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Why Are Rents and Prices Increasing?

I’m sitting here scratching my head and wondering how today’s reality of asset price booms, skyrocketing rental increases, and a sluggish U.S. economy makes any sense.

How is it possible to have a Dow Jones index in the 16,000+ range when a high percentage of Americans still believe that the U.S. economy is not very healthy? What are today’s true unemployment or “underemployment” numbers? 6%, 7%, 8%, 10%, 15%, or 20%?

If the strength of the job market is historically a major determining catalyst for the U.S. housing market as it pertains to vacancy rates, prices, and home inventory levels, then shouldn’t our ongoing weak job market with declining wages, increasing consumer debt levels, and falling net worth lead to a worsening stock and housing market?

One of the best ways for our financial and governmental leaders to get us through this weak economy is to artificially boost asset values. Declining home values lead to increasing foreclosure numbers.

Since a homeowner is more likely to “walk away” from an “upside down” home where the existing mortgage debt far exceeds the current property value, then we may still see increasing home prices throughout 2014, in spite of rising mortgages and a stagnant economy.

A Declining Dollar = Hyperinflation

Money from nowhere

Our government is creating money out of thin air.

As I have noted before, the price of gasoline is directly tied to the “Petrodollar System” in which oil is traded for U.S. Dollars. When the U.S. Dollar weakens, the price of gasoline skyrockets regardless of whether the economy is booming or busting.

For example, 1993’s average cost for a gallon of gasoline hovered near $1.11. Back then, the median price U.S. home was under $150,000, and the Dow Jones reached a high of just 3,799.

In 2003, the average price of a gallon of gasoline was only $1.59 per gallon. For the first half of 2003, the Dow Jones index fluctuated near the 8,000 range. Additionally, the median price U.S. home sold for $195,000.

In 2013, the average gallon of gasoline was in the $3.50 to $4.00 range, depending upon one’s local state fees and tax surcharges. The Dow Jones has held close to the 15,000 and 16,000 range in recent times, which is almost double the Dow Jones index numbers during the first half of 2003.

Sadly, 2013’s national median home prices were just a few thousand dollars higher than 2003’s national median home prices due to the extreme and very wide-ranging “Boom” and “Bust” cycles over this 10 year span.

Who today believes that the U.S. economy was stronger in 2003 than it was ten years later in 2013?

If the economic numbers were so much better in 2003 than in 2013, why weren’t the median home prices and Dow Jones numbers so much higher in 2003?

ANSWER: Quantitative Easing (creating more money out of thin air in order to artificially boost asset prices like stocks, bonds, and mortgages) + A Weaker U.S. Dollar = An Asset Boom.

The Shadow Inventory, Decreasing Inventory, and Rising Rents

shadow inventory

What’s really lurking in the
shadow inventory?

A “Shadow Inventory” home may be a property with a mortgage more than 90 days late, a property currently in foreclosure, or a home already foreclosed upon by the lender or mortgage loan servicing company.

Are there 1, 3, 5, 7, or 9 million plus Shadow Inventory homes around the country? Are there really 10 million plus vacant homes nationwide as alleged by some financial analysts?

If so, why have home listing numbers declined significantly the past few years, which then has led to increasing median home prices?

There have been millions of foreclosed homeowners who have lost their homes since the official start of the Credit Crisis in 2007. These previous homeowners then later became renters in other homes, condominiums, townhomes, or apartments in their same region.

The increase of foreclosed homeowners led to an increasing demand for rentals, which drove rent prices even higher. People who owned small, mid-sized, and large apartment buildings seemed to benefit or prosper as much as anyone due to their increasing monthly Net Operating Income (NOI) related to increasing rents and falling vacancy percentages.

Increasing Rates & Rents

With the Federal Reserve’s recent decisions to begin “tapering” or reducing their once $85 billion monthly investments in bonds and mortgages, will interest rates continue to increase throughout 2014? Obviously, increasing mortgage rates will cause fewer potential borrowers to qualify to purchase new homes. If a person cannot qualify for a home mortgage, they’re likely to become a tenant.

At the start of the Credit Crisis in 2007, there were a higher percentage of homeowners nationally. At the end of 2013, the ratio of homeowners to renters now is close to equal at 50/50.

Owning Is Better Than Renting

Who has prospered or financially benefited the most since 2007?

ANSWER: People who own assets like stocks or real estate.

Who has seen their net worth numbers drastically fall during the ongoing Credit Crisis?

ANSWER: People who rented and who also saw firsthand that the declining value of the Dollar in their pockets made them buy far fewer goods and services at much higher prices.

Regardless of the questionable or truly negative economic numbers that may be released in the near term, asset values seem to be linked more to a falling Dollar these days (which is more likely to continue) than a very strong economy again.

As such, those people who are able to buy properties in the near term can possibly increase their family’s net worth levels tremendously thanks to ongoing “Hyperinflation” strategies. Your comments are welcome.

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About the Author...

Check out Rick’s new book The Credit Crisis: 10 Years and Counting (August 2017 publishing date) as well as The Credit Crisis Deals: Finding America’s Best Real Estate Bargains.

Rick Tobin has a diversified background in both the Real Estate and Securities fields for the past 25+ years. He has held seven (7) different Real Estate and Securities brokerage licenses to date. He also writes college textbooks and real estate courses in several states for some of the largest educational firms nationwide.

Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), Equity Funds, and foreign money sources.

You can visit Rick Tobin at RealLoans.com.

Comments

  1. I recently added another small rental house with this exact hyperinflation in mind. Thanks for backing up my thought.

  2. Rick Tobin says:

    You’re welcome, Tim. I wish you lots of success and prosperity with your recent home purchase.

  3. Hi Rick,

    Another great article. You are spot-on. You have the facts of the matter nailed. So many do not.

    Using borrowed money is the best way to buy income-producing real estate because you (actually your tenants) are paying back the loan with cheaper and cheaper dollars. REAL inflation is nearly 10% (ShadowStats.com) right now.

    To hedge your risk against having high debt, put some excess wealth into physical gold and silver (silver has the better upside). Then if the dollar totally crashes, these two metals will skyrocket in dollar value so you’ll be able to trade them for amazing numbers of dollars, allowing you to easily pay off your property loans. Without mortgages, you might at least be able to barter for goods or services from tenants if a dollar crash wipes them out.

    With smart purchases and smart leveraging and backing that up by putting yourself on the “gold or silver standard,” you’re ready to weather the worst of the coming Big Monetary Reset. Unless the Big Reset gets violent, in which case your prep list is far longer and your future far shakier.
    Good luck to us all.
    MJ

  4. Rick Tobin says:

    Thanks for the kind words, Mike. I agree with your opinions as well.

What do you think? We would love to hear your opinion.

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