The Death of a Dream, Part Two

In ‘The Death of a Dream, Part One’, I showed how Japan’s first catastrophic real estate bubble peaked in 1991. And then showed how it crashed right along our bubble model into 2013.

The difference was, it never bounced. Even when its millennial generation came along to buy houses again.

A rise of baby boom ‘dyers’ (sellers) were offsetting the rise of millennial buyers.

Now let’s look at the US bubble — or our double bubble.

Our first bubble peaked after peak demand from Boomers (2003) in early 2006 on a 41-year lag. And it crashed. The demographic downturn we predicted set in after 2007. Right when the sub-prime lending crisis blew up.

It took six years to build, and six years to crash into 2012. That’s down 37% versus Japan’s whopping 70% over 13 years.

The Downside Risk in U.S Housing Is High Again 20-07-18

Source: Standard & Poor’s Case-Shiller US 10-City Home Price Index

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Massive QE and ultra-low mortgage rates created a second — now artificial bubble — that has recently eclipsed the first one. And it looks almost identical in its size and build up time — six years from 2012 into 2018.

This bubble will start to burst within the next year.

Its target is at least the low of 2012, and likely the low of early 2000. That creates a downside in the next six years, into 2024–25 or so.

That’s worse than last time!

So, what has happened in the aftermath from the first serious real estate downturn since the one from 1925 through 1933?

According to a study by the online apartment service RENTCafé, since 2007 ownership in the US has dropped by 3.6 million and renters have gone up by 1.9 million.

Yes, that also means more millennials living with parents, and rising homelessness.

The causes are obvious: Much tighter lending standards, remarkably low supply — especially of affordable, less profitable starter homes — along with soaring prices and valuations again…

Home prices have gone up 35%, while rent is up only 20% in the last five years, or 75% faster. Both are way above wage gains, which have been near nil.

Overall, the bubble and crash thus far are not nearly as bad as Japan.

Our demographics aren’t as unfavourable, but still very much so given the new model of subtracting dyers from peak buyers to determine and forecast net demand.

In this case, peak buying in the future is at age 42 for the US and age 78 for dyers, as Americans don’t live as long as the Japanese on average.

The Downside Risk in U.S Housing Is High Again 20-07-18

Source: US Census Bureau, Dallas Federal Reserve

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By this indicator, housing demand should have peaked in 2011. But bubble conditions, again, cause buying and prices to overshoot.

We’re now much more above the fundamental trends than in 2006 at the last peak, and those trends point downward until 2039, with the peak of baby boom dying rates.

So, even if we hit a bottom by 2025 due to weak overall economic conditions, prices will still be likely flat to down a bit into 2039 or so.

However, there’s a big difference from Japan’s demographic spiral.

Net demand does not turn negative until 2033 — so we won’t have tens of millions of empty homes like Japan. (As of today, 10 million out of 53 million households — and 15 million forecasted by 2033.)

But builders will be even more cautious next time around, as will buyers, at first.

Millennials will ultimately choose to buy just to control their own house and destiny, even though appreciation is unlikely to top modest inflation, at best.

‘The Dream’ of getting rich off of real estate will be dead by 2025, and no longer considered ‘on hold’.

The demand for vacation and retirement homes will peak last for the aging baby boomer generation around 2026.

The best thing you can do is convince your kids to wait until at least 2024 to buy — and be happy renting until then.

Whatever you do, just know that the dream of owning a home for profit is dead…you see it before everyone else does.


Harry Dent,
Editor, Harry Dent Daily

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