Yes I said it. 2021 will be a repeat of the housing bubble that will hit us hard. Economists try to predict the future with equations, models, theories and all sorts of mathematical statistics. For the average Joe and the rest of us what we really need to look at is what is happening outside when we get out of our homes.
Fed Interest Rates
The Federal Reserve has lowered the interest rates so low that is almost zero. This is all in the hopes of making money cheaper. Basically what they want you to do is to get more debt and for you, the consumer, to go out and shop and spend, spend money. That is how the economy works.
Let’s look a the Effective Federal Funds Rate from 1980 to 2020.
Yes, that is correct. 0% interest rates. The last time we saw these rates was back in 2008 before President Barack Obama took office. Remember those days? Wall Street and many bond traders were coming out of buildings in New York with their brown boxes with all their calculators and notes going straight to the unemployment office.
Take a look at the shaded area. That is a recession. You can see we are in a recession right now in 2020, thanks to Covid-19.
Real Estate Interest Rates
The boom that I see now with people buying houses like there is no tomorrow has much to do with a few factors.
- Federal Reserve Interest Rates – The Central Bank lowering interest rates this low has only one purpose. To get you to buy more homes. Look at the graph below. You can get a 30 year mortgage loan for 2.86%. If you have a great credit score and your finances are in good order that is. Just a year ago, you were looking at a 4.5% interest rate with no points.
- Of course people will jump on the opportunity to lock a rate this low and buy a first home or a second one.
City Life and Unrest
All this protest on our streets in our cities is making people get out of big cities and moving to the suburbs. New York City, San Francisco, Washington, D.C. and all the major cities are seeing an exodus from good hard working citizens that want nothing to do with the riots and seeing people every day on the streets. Think of those who have families with little kids. They sure do not want their kids involved or witnessing this chaos.
I for sure would get out of these cities right away. I would not want my two kids seeing this mess every day. That is why I live in the suburbs and a good one for that matter.
Prices of condominiums and houses in the cities are dropping in price. More inventory means the price will go down. Then, this folks who are moving to the suburbs are driving the price of homes up. High demand means prices will go up.
Lower Tax Income for Cities
Tax paying citizens do not like chaos and unrest. The minute they see instability they move away. Then you are left with citizens who are on the low end of income and thus will pay less in taxes to the cities.
Vice President Joe Biden
If Joe Biden wins the election in November, the first thing he may want to do is increase taxes. That is when people who save and invest will decide not to invest or start new businesses. They economy will continue to decline and the recession will worsen.
Unemployment will go up and this means higher demands from the federal government to fuel the high levels of unemployment benefit applications.
Unemployment means people will lose the ability to pay their financial obligations like mortgage loans, car loans, credit cards and so on.
Repeat of 2008 – Abandoned Homes
People, because of their financial situation, will stop making payments on their mortgage loans. More homes will be available. Inventory will go up and hence the price of houses will go down.
Now I don’t think it will be an exact repeat of 2008. We will not see homes losing value as much as 30%. I think we may see a correction somewhere in the 15% figure.
Shopping Time
That is when I will go shopping for my third home. I am sitting on a good cash position right now. Waiting for the 2021 correction which may occur in the third or fourth quarter 2021. I still have money invested in the stock market. Heck, I made a little over $4,000 in one position in two weeks. I placed that trade in 9/29/2020 and this week it went up. I love making money in my sleep. You can do it too. Just save, invest and stop complaining or looking for someone to blame for not making any money.
Renting homes is also a great strategy and great way to generate passive income. I just dislike all the maintenance and dealing with tenants. Luckily the tenants that I have now have all been very punctual and responsible. They have paid on time and despite the Covid-19, they did not asked me for any help. Thank God because I also have financial obligations. Those mortgages loans have to be paid and the government sure is not helping me.
President Donald J Trump
Now if President Trump wins in November, then things may changed a bit. We will still see a housing market correction but it will not be as high as 15%. Perhaps 10% correction. Either way, we will see homes go down in price.
From an investor’s prospective, I really don’t care who wins in November. I make money either way. From a family, father and Catholic person, I do care who wins. But that is a different story and this blog is about making money and attaining financial independence not about politics.
Sincerely,
The Economy Chief
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