Rule Number Two: Stay Away from Real Estate Until After the Dollar Bubble Pops
,Unless you find an exceptional bargain that you can realistically flip fairly quickly to a ready and qualified buyer, investing in real estate is not a good idea until after the dollar and all the other bubbles burst. Despite what the cheerleaders want you to believe, real estate prices have not hit bottom. All real estate now is basking in the glow of ultra-low mortgage rates, which won’t last indefinitely.
As inflation and interest rates rise (see Chapter 3), mortgage rates will rise, too, shrinking the already small pool of able buyers even smaller and growing the already large pool of real estate inventory even larger—further driving down prices. As inflation and interest rates go up and eventually the dollar bubble falls (see Chapter 4), the overall economy will sink and unemployment will rise, pushing real estate prices even lower—much lower than most people can imagine today. As much as rising interest rates will harm the stock market, they will be even more toxic to the real estate market because high interest rate mortgages and tough credit requirements will put home buying out of reach for most Americans.
So any rah-rah advice you get about grabbing cheap real estate now before home values go back up is just plain wrong. Stay away from real estate! Do not be tempted by past profits you may have made or wish you had made. Now is not the time. Rest assured there will plenty of real real estate bargains in the future.
That said, we all have to live somewhere, so where should it be? In general, from a financial point of view, now is a good time to rent rather than to buy, so if you haven’t bought a home yet, keep renting and feel free to skip the next section about what to do if you currently own a home or other real estate.
What to Do with Owned Real Estate
As we have already said, real estate values are not going to significantly recover, even if they move up slightly in some areas of the country in the short term. Over time, with rising mortgage rates and growing unemployment, real estate prices will continue to fall, and will certainly crash once the dollar bubble pops. So if you own a primary residence, vacation home, investment property, commercial real estate, or farmland, the coming months and years will likely present some challenges. Here’s what we recommend and why.
Vacation Homes, Investment Properties, and Commercial Real Estate
Unless you have very compelling attachments to or very strong sentimental interests in any vacation homes, sell them now. You can always just rent when you go to your favorite vacation spots. Even if selling a vacation home now will result in a financial loss, it will not be as much as you will surely lose later. Ditto for investment property and commercial real estate. Sell them all now before prices fall even lower. We are nowhere near a bottom in real estate values. Now is the time to get out.
Later on (after all the bubbles pop), if you have the means, you will be able to buy vacation homes and other real estate very, very cheaply, but only if you don’t lose all your money in the collapse. So be practical and wise, and resist the cheerleaders. Later you are going to look like a genius.
Your Primary Residence
For your primary home, the situation is trickier. Many people have a sentimental attachment to their homes and may not want to sell them to capture their equity before their values fall further. In addition, it may not be easy to find an equivalent rental. As we said before, strictly from a financial standpoint, you probably should sell your home now and rent instead, but we understand that for many people it is difficult. None of the authors have sold their primary residences. However, if you are planning to move or retire in the near future, by all means, speed up that process and sell your home now. Don’t wait for home values to pick up significantly in the near future. They won’t.
Get Fixed
If you are going to keep your home, make sure you have a fixed-rate mortgage, not an adjustable-rate loan. If you have an adjustable-rate mortgage, we suggest you try to refinance to a low fixed-rate mortgage. Mortgage rates are at historic lows. No one knows exactly when interest rates will begin to significantly rise, but it could be sooner rather than later. If you can, move now to lock in a low rate before it’s too late.
With a fixed-rate mortgage, the monthly payments on your home will be dramatically reduced by high inflation when the dollar bubble pops. Of course, so will the value of your home, but at least you will have a good, cheap place to live for as long as you wish. Just the opposite will be true for anyone holding an adjustable-rate mortgage. The rapidly increasing monthly payments will quickly make repaying the loan difficult if not impossible. So refinancing from an adjustable-rate to a fixed-rate loan is absolutely essential.
What about refinancing an already fixed-rate mortgage? That only makes sense if you can lower your current mortgage interest rate by at least 0.75 percent. If your saving will be less than that, it is probably not worth the trouble and expense to refinance.
