The “Dumb Money” Is Finally Buying New Homes, Just as the “Smart Money” Exits

But how much longer can this trend continue?

By Harry Dent, author of The Demographic Cliff:

New home sales just went up a staggering 16.6% in April: 619,000 new homes were sold – the most since early 2008 just before the worst of the housing meltdown, and the highest rate of growth in 24 years. So is this a sign that the economy is back on track?

Don’t count on it.

Home sales, like jobs, is a lagging indicator, not a leading one. It’s a sign of where we’ve been, not where we’re going. So this isn’t a big surprise to us. In fact, this is just like stock indicators near a peak.

The dumb money is finally pouring in while the smart money is exiting. Except this time, it’s just in real estate.

Millennials have held back on buying homes for a variety of economic reasons since 2008. Tighter lending standards, for one; the concern that home prices could fall again, for another; then there are $1.2 trillion in student debt, falling real wages, and higher unemployment for millennials (since more baby boomers are staying in the workforce longer).

So even while more millennials cross that 28 to 33 age time frame when they’d normally buy a house… more and more of them have been opting out, choosing to stay at home with their parents, or rent. They’ve put off the biggest financial decision of their lives because they all know the worst could happen.

But, home prices have continued rising, and the inventory of existing homes for sale has been falling. Hence, new home sales keep advancing. So last month, the most people in eight years decided that if they’re going to buy a new home, now’s the time to do it.

But how much longer can this trend continue?

Even with last month’s boost, new home sales aren’t anywhere close to where they were at the housing peak in 2005 when a million or more new homes were selling every month. We’re not even close to where we were before the bubble started in 2000!

Just look at the reality of it in this chart, which adjusts new home sales for rising population growth:

New Home Sales Since 2011 Dead Cat Bounce

The baby boomers carried us to new highs in the middle of last decade. After that, real estate suffered the most drastic fall in U.S. history. The rise in new home sales since 2012 is nothing compared to that! This one-month, 16.6% rise hardly even shows up in the chart!

A “dead cat bounce” is trader terminology for a modest bounce that follows a substantial crash, meaning there’s more to come.

Do the bounces following major crashes in the early 1980s and early 1990s forward look like this one? Not hardly! The millennial generation will not carry the housing market to new highs the way the boomers did.

It’s not just the skittishness of these fragile new buyers. Their demand will simply not be enough to offset the retiring baby boomers who eventually die and become sellers by default.

So net housing demand will fall – even turning negative over the next two decades – perhaps starting later this year. This isn’t just a consequence of economics, but of demographics. Over the longer term, demographics is destiny, and very predictable, as I discuss in my book, The Demographic Cliff.  [Find out how to get it here.]

This critical demographic indicator shows it won’t turn positive again until after the year 2039! That’s 23 years from now. The same indicator explains why the echo boom in Japan never caused a bounce in housing, even 25 years after its all-time bubble highs and 60% crash.

What we’re seeing today is simply the “dumb money,” particularly the everyday household from the millennials, finally buying after holding back for years, now that they feel the risk of another housing downturn is waning.

But the “smart money” is retreating from the highest-end real estate in bubble-cities like London, Manhattan and Miami – with more of them to follow. They see the risk of another downturn. By Harry Dent, author of the new book, How to Survive (and Thrive) During the Great Gold Bust Ahead, where he warns investors that moving their assets into gold isn’t the safe haven they think it is – and why it won’t protect them from the biggest market collapse since The Great Depression. Get a free copy of his eBook here.

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  42 comments for “The “Dumb Money” Is Finally Buying New Homes, Just as the “Smart Money” Exits

  1. Bookdoc says:

    I guess I got lucky-I landed up selling my mother-in-Law’s house in March closing in April. It was 50 years old in a nice neighborhood and I got $315000 for it. She had passed the previous year and I had financial responsibility. We got lucky enough to find a good elder law attorney who set up the POA and trust as her memory was starting to go. When she did pass, things were immensely easier to handle. If you are responsible for an elderly relative, and a lot of us boomers are, consider someone like that.

    • Paulo says:

      Warning…..Off topic but about property:

      We are on our 2nd go-around doing exactly that. People need a will. People need a care plan. And people need to have the harsh and sometimes impossible talks with aging parents before rapid decline sets in. In the case of my in-laws, my wife and her sister were put on their bank accounts a few years ago, RIFFs and RRSP accounts were organized. And a big plus was moving all accounts to an institution located nearby to us.

      It really helps when you have POA and are making decisons on your folks behalf to be able to make an appointment and talk to someone face to face about the issues.

