Generation Rent

Addison Wiggin – March 27, 2012

  • Gen Y is going to buy all the boomers’ homes and revive the housing market? Some salient facts and charts that defy conventional wisdom
  • Yet U.S. housing looks cheap for a certain kind of buyer…
  • Abe Cofnas with a stunning visual reminding us Greece isn’t fixed
  • City raises cash by selling off the family jewels… Buffett hoisted on his own tax petard… readers square off about “gated communities”… and one last chance to listen in to The Rancho Santana Sessions at the lowest price

   “This is bad news for a housing market that is still struggling to recover from the Great Recession,” writes demographer Neil Howe.

Just back in Baltimore from our extended stay at Rancho Santana, we found ourselves trying all morning to drive a stake in a persistent myth: that your house is an “investment” — rather than a home.

   The report that got us started on this tangent this morning: Home prices in 20 U.S. metro areas are now as low as they were nine years ago, according to the just-released Case-Shiller Home Price Index:

In other words, housing prices are back where they were when the space shuttle Columbia blew up and Washington was about to foment the doctrine of “preventive war” in Iraq.

Good times.

(The index’s year-over-year decline works out to 3.8%. It would likely have been worse if the weather in January had felt, well, more like January.)

   Alas, the Case-Shiller is but one of several limp housing numbers that have been released in recent days.

“From home-builder sentiment to housing starts,” writes Diana Olick, one of the more sensible observers of the housing market in the mainstream press, “to home-builder earnings right through to sales of newly built homes, there was not one hopeful headline in any of it…”

That Ms. Olick is employed by CNBC is one of those freakish facts we can chalk up only to… who knows, sunspot activity.

   A year ago, in these pages, we covered a study from Wells Fargo that gushed, “there are 51.5 million potential first-time home buyers born between 1979 and 1991. Roughly 6 million more of these Millennials are reaching the prime home-buying age than baby boomers did in 1977.”

The “Millennial” generation (aged 30 and under), concluded the HousingWire, will ride to the housing market’s rescue… restoring the National Association of Realtors’ (NAR) version of the American Dream.

Yet one year on the opposite appears to be happening.

“Homeownership rates for young adults have plunged back down to near-1990 lows,” writes the aforementioned Neil Howe, “despite record-low interest rates and very attractive prices for a new home”:

What’s more, first-time buyers are disappearing: From 2009-11, only 9% of people aged 29-34 got a first mortgage. A decade earlier, it was 17%.

   The reasons are legion. According to a Chicago Fed study, several factors are at work: Young couples are waiting longer to have kids… thus, the urgency to buy a home is less.

They’re also at what the study delicately calls “heightened income risk”… or what you and I would call “unable to find a dang job.” Unemployment among people 25 and younger is double that for people older than 25.

Too, their inflation-adjusted wages are lower than a decade ago.

   All of these downward pressures on the “Y me?” generation arrive at a bad time.

“For someone in his or her 30s,” Mr. Howe continues, citing a separate New York Fed study, “the average college loan balance is now $28,500, and balances over $50,000 are common.”

“Debt at this level stifles consumer spending and can render many young people ineligible for home mortgages, no matter how low the interest rate.”

Conclusion: If you’re expecting a Millennial to come and prop up your “investment” in a primary residence… well, dude, he or she might be around the corner looking for a cheap rental instead.

   If you’re looking to invest your own money in this trend, “the U.S. is cheap now,” a friend told us last week at Rancho Santana. Lawrence Mackhoul is a native of Honduras, a resident of Cambodia and a world traveler in search of bargains. “Real estate in particular,” he says.

Following the conversation, our managing editor, Chris Mayer, passed along this chart from a website called Numbeo:

The chart shows how many years it would take for a median income earner to buy a median-priced home. The comparison is between a more or less typical midsize U.S. city — Portland, Ore. — and some of the world’s major population centers…

“You might scoff at comparing Portland with New York or Tokyo,” Chris acknowledges. “I would probably agree.” Still, the numbers raise several intriguing questions.

“Is it reasonable,” Mr. Mayer muses, “that Beijing should be so much more expensive than Tokyo or London or New York? And doesn’t Berlin look cheap, at nearly half of Delhi? Why should Rio be nearly twice as expensive as New York?” “I don’t have a firm opinion on the questions. And I’ve not vetted the data at Numbeo. But the picture here does seem to support, at least anecdotally, the contention that U.S. property is a relative value.”

