In Vegas, a last ditch effort to break a losing streak by betting everything you’ve got is called going “double or nothing.”
In politics it’s called a “bailout.”
The Federal Regulators have certainly maintained an incredible losing streak regarding their interventions during this financial crisis. A brief recap is as follows:
- The Federal Reserve cutting interest rates from 5.25-1.5% (Sept ’07-today)
- The Bear Stearns deal/ Fed taking on $30 billion in junk mortgages (March ’08)
- The Fed opens up various lending windows to investment banks (March ’08)
- The SEC proposes banning short-selling on financial stocks (July ’08)
- Hank Paulson gets a blank check for Fannie/Freddie but promises not to use it (July ’08)
- Hank Paulson uses the blank check with Fannie/ Freddie (Sept ’08)
- The Fed takes over insurance company AIG (Sept ’08)
None of these have loosened up the credit markets or renewed the bull market in stocks. In light of this, the mega-bailout was nothing if not a “double or nothing” bet. Throwing money at the financial crisis hasn’t worked in the past. Only a lunatic, the most obsessive gambling junkie, would think that throwing an even larger amount would work now.
And sure enough, it hasn’t.
As I illustrated last week, during the housing bubble US homeownership hit 67%: well above the 64% that has been the historic average since 1960. We got to this point because banks were overconfident in two assumptions:
- Incomes would continue to grow
- Housing values would continue to rise
Now that both of these assumptions have proven false, financial firms have lost all confidence, hence they are no longer lending, hence the credit market is frozen.
There is another issue here. Only 21% of US homes have a head of household under the age of 35. A booming housing market requires new buyers to come in at the bottom end of the market. Given the savings rate in this country, as well as the fact lending standards are tightening, a lot of young people are going to stay renters for much longer.
On top of this, more than a third (36%) of the US housing market is comprised of homeowners over the age of 55. This means a whole new wave of pre-existing homes will be hitting the market during the next ten years. My reasoning here is simple…
When people retire, they almost ALWAYS downgrade their home.
For years the Boomers have been sold on the idea that their home is the single biggest investment they will ever make. Because of this, many of them have used Home Equity Lines of Credit or HELOCs to fund lifestyles beyond their means, all the while believing that one day they could sell their home to recoup the costs.
After all, which is an easier method for paying off debt: alter your spending pattern or simply sell your home and use the proceeds to pay off your debts?
Put another way, which would the average worker aged 55 or older do: keep working and live in a big house OR retire and live in a smaller house?
It’s a no-brainer.
I already touched upon the glut in housing supplies in last week’s essay. When you add in the number of houses that will come to market as Baby Boomers retire and downgrade to smaller homes, you’re talking about even MORE big, expensive homes hitting the market. And this is happening at a time in which most young people are broke or in debt WHILE lending standards are tightening rapidly.
However, there is opportunity here. As far as I know, few homebuilders have focused on the retiree market. I’m not talking about condos in Florida… I’m talking about nice homes designed for a retired couple. The US housing market has shifted from a young buyer to a retiree market. It’s just that most homebuilders haven’t realized it yet. Whoever does first is likely to make an absolute killing.
And whoever doesn’t is going to get killed by excessive inventory and too few sales.
