The Risk of Real Estate – Forget Derivative & Fiat


The asset class within tangible assets in the immovable category is none other than real estate. This greatly varies from one location to the next. We face two main problems with real estate because we are facing a major Sovereign Debt Crisis.

First is the fact we have a problem with leverage reflected within interest rates. While many tout derivatives and fiat money are the reason for a crisis on the horizon, of greater concern is the leverage within real estate. The 30-year mortgage was part of Roosevelt’s New Deal. Real estate prices collapsed along with massive bank failures. There was no credit available, so real estate collapsed to about 10 cents on the dollar.


Real estate was auctioned, and land that had sold for $2-$3 during the mid-1800s brought 10 to 30 cents an acre. FDR created Fannie Mae to revitalize the real estate market by providing 30-year mortgages to allow people to buy property. Sales were taking place at auctions and on a purely cash and carry basis, which obviously limited the buyers.

We have to be concerned about the results of shutting down these agencies, which can result in reduced leverage within the system; if you add to that a banking crisis, then we will see a return to the atmosphere of the 1930s. The amount of leverage within the entire system based upon real estate is astronomical. This has been a major factor in creating the long-depression in Japan, for at the top mortgages became 150-years with several generations responsible. Everyone was doing it so it became the NORM. As property collapsed with banks, everything changed in Japan.

Derivatives and fiat scenarios pale in comparison to the deleveraging of real estate for this is also a direct hit upon the people. Many have built their lives around the assumption that the value in their home will be there for retirement. This is part of the massive DEFLATIONARY wave we are in, and is why we have to restructure. The entire future will be lost and there are no political candidates willing to tackle a subject they do not understand. They will never accept the fact that government is responsible for this economic nightmare.


Secondly, the negative impact upon real estate will also come from taxation, just as Chicago is looking to raise property taxes by 30%. The 2007 peak in real estate was the low-end leveraged out by the banks in their speculative bubble. We warned there would then be a bounce back into 2015.75, but this would be the higher-end. This was aided by the inflow of foreign capital from both Europe and China. As taxation rises, this asset class will be hit dramatically. The high-end, which is peaking here in 2015.75, has NOT been financed for much of this has been paid for with cash by people trying to get off the grid. These are not the same locations or sectors that peaked in 2007, they were the low-end leveraged pools based upon unsound speculation. That hurt the majority of home owners, whereas this peak in 2015.75 has been in completely different sectors of the market.


We face these problems in real estate. With state and local governments going broke and property taxes rising sharply, put this in the cauldron and stir it with the decline in capital lending for mortgages, closure of Fannie Mae, and the collapse in long-term lending (transactional banking), and the potion created is a very toxic witches brew.


The stock market or monetary issues do not create depressions. You have to destroy the bond market for that is where capital resides typically at least 10:1. Once you take out the bond market, that deleverages to the real estate market and now you have undermined not just the investors, but you wipe out the savings of the population as a whole. People just begin to walk away from property as taxes rise. This is how Rome collapsed; the city of Rome fell from its peak of about 1 million inhabitants to just 15,000, and in the process, real estate became worthless.

It is critical for us to understand how civilizations self-destruct. They are ALWAYS at the hand of government. Their self-interests are always at the expense of the people. There have been few exceptions in 6,000 years of recorded history. The Paradox of Solution is always the solution as today’s crisis sets the stage for the next crisis. We live in a cycle, so indeed, what comes around goes around.


Nothing is ever constant and no solution will create a permanent result. Whatever we “think” today may not be true tomorrow, which is why we need a computer to avoid that human error factor to which there is no exception. We are all wrong about something at some point. That is how we evolve and learn. No human being is perfect because we cannot foresee the future. What I have seen in research is straightforward: if they have done it before, they will do it again. Why? Because similar situations produce the same series of human responses. History is a map to the future; there is nothing new under the sun.