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What Will Cause U.S. Residential Real Estate To Rise in Price?

November 20, 2010 -

1. Demographics
The United States population is growing by about 2.5 million each year. In addition, the average age of the first-time buyer is now 38, and the mid 1970s was the bottom of the birth bust, when the fewest number of Americans were born, with 1973 having the fewest babies born in the last 60 years. So as more Americans move into prime home-buying age, the potential number of first-time buyers can only move up for the next 40 years.

2. Decrease in unemployment and increase in hourly wages
Then the question becomes "What will trigger an improvement in economic conditions?" We still have high wages compared to Asia, while U.S. wages and productivity have been competitive with Western Europe for years.

3. Decrease in the U.S. regulatory burden and lower corporate tax rates
A net decrease in regulations is unlikely both before and after 2013, due to the current Administration, Senate, courts, state regulations, and the permanent federal and state beaueaucracy. U.S. corporate tax rates are currently at 35%, the second highest in the world.

4. Interest rates
Well, actually not. Interest rates have just come off a post WW2 low, and if mortgage interest rates go any lower, it will be due to lack of loan demand. 15-year loans are still available for under 4%, while 30-year rates are now 4.55% and in 1980, mortgage rates were over 20%. So rates will not support higher housing prices. What would happen to housing prices if interest rates go back to 20%?
30-year loan $1,000 monthly payment at 4.55% per year $196.812
30-year loan $1,000 monthly payment at 20.0% per year $ 59,860.96
Decrease in home prices: 69.58%

5. Increase in general inflation
See 4.

6. Hyperinflation
In the case of hyperinflation, new home loans will not be made in dollars.

7. Immigration
In the current employment environment, Americans are unlikely to support any change in the laws that would increase immigration into the U.S.

8. Destruction of the current housing stock
In the current housing environment, many home owners, including REO (real estate owned by banks) will be unable or unwilling to properly maintain their homes. In addition, with 7 million homes currently vacant, and with that number likely to increase until 4Q 2012, damage due to both weather and vandals is unlikely to be repaired in vacant properties.

In summary, housing prices are likely to decrease for at least the next two years, and by far greater than the consensus 4-8%. I expect housing prices to decline in real terms for 4-5 years (until 2015), and to drop by 20-70%, with the most likely range to be a 25-35% drop.

B. Illuminati (c)2010

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