disturbing as you begin to understand where the money eventually ends up.

But Where Does That Money Go?

When you start thinking about all the money and jobs we shift into Mexico each year you would think by now Mexico would be rolling in cash. Interesting trade deficit data concerning Mexico reveal a fact most people miss. A bit of research quickly confirms that the money Mexico receives by way of trading with America quickly passes through its lands and flows to Asia. It could be argued that when all is said and done we are still transferring our wealth to the far east only by the scenic route. In addition to the United States being a huge importer of goods from China, Mexico also runs a massive trade deficit with China. In 2019 Mexico recorded a trade deficit with China of roughly 85.9 billion US dollars. 

Sadly, for those living off exporting to America, this spells trouble. When the US consumer falls into a state of protracted economic funk their priorities will take a hit. In times of economic duress expect American consumers to turn to keeping a roof over their heads, food, and basic transportation rather than buying much of the junk we import each year.

In the following video, Robert Kiyosaki talks about what he sees as the possible looming global economic downturn. Best known for his book "Rich Dad Poor Dad" Kiyosaki's unique approach to personal finance and wealth-building has earned him a loyal following. He believes traditional education fails to teach people about money and that true financial freedom comes from understanding how to make money work for you. He promotes the idea entrepreneurship is the path to financial independence rather than simply settling for a traditional 9-to-5 job.

While I believe in many of his views, where I differ strongly with Kivosaki is that he does not point out that other fiat currencies are far worse than the dollar. Currencies are where many people store much of their wealth and even if they are debased and lose much of their value this is likely to continue. This is because long ago they replaced bartering as a means of trading goods and services. Currencies act as a primary medium of exchange in the modern world. 

Short of America suffering a massive military defeat, it is difficult to see any rival ripping away the dollar's role as the world's reserve currency anytime soon. As American consumers cut their spending, the combination of more wasteful government spending, more debasing of currencies, and a slowing of global economies has the potential to usher in a major "inflationary" global slowdown. The world has not decoupled from the American consumer.


(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

Tuesday, March 14, 2023

Putting A Big Hole In The Idea A Run On Banks Has Legs

If the Fed wants to blow a big hole in the idea you need to rush to get your money out of a bank before it locks its doors the Fed can easily do so. All the Fed needs to do is adopt the policy that if a run starts, skids of freshly printed bills will arrive on the doorstep of the troubled bank the next morning. In our modern world, this should be a relatively easy task to accomplish.

While this solution may seem a bit simplistic, the argument can be made it would remove the notion depositors would not be able to get their money back. This concern is the key driver of such bank runs. 

In the overall scheme of things if handled properly bank runs are not a real threat to the system. This is because most people and depositors have few real options as to where to safely stash their wealth. This dovetails with the idea the banking system is a manipulated utility so why not manipulate away?

After pulling their money from a bank, worried depositors have three options. One deposit in another bank or institution, take it home where it gets buried or put under the mattress, or rapidly spend it on what would most likely prove to be a bad investment. None of these options bode well as a solution and the last two are particularly problematic.

If the policy was to simply provide liquidity when needed, most likely there would never need to be a panic. In the end, what is important is how a bank runs its business not how much cash it has on hand. This is because there is never enough cash on hand if depositors decide to withdraw their money in mass. Again the bigger issue is whether banks are solvent. As for the cash dumped into the system, that can easily be drained out as quickly as it was put in, it would then be a wash. No harm, no foul, at least that is my humble opinion. 

(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)



Monday, March 13, 2023

The Navy's Future, Are These Ships Sitting Ducks?

Having a navy is very expensive but carries with it a bit of prestige. It projects power and can also intimidate rivals. The Navy's future in a shrinking world is a subject of much debate. Warfare is changing and undergoing a major transformation. this may make ships sitting ducks. All trends are pointing to this happening and many of us have been predicting this for years. An issue that merits some thought is whether this could happen rapidly making even our newest ships obsolete or even worse turn them into death traps.

Throughout history when fleets collide the outcome of a naval battle has often proven decisive in which country eventually wins a military conflict. Today ships face a new challenge. Both Russia and China are now in possession of hypersonic weapons. China has not been shy in letting us know these weapons are intended to repel American ships if the need arrives. Several of its highly maneuverable anti-ship weapons hypersonic missiles are reported to be capable of reaching delivery speeds of Mach 10.

