QUESTION: “Hi Mr. Armstrong, You mentioned before that real estate will decline from 2015.75 and will continue for over 10 years. Do you still feel that way and why? Thanks,”
1933 Virginia Land Foreclosure Auction
ANSWER: Real Estate is a strikingly different animal. The 30-year mortgage was created by FDR to try to restore the value of real estate. Our problem today is people will be less and less inclined to lend for 30 years due to uncertainty as this cycle moves forward. Fund managers who are still inside the box will but that stuff all day long until they lose your shirt.
The real estate that has been coming back are high-end in New York City and selected places in Florida for example. But this is being driven by foreign capital inflows. Lots of Europeans are buying in the USA right now to hedge against the banks and the euro. They are trying to keep assets out of the country and the banking system.
Places like Detroit and the lower income will not recover much and will turn down again. The lower the income area the hard it is to sell property. The high end is acting like a hedge at this time. That will survive and may rise sharply into 2015.75. The downside will be purely one of liquidity. Cash always rises in purchasing power during economic declines.However, we are not likely to see the traditional flight to quality. Expect cash to go to corporate bonds more so than real estate after 2015.75. There is likely to be a crisis in government debt at the state and local level that infects the national level as well. As shown here, there was a reduction in the flight to quality after the 1931 Sovereign Debt Crisis as corporate yields declined in a premium over federal issues. This is what we see coming ahead. The quality will more and more emerge on the private side.
