Investing

Housing Market Bubble Is Shivering And Might Pop Before Election Day

The corona crisis has led to unprecedented lay-offs and a steady unemployment figure of 10 percent. As in every crisis, the most vulnerable get hit the hardest. This has led to delinquency rates not seen in 21 years. In this article The Golden Investor will shed some light on this disturbing data.

The corona crisis has led to unprecedented lay-offs and a steady unemployment figure of 10 percent. As in every crisis, the most vulnerable get hit the hardest. This has led to delinquency rates not seen in 21 years. In this article The Golden Investor will shed some light on this disturbing data. While many countries have a ban on evictions during this pandemic, however this is not a solution to the problem. The debt burden will be huge and renters will face huge troubles recovering from these debt burdens.

In April the transition rate, the share of mortgages that transitioned from current to 30 days past due, rose to 3.4 percent which is significantly higher than the 2 percent peak amid the last financial crisis in 2009. In May this number dropped to 2.2 percent, but considering the amount of governmental support given in that time, it should be taken into account that this number may rise again after governmental subsidies dry out. This must be the biggest shock the housing market has ever had to endure. The national unemployment rate soared from a 50-year low in February 2020, to an 80-year high in April, which will result in many more homeowners struggling to pay their mortgage when governmental support stops. Congress could not agree on a new corona stimulus package, meaning that new help is not coming for many who currently are in need of support. And as the ban on evicting renters is expiring many more will get into trouble.

delinquency rates
Figure 1- Current To 30-Day Transition Rate

A survey by Apartment List showed the massive struggle of renters and homeowners; In July 36 percent of renters and 30 percent of homeowners failed to make full on-time payments. Younger and lower-income households have more trouble than older and wealthier ones; for those under 30 years old and those making less than $25,000 annually, the missed payment rate exceeded 40 percent in July. One of the hardest hit state New York saw rents drop up to 10 percent in an unprecedented flow out of the city. As is visible now, in all ways the current corona crisis is unprecedented and the housing markets seems to become the first victim. While financial markets and corporate U.S. can afford to ignore Main Street and the highest unemployment levels in decades, the housing market is as real as it gets because it is driven by all people and not only features the wealthy.

The Great Disconnection

Even though financial markets saw a V-shaped recovery, Main Street did not sees this kind of recovery. While earnings drop, stock markets reach for new all-time-highs led by the tech sector, portraying the big disconnection of the financial market from real life. However, such a situation is not sustainable on the long run, P/E ratios of tech companies are rising more to pre-financial crisis levels, but this time it’s amid a worldwide pandemic and financial crisis. This a further indication of inflation of financial markets by unlimited quantitative easing and the ultra low interest rate environment. With rates close to zero, investors search for yield in different financial products and flock into relatively safe stocks like Apple (AAPL), Amazon (AMZN) and Walmart (WMT) due to the lack of yield in the relatively safe bond market. This can be clearly visible in the increasing P/E ratios of many big (tech) companies.

Figure 2 – P/E Ratio Apple (AAPL)

Winter is coming and a rise in corona cases could hold down economic recovery, only new rounds of quantitative easing can prevent worse. That is why The Golden Investor stays bullish on gold and silver, because real V-shaped recovery is nowhere near. Just like the financial crisis in 2008-2009, the real debt burden will only become visible after the damage is done, but currently we are still taking hits. For now, the world is still trying to prevent worse leading to the highest global debt level ever recorded, and this is just the start. The new all-time high of gold will not last long as new rounds of stimulus and a further surge in global debt is near. Even though 2020 has not been the best year, 2021 will be even worse, especially for the median worker.

Disclaimer: The Golden Investor is not a fortune-teller, be sure to make the right decisions in accordance to your own financial situation, this is not investment advise or anything like that.

Bibliography

https://www.corelogic.com/blog/2020/7/jump-in-early-stage-delinquencies-leads-to-highest-overall-delinquency-rate-in-over-four-years.aspx

https://www.apartmentlist.com/research/july-housing-payments

https://www.macrotrends.net/stocks/charts/AAPL/apple/pe-ratio

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