Still, countries are continuing to invest in their navies. America’s newest aircraft carrier, the USS Gerald R. Ford, was deployed for the first time in October of 2022. The $13.3 billion Ford is the largest and most expensive warship ever built. Its sprawling five-acre flight deck stands more than nine stories above the waterline. The Ford weighs 97,000 tons and its airpower exceeds that of at least 60 nations. 

The role of maned ships in future combat is a matter of great debate. It does not take a rocket scientist to realize this, however, we are not yet at the point where the negatives of warships outweigh their positives. Most of this debate centers around three issues, vulnerability, cost, and, simply put what is seen as the possibility of a huge loss of life at one time. 

The fact that in a war millions of people could die in one incident lasting a few seconds does not lessen the pain that would be felt by the families of those lost when a ship is sunk. The issues mentioned have turned our interest to protecting these ships but that may be a battle that cannot be won. Intercepting even slow-moving missiles in flight is a complicated task. 

Knowing that missing even one incoming weapon can spell disaster is a frightening proposition. The DF-ZF’s speed and unpredictable path makes it almost impossible to stop this threat with existing defenses. The fear is that while the Ford and ships like it have a battery of antimissile defenses, none are adequate to protect it in a prolonged battle against China’s latest weapons. One of the few defenses against attacks from swarming drones and hypersonic missiles may be high-powered lasers.

Unfortunately, China’s hyper-sonic weapons aren’t the only challenge. There is also the threat posed by batteries of anti-ship cruise missiles. Like any weapon, when fired in high numbers, these can overwhelm a ship’s defenses. As the face of war changes, we should realize, large numbers of relatively cheap weapons such as suicide drones also make carrier groups vulnerable.

Battleships Are No Longer King Of The Sea
Like the aircraft carriers today, decades ago, battleships were considered the largest and most powerful vessels on the high seas. That changed long ago when within a few minutes of each other two of these mighty ships became the first major warships in history to be sunk by aircraft. Replace the attacks from airplanes with drones and high-speed missiles, and the predicament the Navy faces today becomes clear.

Aircraft carriers sail with strike groups made up of an armada of 10 or more cruisers, destroyers, frigates, and sometimes submarines. Some of those vessels specialize in air defense using powerful onboard radars to detect targets more than 200 miles away. These ships armed with surface-to-air missiles and the Navy’s Phalanx CIWS (Close-In Weapon System) use radar-controlled 20mm 6-barrel Gatling cannons capable of firing 4,500 rounds per minute. 

A huge problem is what the Pentagon calls a “depth of magazine” problem. This occurs when a ship runs out of interceptors to fire, which must be stored and then restocked after the battle. Some munitions can be replenished at sea while others, such as missiles, often mean returning to port. Running out of ammo makes a ship defenseless and this is a problem enemies can exploit with swarming attacks.

This is why many experts say the best defense against swarming drones, is one based on lasers. If powered by nuclear reactors, lasers can potentially fire thousands or even tens of thousands of times at incoming munitions. Since laser beams travel at the speed of light they can track and target unpredictable weapons like China’s hypersonic DF-ZF better than missiles. Another strong reason to turn to lasers is firing a high-powered laser will cost somewhere between $1 and $10. This is far less expensive than the $1 million to $10 million that defensive missiles cost.

The Navy installed a laser on a ship for sea trials in 2014 and in 2022 it installed its first permanent laser on a destroyer. The weapon developed by Lockheed Martin has a 60-kilowatt power output that integrates with the ship’s advanced AEGIS radar and weapons control system. The Navy calls it HELIOS, or High-Energy Laser with Integrated Optical Dazzler and Surveillance system. Lockheed Martin says the weapon could eventually scale to 150 kilowatts, at that strength, it will be useful against drones and small surface ships.

The real challenge will be stopping a barrage of cruise missiles or a hypersonic weapon barreling toward a ship, the Navy estimates that it needs at least a 300-kilowatt laser. Not only do they face the issue of size and speed, but their nose cones are also made out of such materials as pyrolytic graphite or Pyroceram ceramics. This means lasers will not only be able to target them as they travel at over a mile a second but be able to rapidly burn through those heat-resistant substances as the laser adjusts for atmospheric turbulence.