   On Dec. 8, 2011, Mr. Mayer made a reasonably compelling case for buying rental property now. If you wait to buy on the theory that prices will fall further, you run the risk of interest rates rising in the interim.

Indeed, “distressed sales” made up a near-record 48.7% of sales last month, according to a report just out from Campbell/Inside Mortgage Finance. With interest rates at near zero and Millennials renting in historic droves… rental property probably is a pretty sweet deal in many places now.

[Ed note: You might think it ironic a world-traveling investor would make the case for U.S. real estate on the remote Pacific frontier at Rancho Santana… especially during a conference devoted to offshore investing… in which we’re hoping to encourage attendees to review our own portfolio of land in Nicaragua.

But there were many unconventional insights that emerged during The Rancho Santana Sessions… from unlikely U.S.-traded stocks with lucrative international exposure… to property opportunities even cheaper than in the United States… to the ever-present question of putting overseas assets in an IRA.

The seven expert speakers who took part in The Rancho Santana Sessions tackled all of those subjects and more… in an intimate gathering of 30 Reserve members that allowed plenty of opportunity for give-and-take.

We’re sorry if you couldn’t join us. But you can have the next best thing, and at a fraction of the cost — full audio recordings of every session. The MP3 files can be in your email inbox as early as this Friday… and if you order before midnight tonight, you’ll lock in the lowest price.]

   U.S. stocks are taking a breather after yesterday’s rally. The major indexes are flat.

   Ditto for precious metals. Gold is at $1,685, silver at $32.76.

“I was wrong in standing aside,” says our friend Dennis Gartman of his decision to get out of gold last week.

He’s back in after Fed chief Ben Bernanke signaled no reversal of easy-money policies. “Sometimes you get lucky… Dr. Bernanke got me a little lucky [yesterday] morning.”

   The greenback is also mostly flat today. But the dollar index managed to inch its way back above 79, where it’s spent most of March.

The euro is at $1.334, while the yen is weakening, currently 83.34 yen to the dollar. That means Abe Cofnas’ “mock trade” is still intact.

As described yesterday, Abe’s counting on the yen to stay below 84.25 by Friday. If it does, it means a payout as high as 24%.

   “While the politicians and bankers have succeeded in defusing the Greek debt problem,” Abe warns, “they have not managed to remove the underlying economic reality.”

He points to a recent piece by his friend, currency economist Steve Hanke from Johns Hopkins: “Greece’s annual broad money (M-3) growth rate has been in negative territory for every month since February 2010,” writes Mr. Hanke, “and it is currently contracting at a fantastic 17.5%”:

Europe’s elites, opines Mr. Hanke, “have built an economic doomsday machine.”

“Right now,” says Abe, “the perception of a Greek solution is in contrast to the underlying economic reality of the contracting and collapsing Greek economy.” He’s watching for suitable trading opportunities.

Last fall, as the euro crisis raged, Abe played it for spectacular gains, using Germany’s main stock index, the DAX, as a proxy. He generated gains of 161%, 72%, 120%, 125%, 117% and 66%… all in four days or less.

Over the last four weeks, you’ve seen the results of the “mock trades” he’s laid on… consistent gains in the neighborhood of 20% — again, in four days or less.

Abe’s one-of-a-kind service, Fear & Greed Trader, is still available at half-off the regular access price. This discount comes off the table at midnight Thursday night.

   Back in Baltimore this morning, we found a variation on the old story of cash-strapped governments selling off toll roads and airports: The city where we lay our head to sleep late last night is looking into a fire sale of historic landmarks.

“We have some great properties in unique locations, and we hope we can find the right kind of marriage to make it work,” says Baltimore planning director Thomas Stosur.

Among the properties under consideration: the Phoenix Shot Tower, which was the tallest structure in the nation when it went up in 1828. (The tower was originally used to make musket shot, hence its name. Large clumps of lead were dropped from high inside the tower, formed and cooled by the passing wind, before landing in a tub of water.)

