“Housing, Inflation both getting worse,” says a headline at MarketWatch.
The price of oil held steady yesterday - in the face of Saudi plans to pump another 200,000 barrels a day. The dollar held steady too. And the yield on the 10-year note rose to 4.24%. Gold jumped $13.
Unless you own an oil well or a goldmine, it has been a bad year. Out of the world’s 52 leading stock markets, 49 are down for the year. Ireland, for example, has lost 15% of its equity market value. Vietnam has been crushed…everyday is a down day in Hanoi.
In the United States, the fall in stocks has cost investors almost a trillion this year. Losses from housing are said to be about a third of that. But that is just the beginning. From 2006, the value of U.S. housing stock is said to be down about 16%. Case/Shiller, the experts on housing trends, think another 15% will be lost before the housing market bottoms out in 2010. That will mean a further $3 trillion haircut for U.S. households.
You’ll remember - how could you forget? - that the U.S. government’s ‘financing gap’ is about $57 trillion….and that the federal government’s official ‘national debt’ alone is increasing at the rate of $1.5 billion per day. Well, in today’s news comes word that the “combined net worth” of all U.S. households is $56 trillion. Already, you see, the country is technically broke - with more in liabilities than in assets. But the asset side of the ledger doesn’t include the value of government property - such as the White House or the Pentagon - which could be sold off to an Arab sovereign wealth funds in an emergency.
An emergency is probably coming, so the feds might want to get some appraisals.
But it is housing we are writing about today, not the approaching bankruptcy of the United States of America. As to the roof over their heads, Americans probably have no illusions. But as to the other roof - or the extra roof - they bought in order to benefit from the greatest boom in housing prices in 100 years, we feel a revelation is coming. A profound insight is approaching them, like a tiger through the bushes…ready to rip them to pieces.
That insight hit us hard over the weekend. We pass it along today, in the language of an enlightened economist, so that our dear readers won’t be caught off guard. In two words: houses suck.
What makes houses such a terrible thing to own is what investors refer to as “negative carry.” When housing prices are rising, you scarcely notice the ‘carry.’ Your capital gains offset them. But when housing prices go down, you take not only the capital loss…but you begin to notice the carrying costs too. You can own a stock without having to pay property taxes on it. In fact, you should have “positive carry” on it - assuming the stock is the sort that pays dividends. There are banking stocks, for example, paying 5%, 6%…8% dividends. In other words, they pay you to own the stock. Same thing with bonds - positive carry. You collect your coupons…and hope yields go down so you’ll make a capital gain on the bond itself. Businesses, partnerships, commercial property - all produce (or should produce) positive carry. Even a dog can produce a kind of positive carry…you have to feed him, but at least he licks your hand. And a wife…well, never mind….
But a house? Even it could produce positive carry if you bought it cheaply enough and it is rented out to good tenants. Otherwise, your carry will go negative…and negative in a major way.