Pay It Off Faster or Slower?
Once upon a time, accelerated mortgage repayment made a lot of good sense because it got you out of debt and out of paying interest that much sooner. But not so going forward in this popping-bubble environment. It may seem counter-intuitive, but you do not want to pay off your low-interest, fixed-rate mortgage any faster than is minimally required. Remember, high inflation is going to all but wipe out this kind of debt for you in the not too distant future because you will be repaying your mortgage with “cheaper” dollars. However, you do have to be able to make enough money to pay your mortgage payment each month or you’ll risk losing your home.
Pull Out Equity?
Rather than paying your mortgage off faster, there is a very good argument to be made for paying it off even more slowly, given that inflation will rise and therefore each year you will be repaying this loan with cheaper and cheaper dollars. High inflation will essentially make your fixed-rate mortgage payment close to free because it will be tiny compared to the number of dollars you will have as the value of the dollar drops and your income goes up more or less with inflation, assuming you still have a job or inflation-protected assets to sell, such as gold.
If you share our point of view on this, you may want to consider extracting some of the equity from your home to invest elsewhere (see next chapter), to the extent that you feel comfortable and agree with our forecasts. This clearly has risks—the big one being difficulty in paying your monthly mortgage payments if you do not save and properly invest the excess proceeds from your home. But, as soon as high inflation hits, you will be able to pay your fixed-rate mortgage payments with cheaper and cheaper dollars.
What about pulling out equity with a “reverse mortgage,” in which a buyer pays you each month for your property, while you remain in your home? Under normal circumstances, a reverse mortgage can be a good idea for some people, especially later in life. However, under current and future circumstances, reverse mortgages are a very bad idea because inflation will eat away at the value of your fixed payments. Even if your payment is tied to the official inflation rate, it is very likely that the bank or mortgage buyer you are dealing with will go under. In time, even government guarantees of reverse mortgage payments will not be honored (once the government is out of money), and you will not get another penny for your property.
Rather than a reverse mortgage, consider selling your property and investing that money for protection and growth before and after the dollar bubble pops.
What to Do If You Are “Underwater,” Facing Foreclosure, or Cannot Make Your Mortgage Payments
As we already mentioned, the best plan is to refinance to a low, fixed-rate mortgage that will lower your monthly payments to an amount you can manage. If you cannot refinance, walking away from the house can be a good idea if your income does not depend on your credit score or you don’t have high-value assets that could be jeopardized, based on the laws in your state.
If you are underwater (owe more than the home is worth) or you are facing foreclosure, be on the lookout for any mortgage bailout programs you may qualify for in the next couple of years. On the other hand, it is not a good idea to throw good money after bad and for many people who are underwater in their mortgages, walking away might be best, depending on your individual situation.
Even if all else fails and you cannot refinance, don’t qualify for any bailouts, and simply cannot make your monthly mortgage payments, you do not necessarily have to abandon your property immediately. Even now, it can take a year or longer from the time you stop paying your mortgage until you are evicted. After all the bubbles pop, it will take much longer to be forced out of a property because the courts will be so backed up. So keep paying your mortgage as long as you can, and if you must stop paying, you can stay in your home as a squatter. When the dollar and government debt bubbles pop, banks will be overwhelmed and foreclosures will become increasingly harder to enforce. You will probably be able to stay in your home as a squatter for longer than you think. But not forever. Eventually, squatters will lose their homes, too. But at that point you may also be able to rent your home from the bank or government very cheaply and avoid eviction. We are moving into a very dynamic situation that we have never seen before in the United States, in which many actions will become possible that would not be possible today.
There are also some delaying tactics you can use to put off foreclosure for as long as possible. For example, you can claim that records are not accurate and ask for depositions; both will buy you time. Or try negotiating with whoever owns the mortgage note by offering to make a partial payment each month to bypass or delay foreclosure. Keep in mind that banks do not like to foreclose on a property if they can avoid it because they will most likely have to sell the property at a loss and then show that loss on their books. Also, foreclosing costs the banks money and time they would rather spend elsewhere. So if you get in trouble, don’t immediately assume that you cannot cut a deal of some kind, such as a loan modification, refinance, or temporary partial payment. It’s worth asking. Banks won’t even talk to you unless you are behind on your payments, so you have to be a few months late before you can make your request. On the other hand, if you are underwater, it gets a lot harder to get the bank to modify your mortgage because it is no longer fully collateralized by the home’s value.