Psst, wanna buy a used shot tower… cheap? [Photo by Bruce Andersen]

Of the 15 sites under consideration by the Baltimore’s planning board, 12 have historic landmark status. Just moving a stray brick back into place would require approval from a half-dozen agencies. Good luck unloading ’em…

   And here’s a curious item from the morning’s news: If Warren Buffett is so keen for the “wealthy” to pay their “fair share” to the government, why is the government suing Berkshire Hathaway for back taxes?


Uncle Sam sued a Berkshire unit in Ohio this month, seeking $366 million in taxes and penalties.

Mr. Buffett had no comment for The New York Times, referring any questions to the division — which says it “does not comment on pending litigation.”

Bonus irony: The Berkshire division in question leases… corporate jets!

You may recall, even before issuing a proposal that was dubbed “the Buffett tax” by the press, the president relished every opportunity to demonize corporate jet owners.

This particular case revolves around an obscure backwater of the tax code so arcane that we won’t bother describing it. Just let this soak in: Around the same time the IRS filed suit, it also issued a memo describing how it interprets this rule.

Apparently, that’s so other corporate jet operators will realize they’re on notice. The hypocrisy is so delicious.

   “Really, it’s good to read that,” writes the follow who groused about the “gated community” at Rancho Santana, after we pointed out all of the efforts we’ve made to integrate the ranch with the local community.

“However,” he says, “the best way, in my opinion, to insure that that integration takes place is to remove the gate and the fences that surround the complex.” “If you get rid of the gate, the fences and move even closer to truly integrating your new community with the locals, I will consider checking it out.”

The 5: On Friday, we thought your comments were intriguing… considering you’ve never been to the property. But then today, we came back and heard our friend Dan Rodricks, a local NPR talk show host, airing a program on… gated communities.

Apparently, the “epitome of everything that’s wrong with America” is a hot topic after a teenager was shot in a gated community in Florida.


We thought you were on to something original.

Oh well.

   “To say that gated communities are the epitome of everything that’s wrong with the U.S.” another reader writes, “just makes me roll on the floor laughing.”

“I share my living address between Chicago, Shenzhen and Chongqing, China. Here in China, it pretty much does not matter what income level you are at. If you live in newer apartment building or a high-rise it is a gated community. If you are a factory worker who has moved here from the country or the CEO of the same factory, chances are you are in a gated community.”

“Pretty much wherever you go, every apartment complex and condo complex has its gates and security person. I have observed this in Vietnam as well; it is a safety feature, not a vehicle to show class separation.”

“Thank you for The 5; it’s a breath of fresh air.”

   “Your reader’s comment on exporting the American way is right,” says another reader who goes out of his way to prove he’s a PT, in the Harry Schultz school (i.e., he has “a business in one country, banks in several others, has citizenships in three others, works in most others and lives in yet another”).

“I’ve been looking at the various Galt’s Gulches springing up,” he says, “and they all have that central planning/condo complex mentality. Uniform building codes, planned activities, mostly North American WASP, etc.”

“I’d be happy to move to Estancia de Cafayate or Rancho Santana or whatever, if I felt I’d be free to put up a few old cars on blocks in the front yard without bringing down the ire of the planning committee.

“What shines through are the promotional hype, inflated price and the paranoia of life in El Norte. Sounds a lot like ‘Club Green Zone’ in Iraq to me. I guess the apple doesn’t fall that far from the tree.”

The 5: The community of folks seeking alternatives lifestyles outside the mainstream is as diverse as the group of folks we used to know when traveling with the Grateful Dead in the late 1980s. And like that community, there is a high degree of one-upmanship.

“My ‘expat’ strategy is bigger than yours…”

“Nuh, uhh… mine’s bigger.”


   “My only question is: When will the Occupy Wall Street gang arrive? That place is too 1%! LOL.”

The 5: Oy.

If you’re actually interested in taking a look at the project before dismissing it entirely, we invite you to keep your eyes peeled for Rancho Santana Sessions 2 dates, likely in November, after the rainy season.


Addison Wiggin
The 5 Min. Forecast

P.S. Final reminder: We captured the pros and cons of exploring, living and investing in frontier markets with MP3 files of our Rancho Santana Sessions last week. We’ll be editing the content into special reports for those who are truly interested in investigating the alternatives we often discuss in The 5.

If you want the raw, uncut version, please note the pricing for Rancho Santana Session I goes up tonight at midnight. After that, it’ll cost an additional 30%, don’t wait to get your copies… inexpensively… right here.


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