“Sales of new houses have slumped to their lowest level in six years after NSW and Victoria recorded big drops in activity in the wake of last month’s interest rate rise… The weakness in the freestanding house sector was underpinned by falling activity in the eastern states, as new house sales fell 29 percent in Victoria and 14 percent in NSW,” comes more news from today’s paper.
There’s not much to add to the housing story, except, perhaps the reminder to take what housing and realty organizations have to say about the market with a lick of salt. Or a big salt lick. Housing bubbles can unwind in a slow-motion way, or they can pop quickly. George Karahalios, a property developer in San Diego explains in a recent letter, “Though the Nasdaq 5,000 bubble took years to form, it took only months to unravel. So far the housing bubble seems to be following that precise road map.”
By the way, six years after its peak, the Nasdaq is still barely half recovered, closing yesterday at 2.435. Karahalios continues, “As normal housing cycles take a few years to hit bottom, it’s curious that so many central bankers have been so quick to declare that ‘the worst may well be over’ in this housing cycle. But given the fact that central bankers have never operated their printing presses more efficiently than today, I interpret their ‘prognostications’ as evidence of their intentions.”
Karahalios means by that that central bankers everywhere (though he is talking mainly about North America, the U.K. and Australia) will try to soften the blow of falling housing prices and rising rates with… lower rates. How they will do this without sparking the kind of inflation it is their primary charge to avoid, we have no idea. But there is good news in all of this for hard asset investors.
“The antithesis of investing in equities,” Karahalios continues, “is investing in hard assets. Because via the banking system money flows through the economy unevenly, some hard assets (such as real estate) benefit from the increased liquidity long before others. Hard assets that yield no dividends, such as the precious metals, are often the last to benefit from increased liquidity, and in fact perform the best during brief periods of increased Fed tightening as investors flee leveraged assets during such times.”
Yes… yes, we are going to float the idea of gold again. We’ll let Karahelios do it for us, “Given that the return on equity has now been forced to extremely low levels across nearly every asset class, precious metals are poised to gain disproportionately from any Fed easing. Thus, for the foreseeable future, I am expecting the precious metals to compound at a greater rate that equities did during their last great bull market run.”
He said it, not us. But it makes sense.