“I have been waiting for more than five years to offer this advice. It is now time in most cities across the country to buy a new home or refinance your existing home with thirty-year fixed rate mortgage debt.” So says the author John R. Talbott of The Coming Crash in the Housing Market which was published in 2003 predicting the crash. In 1996 he called the absolute peak of home prices when he released his book, “Sell Now! The End of the Housing Bubble.” He’s known in some circles as “The Real Estate Prophet.”
Here’s his reasoning:
Home Prices Relative to Peak Prices During the Bubble
Home prices are off anywhere from 10-60% in cities across the country. He believes there’s no reason to believe that prices were “fair” during the bubble since prices were driven upwards by loose and aggressive lending by banks and non-banks. Real prices, adjusted for inflation, are almost in line with prices in 1997 before questionable lending was rampant.
Home Prices Relative to Construction Costs or Replacement Costs
Homes in many cities across the country are now selling for as little as $60-$70 per square foot. Depending on the quality of construction and land value, this represents a 50%-65% discount to the costs you would incur if you tried to build a similar home today in these cities. It gets down to simple mathematics: if you can buy an asset at half of the cost of building them … buy!
Home Prices Relative to Incomes and Rents
In the peak of the real estate bubble some cities had home prices at 11 times the median income of a family in that area. In St. Louis, with a median income of $53,894, that would make a typical house cost $592,834! As of today, according to local statistics ,the St. Louis median asking price is $139,900 which is under 3 times the median income of St. Louisans.
Mr. Talbott goes on to say, “Now, with homes trading at more reasonable multiples or rents, houses can be purchased that are immediately cash flow positive in year one and enjoy all the upside of any appreciation that will incur as inflation returns.”
Home Prices in Real Terms, Not US Dollar Terms
A concept you won’t hear on the evening news: He believes it’s “silly” to talk about home prices in dollar terms since the dollar has lost almost 98% of its purchasing power in comparison to a more stable asset like gold over the last 50 years. The chart below shows that average homes, measured in number of gold ounces it would take to purchase are now trading at 40 year historical lows.
One could argue this philosophy because the price of gold is so high today. Mr. Talbot, however, argues that the purchasing power of gold has changed very little over time and that it is the dollar that is depreciating giving the appearance that the price of gold is rising. It is the dollar that has the volatility and declining due to the US funding our deficits by printing more dollars!
Where is the Real Bubble?
The real bubble on the horizon is US Treasuries and 30-year fixed rate mortgages for homebuyers. With our national debt equaling 4 times the amount of money taking in, when will we have to pay the piper in higher interest rates and inflation? Maybe homes will not appreciate a lot over the next 20 years, but they don’t have to if inflation comes back. You as a buyer could do really well on your investment as your 30 year debt becomes worht less and less in real terms.
Many economists believe that when inflation comes back the only perfect hedge is to be a borrower, not a lender or investor.
So the man who many say is a Real Estate Prophet, ends his article with the following statement: “So, run, do not walk to your neighborhood banker and either finance a new home purchase or take out the maximum amount of money he or she will lend you on a home equity loan and buy hard assets, not financial securities, with the money. Shakespeare said “Neither a borrower nor a lender be, ” but they didn’t have huge government deficits and the risk of future inflation back in the Bard’s time.”
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Finding Homes for You is an Exclusive Buyer Agent company which only represents Buyers and never the seller. See Video
- Hope for the St. Louis Real Estate Market (media.findinghomesforyou.com)
- John R. Talbott: Homes – Buy Now! (huffingtonpost.com)