Currently, China claims sovereignty over nearly all of the South China Sea, extending thousands of miles from its own shores. International law recognizes territorial claims only 12 nautical miles offshore. China's claims have forced America’ and its allies in the region to rely on our naval presence to maintain free shipping lanes. This has placed America's Pacific Fleet within range of China’s anti-ship missiles and drones.

At this point, China is our biggest worry but soon other countries will be added to the list. As some of these weapon systems find their way to smaller countries or into the hands of terrorist organizations the risk of a ship being taken out will increase. At this point, it appears the future of military conflict is all about drones, lasers, and super-fast missiles that are becoming more accurate every day. 

(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

Monday, March 6, 2023

China's Pension System Screams Corruption And Failure

It is important to understand how China's pension system works because it reflects just how flawed the Chinese system is. The fact is China's population is rapidly getting older partly as a result of the one-child policy the country had for many years. This is a time bomb that will leave many older Chinese living with nothing. Having faith in a corrupt system generally yields little.

Most of the older people in China had better prepare themselves to work until they die. In this video, China Insights, puts a spotlight on how China's pension system is in big trouble. The numbers, even those from China's government, do not bode well or bolster the argument that life in China will be kind or soon get better for the average Chinese citizen. 

As an example, in one Provence the pension of some government and institutional sectors, which of course includes members of the CCP is around 25 times that paid to the average urban resident. Adding to the problem is that little money has been set aside to fund these pensions in the future, which means they are being paid "out of pocket" by a government that already has a slew of budget problems. 

The Graph Above Shows China Has An Aging Population

Chinese pension funds had a deficit of over 600 billion yuan ($93 billion) last year, due to tax cuts to help struggling firms amid COVID-19, according to the financial magazine Caixin. Recently the former President of China's central bank acknowledged the existing pension base is not good because of the large and aging population. The shortage of available pension funds means older people will need to rely more on "personal pensions" to supplement their income in the future. By bringing this up and letting the public know, he may have been testing the waters for a change in policy. 

The unfairness of China's pension system combined with funding issues is a bit ironic. Pension payments as low as one hundred yuan or about $14.60 do not go far. It is a slap in the face to all those loyal citizens raised believing in communism with the belief all the people of China would share equally in the wealth they helped to create. With this in mind, we have to think, the poor people living in rural areas should be prepacked to fend for themselves.

This dovetails with the failure of the Chinese Communist Party ( CCP ) to protect its citizens from bank fraud. In China, even when deposited in a bank, a saver's money can vanish in the blink of an eye with nobody taking responsibility. Considering how many Chinese investors have lost money during the housing collapse, the overall message is that the CCP does a poor job of protecting the money of its citizens. In short, when all is said and done, like most governments, China gets a big fail when it comes to taking care of its elderly.


(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)

Friday, March 3, 2023

The Face Of Housing Ownership Is Changing

Mortgage rates have doubled over the past year and this has hit housing affordability hard. How much housing prices will retrench is still up in the air. Consider the whole premise housing prices in America are about to fall like a stone may be overdone. Hard economic times could very well take a greater toll on the price of intangible assets and paper promises than on things like housing.  

Whether a person is better off renting or buying is often directly linked to rental rates that are related to cost. Feeding into what a landlord charges are things such as taxes, insurance, maintenance, utilities, and a slew of fees. If landlords cannot make money, they exit the business and the number of housing rental units is reduced. This puts a bottom under the market and/or drives rents higher. Yes, a lot of new rental units are coming online but how easy will it be to rapidly fill them with good tenants? Simply filling a unit at a huge discount or with tenants that want a new unit but fail to pay or tear the hell out of it does not work. 

What many renters fail to consider is that landlords have far more to risk than tenants. It is the kiss of death to lower your standards just to fill units up. Doing so simply destroys a property's reputation while creating a slew of evictions, costly turnover, and an explosion in maintenance costs. Adding to this ugly path forward is the fact our costly legal system has lost its teeth when it comes to collecting on small claim judgments.

