Friday, November 16th, 2018 MST

Housing market stalls; gold rises

The housing market is one of the leading indicators of economic activity, and the US market is suffering its longest slump in four years.  Sales of previously owned homes fell 3.4% in September from August and were down 4.1% from last year, for the seventh straight month of declines.

Additionally, Canada and Australia are seeing declines in their housing markets.  Remember, the 2006 housing bubble was worldwide.

The primary contributing factor to the slump is the Fed’s “normalization” of interest rates, which is code talk for raising interest rates.  Fed Chair Jay Powell had indicated four rate hikes in 2018, and so far there have been three.  There is much speculation about a fourth hike in December.

Jared Dillian, editor of The Daily Dirtnap, noted today that the reason the stock market is taking so long to correct that that the Fed is moving at glacial speed in raising interest rates.  Whereas the Fed used to move the Fed funds rate a half a point at a time, so far this year the Fed has hiked only .75%.

Other factors causing the slowdown are a lack of inventory and the new law that gave taxpayers lower income tax rates but also reduced the incentives for home-ownership.  Basically, the new law put limits on how much interest expense can be deducted.

Meanwhile, gold is trading at its highest level in three months.  More important, gold is trading above both its 50-day and 100-day moving averages.

Also causing more money to flow into gold are sharp selloffs in stocks, trade tensions between the United States and China, Italy’s budget squabble with the European Union and the ugly situation with the supposedly dismembered Saudi journalist.

Other factors could cause still more money to move into gold, such as the record total debt in the United States (now in excess of $68.5 trillion).  Worse, debt worldwide is at record high levels.  When so much money floats around the financial system, credit standards are lowered and some really bad investments are made — which end in bankruptcies.

Gold and silver have not yet priced in all the things that could go wrong — or are going wrong.  The metals at these low prices are more than reasonable investments, they are excellent investments, not too far off their December 2015 lows of $1,062 for gold, $13.91 for silver.

Mainstream investment advisors like to call gold and silver “insurance investments” but they generally recommend only 5% of one’s investment portfolio in the metals — if recommended at all.  Gold and silver could, considering what the world is facing, be what Jared Dillian calls a “hero trade,” one that makes you way more than you expect.

One Response to “Housing market stalls; gold rises”

  1. Bill Haynes

    As noted, the housing bubble was worldwide. Now The Economist reports the likelihood of a slowing housing market in Ireland.

    In 2016, housing prices rose 8.6%, and in 2017 jumped 11.9%. However, Standard & Poor’s sees prices rising 9.5% this year, 8% next year and 7% in 2020. The agency is predicting a “soft landing” for Ireland’s housing market.

    If S&P’s predictions are borne out, house prices will have increased 127.9% between 2013 and 2021. Such rises are not typically followed by soft landings. In the 2008 housing bust, Ireland’s housing prices declined 55%.

    Reply

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