Is the Next Real Estate Crash Coming?

The Obvious Is Difficult

One of the two ways I approach investing is to look for the obvious. The reason I start with the obvious is because no one does. We have all been taught that investing is complicated and complex. And therefore, we are taught to overlook what is right in front of us. But in reality ‘the obvious’ is where the power lies.

The Recession Ended In June 2009…

So that date (June 2009) is as good a place to make a few obvious observations and then we can take talk about meaning.

First, what’s most obvious is that you can only invest your money into one of four different assets on this planet: stocks, fixed income, real estate or commodities. That’s it. There isn’t a fifth, or sixth, or seventh place.

And what most don’t think about, is that as soon as you get a paycheck, your money is invested into fixed income. Cash is one form of fixed income. It sounds obvious when you take a moment to notice this, but most are not able to because they are lost in complexity.

There Are Only 4 Horses In This Race

All you have to figure out with investing is, which horse is beating the other three.  And that’s what I want to show you today. Again, your money is ALWAYS being ‘bet’ on one of the horses. So there’s no sitting in the stadium watching the race. Your wealth is always, at all times riding one, some or all of the horses.

Now that we have entered the 98th plus month of US economic expansion we can get a good view of which horse is the strongest.

Are Stocks Topping Finally?

Horse #1 = Stocks.

The first horse is stocks (S&P 500). And since the recession ended this horse is up 208%. But if you adjust that horse for inflation that number drops to a 172% gain over the same time.

Please note, there’s no one “inflation” number,  inflation is different for everyone. Your inflation partially depends on where you live, how old you are, whether your kids are going to college and how good your health is.

If you live in Silicon Valley, have kids going to Stanford and you’re covering your sick parent’s medical bills, you are basically screwed, as your inflation might be 10%+ a year.

But if you are single, younger, in great health, with healthy parents living in Hawaii then your inflation is maybe 1%. So inflation matters. But… or And,  the inflation number I’m using today is the US government’s CPI rate as its the most followed.

Stocks since June 2009.

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Stocks [inflation adjusted] since June 2009.

Is Fixed Income A Better Investment Than Stocks?

Horse #2 = Fixed-Income.

The next horse is fixed-income. And since the recession ended in 2009 fixed-income is up 43%. By the way, the vehicle I’m using for Fixed Income is the 10-year US Treasury Bond with dividends reinvested.

If you adjust the US 10-yr for inflation its performance drops to 25%. The point I want to make is that one of the safest places your money can be is on a stable uptrend that is safely accelerating.

Both stocks and fixed-income are in a stable uptrend. BUT one has outperformed the other by 5X. Stocks have the stability of the trend and the steadiness of safe acceleration.

Now, of course I don’t know what’s going to happen tomorrow or next week, but we do know that Horse #1 (Stocks) has the steadiness and stability most people are groping for in their “pick of the month” newsletters.

Fixed Income since June 2009.

Fixed Income [inflation adjusted] since June 2009.

Is the Next Real Estate Crash Going to be 40%?

Horse #3 = Real Estate.

Since the end of the recession in 2009,real estate is up 39% (U.S. Real estate). As you look at the chart below you can actually tell that real estate didn’t bottom officially in the U.S. until 2012.

And when you adjust this number for inflation, you can clearly see that real estate is up only 23% (second chart below).

I want to call out this huge gigantic number (23%) to those that predict real estate is going to collapse 40%. I’m talking to you Harry Dent. Thirty-nine percent and twenty-three percent (inflation adjusted) are NOT “nose-bleed” numbers. They’re actually pretty small. Who brags that they grew their money 43% over eight years?

So people calling for the collapse of real estate in the United States must be looking at a different set of price charts then I’m aware of. Real Estate peaked in 2006 when the average 30-Year mortgage rate was yielding 6.4%. That means a $200,000 loan would cost a home buyer $12,800 a year in interest payments alone.

Today, with the real estate market still 6% below the 2006 highs and 23% below those highs if you adjust for inflation you can get a 30-year loan for 4% today. That means the same $200,000 loan will only cost the homeowner $8,000 a year in interest payments…or a saving of $4,800 a year. That’s 37.5% cheaper to borrow the same money today than in 2006.

If anything these lower mortgage rates mean that real estate is going higher because it costing 37.5% less to buy the same house.

Real Estate since June 2009.

Real Estate [inflation adjusted] since June 2009.

Have Commodities Bottomed?

Horse #4 = Commodities.

The last of the four horses is commodities. You can immediately see that commodities are down (see the first of two price charts below). In fact commodities are down 32% since the recession ended and if you adjust for inflation commodities are down 38% since June 2009.

Now, here’s the thing, eventually commodities will turn around and there is a distinct possibility we are in the first inning of the new trend. Last week I talked about how commodities might finally be bottoming.

Here’s the point I want to leave with you about commodities, there will be a time (maybe soon) when you will want to consider this horse.

Commodities since June 2009.

Commodities [inflation adjusted] since June 2009.

We Are 98 Months into an Economic Expansion Cycle

There are ONLY four places to invest on the planet. We are 98 months into an economic expansion cycle. Stocks are up 208%. Fixed-income is up 43%. Real estate is up 39%. And commodities are down 32%.

It’s obvious which one has been winning up to now, so there’s no big news flash around that specific piece of data except that most people might not even recognize this obvious fact.  

Be easy on yourself because complicating is what we’ve been taught to do. And it makes sense because it feels right in theory. But in practice it hurts. Stop hurting yourself.

Modern Life is Hurting Your Returns

We in the developed world don’t have much to worry about and this is a problem for our brains.

Our brains were developed to help us survive. But we no longer have to watch out for big animals with large teeth running after us. And most of us don’t have to worry about where we’ll get our next meal or where we’re going to find shelter to sleep tonight.

Even the poorest state in America is filled with people that have adequate shelter, food, clothing and cable TV. We’ve all already won…our brains just don’t know it. Therefore our brains create stuff that we then have to survive, like complicated investment strategies.

This is why “obvious” is hard to see.

And what’s obvious about the investment world? Look for the trends. Trends are the safest place to put your money. And the bigger/longer the trend, the safer your money is.

When you go out into nature you can see this everywhere. What’s the trend of a tree? To keep growing each year.

Part of this means following the price. Stocks are up 208%. Stocks are outperforming everything else. This means stocks are trending up which means they are a safe investment until they aren’t.

And yes, one day one of the other three Horsemen, will take the place of Stocks. And when it does it will come as a shock and surprise too all that are following complicated strategies.

You don’t want to get surprised you say?

Then learn to allow “obvious” into your investment lives.

In Your Corner,

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RC Peck, CFP



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