Much of the problems we see in housing stem from a lack of starter homes and new small houses at a reasonable cost. Several reasons exist for this situation. First and foremost is that builders and realtors like bigger more exotic homes because that is where the money is. Another factor is zoning, this includes tightening rules and restrictions in plotted additions. These are often intended to keep standards and values high. People are seldom excited to see less expensive homes being built in their area. 

Millennials Have Been Locked Out Of Buying Because Of Affordability 

The cost of shelter has skyrocketed and the face of housing ownership is changing. Over the last several decades starter homes have become a thing of the past. This has created a shortage of low-cost housing that will put a floor under housing prices. The areas where housing will drop the most are areas where prices have increased the most with the bigger most expensive houses taking the brunt of the hit. This is partly because they cost more to maintain and are more heavily taxed.

Low-Interest Rates Have Pushed Prices Higher
The decision of the Fed to buy mortgage-backed securities years ago added to soaring prices and the mess we face today. Buyers are out there, many are speculators and inflation believers, these buyers are circling each new listing like hungry sharks. They are driven by the idea interest rates will soon fall and they will be able to refinance. If rates drop prices are likely to soar again. This could put a strong floor under most of the housing market. 

One problem causing an issue for those looking at the low end of this market is that lenders have little interest in making small dollar loans because they are less profitable. This means these properties are often picked up by cash buyers. Many of these now go to big players that at times may buy without looking at the property but simply have it inspected by a company that sends them a report. Others are sold on contracts that often give the buyer little protection. 

As stated many times in previous articles here at AdvancingTime, it could be argued the government holds huge responsible for many of America's housing problems. Our government makes the rules by which builders and landlords must play. This includes some of the factors I have moaned about in the past, a big one is that roughly 80% of new apartment construction has been for the high-end luxury market. 

The government has its finger prints all over the housing sector and also causes problems for renters. This is because its policies avoid dealing with the growing number of tenants that are irresponsible. In short, Government housing cherry-picks the best of the low-income renters providing them with very low rents and nice apartments while dumping the worst of these renters on the private sector. ( makes housing more expensive for the rest of the population.

The number of units being built during inflationary times with higher interest rates also plays into this market. Who buys homes greatly depends on who can afford them and how these buyers envision the future unfolding. In short, if buyers think prices will continue to rise this is very supportive of higher prices.  

And then, there is the decision of the Fed to buy mortgage-backed securities years ago, this has added to soaring prices and the mess we face today. Following 2008, big money from Wall Street got behind a move to have Fanny Mae and other big lenders bundle foreclosed properties. Selling them in packages eliminated and locked out small concerns and individuals from participating in buying. In recent years, a small but mighty group of corporations have purchased hundreds of thousands of homes. 

These Wall Street funded corporations are just one of the forces shutting people out of the home-buying market and locking them into being perpetual renters. When it comes to financing, short of some government giveaways to certain segments of the population, Wall Street has a huge advantage over individuals. This is why even though managing the renting of individual houses is challenging, Wall Street may not retreat from the task. It is important to remember this is about the real rate of inflation.

Not only have institutional buyers with deep pockets hijacked some markets by buying whole neighborhoods but the market is changing in other ways. The U.S. housing market has become a speculative investment and now homebuyers are competing with I-Buyers that have lots of low-cost capital. An I Buyer is an "Instant Buyer" in the real estate industry who uses data-driven online home value assessment tools to determine what your house is worth and then makes you an offer.

Returning to the subject of inflation and the benefits of buying tangible assets as a way to protect ones buying power, as it becomes more obvious inflation is only going to get worse, those that can afford to buy houses will continue to do so even at higher prices. The point is, we should not be surprised if housing prices prove far more resilient in a slowing economy than many experts think. In an inflationary environment, these houses fall into the category of a tangible asset capable of earning a positive return. Few investments meet this criteria and those that do will be in strong demand. 

Note, housing prices are much higher in many parts of the world. One thing for certain, it will be interesting to see what happens next. Before you just assume housing prices are going far lower consider who will be buying those units that come available. All of what you have read above feeds into why those homeowners that have a low-interest rate mortgage may not be in a hurry to sell their home if they are not in distress. Expect how people handle their investments in the future to play a huge factor in future housing values.


(Republishing of this article welcomed with reference to Bruce Wilds/AdvancingTime Blog)