In general, we recommend doing a short sale (selling the property for less than the balance due on the mortgage) rather than a foreclosure if the bank will allow it. However, in a short sale, the difference between what you owe on the loan and what the home is sold for can be counted by the IRS as a gain to you that may be taxable (check this with your CPA or tax attorney).
The key is to not give up easily. You can fight foreclosure and the government does have programs to help you do that. In a blatant plug for a sibling’s book, if you find yourself in a foreclosure situation, you should take a look at The Homeowner’s Guide to Foreclosure: How to Protect Your Home and Your Rights, Second Edition by James Wiedemer (Kaplan, 2008). Jim is a real estate attorney who practiced during the foreclosure crisis in Houston in the mid-1980s and knows foreclosures well. It’s a good book that gives you excellent detailed information on how to fight foreclosure.
What to Do with Commercial Real Estate
If you have commercial real estate that is bringing in money, keep running it until it goes under—assuming your mortgages are not personally guaranteed loans and are owned by a corporation. If they are personally guaranteed loans, it would be wise to sell now or as soon as possible, rather than waiting for the bubbles to pop. Also, if you have significant equity in your commercial property you should sell to capture that equity before it is lost.
If you wait too long, it will get hard to sell at a decent price and you may find yourself throwing good money after bad, in a losing attempt to just hang on until things get better. (Every situation is different. Please call us at (800) 994-0018 if you want to discuss yours.)
What to Do with Farms and Farmland
As with primary residences, unless you have a strong personal attachment to your farmland or are actively using it in some way, the best thing to do from a strictly financial point of view is to sell your farmland now, while land values are still relatively high compared to where they are going in the future. If you are attached to your farmland, think through your individual situation carefully and try not to make an entirely emotional decision. Are you near an urban center where you can get a reasonably good price if you sell now, or are you in an economically depressed rural area? Are you ill and unable to work on or fully enjoy your farmland? Have you been planning to sell your land in a few years due to retirement or other change? If so, better to sell now than to put it off.
If you love owning farmland, remember that, just as with houses and other real estate, farmland will get very cheap in the future and you will be able to buy farmland for much less than you can sell it for today.
Working farms are businesses, not merely real estate. As we are already starting to see, food and crop prices will rise significantly with inflation. When the dollar bubble pops, the buying power of the dollar will fall relative to other currencies, making U.S. crops cheaper for foreigners to buy than food grown in other countries, so demand for our food exports will rise, making U.S. crops profitable. So the farmland that produces those crops will create a significant income. That income could be high and if you don’t intend to sell the land because it is part of the family, then your future farmland income will be good even if high interest rates lower the value of that land. If you don’t plan to sell your land, who cares?
High interest rates will make the cost of borrowing money to buy farmland high, and with credit not flowing, loans will be hard to get. Adjustable-rate mortgages on farmland, as on all real estate, will go sky-high with rising interest rates, pushing some farms into foreclosure. Like commercial real estate, working farms that are underwater in their mortgages may not be worth fighting to keep, depending on your unique situation.
If you have a working farm or some other reason why you wish to keep your farmland, your best bet is to refinance any adjustable-rate loans to low fixed-rate loans as soon as possible. As with your house, you have the option of pulling some or all of the equity out of your property to use for more profitable investments elsewhere (see Chapter 7).
The main thing to keep in mind is that real estate values across the board are not coming back to their past bubble highs, so don’t make the mistake of hanging on at all costs because you “just know” things are going to turn around soon. Even when real estate values do begin to recover (long after all the bubbles pop, including the dollar bubble), they will not return to pre-bubble pop prices, in terms of inflation-adjusted dollars.
Our national house party will definitely be over.