      We followed the game plan used years ago when I dealt with my Mom’s issues. We first met with an accountant and a lawyer and then mapped out a plan. This was in BC Canada. Every State/Province has different rules and responsibilities. Early groundwork makes an impossible issue, doable. This includes guarding their assets from relatives and others trying to take advantage.


      • Ras Moyag says:

        The POA sounds great and works great in that wonderful magical rose coloured world. Then you find out that charming delightful thougtful considerate sister who was appointed sole POA is actually a nefarious, slimy, deceitful, underhanded, cheating capital B. And you never ever find out what happened to the assets because the costs of litigation are too big, you can’t live long enough to see the end of the court battle even if you can afford it, and there are no assets left in any case to fight about. But long live the POA in conventional financial planning.

        • Paulo says:

          Maybe. I am sorry to hear about that experience. In my case my brother and I both have POA. We consult with each other on all decsions and both of us on are on all bank accounts. With my wife, she and her sister have patterned their situation on what I have done. It works, but then again we are making it work with the first priority parents.

          I guess you are right that the agreement is only as good as the people involved. I have another sibling who would echo what you have encountered. We are forced to keep him at arms length as he would have spent every last cent of my mom’s on his needs. In fact, his mooching forced us to take over all banking in order to protect my mom’s assets. I think we have done this for the last 12 years, or so.

        • Lee says:

          Yeah, welcome to the club.

          People get ‘funny’ when 8 figure sums are involved………….

  2. NotSoSure says:

    Judging from Wells Fargo recent 3% down payment initiative, the party can still go on for a long time ……………..

    • TeeJay says:

      And that’s just part of a very disturbing trend I see – many businesses these days are getting just plain DESPERATE to maintain their sales by offering ridiculous incentives. One local car dealer advertises constantly on the radio that they will get you into a new car with just $6 down, and more are advertising crap like “We’ll make your first two payments”. Furniture and other stores offering not only zero percent, but no payments for the first x months.
      To me, these moves are bad for both retailers AND consumers, but this reflects the current state of our economy.

    • nhz says:

      Downpayment, are you joking? In the Netherlands we still have 103% mortgages as the norm (down from 110% some years ago, and sometimes even 150-200% around 2000 …).

      And the US still lacks most of the crazy homeowner subsidies and tax incentives that the Netherlands has. Never underestimate what politicians will do to keep the party going for the largest chunk of the voters. In many countries in the developed world homeowners with a big mortgage are a bigger group than renters (who pay out of their own pocket, not counting those in social / free housing).

    • Lenny says:

      Countrywide said the same thing in 2004

  3. VegasBob says:

    It ought to be noted that the 619K figure is a seasonally adjusted ANNUAL rate, and not a monthly rate. Divide that by 12, and it means about 52K sales (more or less, depending on the seasonal skew) took place in April, which is the busy selling season, in a nation of about 320 million people. That’s about 1 house per 6000 people…

    Also, this is LESS THAN HALF of the annual sales of the peak bubble year of 2005 or 2006, and has been achieved only with historically low interest rates.

    But NotSoSure has it right. Wells Fargo is rolling out 3% down payments, so the party is just getting started.

    My guess is it won’t be long until no-doc NINJA loans are back. I guess we’ll find out soon enough whether stocks crash first or housing crashes first.

    • economicminor says:

      Recently I saw a chart showing that overall consumer debt has again reached the level it was prior to the 2008/9 crash. Add to this that wages have not gone up. Add in the recent figures on retail sales and sales to inventory levels. Add in Obamacare and the other tax and service fee increases we’ve seen since the last debacle.

      My guess is that we are close to if not exceeding peak consumer debt levels again. The decline in retail sales and raise in inventories should start the layoff machine going again. After all, we are not France.

      I agree with Harry, How much longer can this go on? China is already in a significant down turn and I understand they have been a big force in both housing price increases and commercial space.

      Today, tomorrow, next week, next month, certainly not until after the elections.. but maybe.. Sure wouldn’t want that job from what I am seeing coming our way.

      • Petunia says:

        Since I’m in a new area I have been exploring the local shopping areas. I have noticed in the past couple of months that the prices in the discount stores have increased significantly. At first I thought it might just be particular stores, but now I can see they are all more expensive. It is almost as if they have added $1 to the price of everything.

  4. BradK says:

    Their demand will simply not be enough to offset the retiring baby boomers who eventually die and become sellers by default.

    But what of the boomers who leave their paid-off home to their children? Even if there are multiple heirs who have to sell off the house and split the proceeds?

    What we may be seeing is just a delay in historic inter-generational wealth transfer as boomers are living longer than their preceding generations did. And want to die at home rather than in a warehouse.

    • nhz says:

      What I’m seeing in my country (Netherlands) is that more and more homes remain empty and are used just for speculation – which of course helps to drive up prices and make new buyers even more desperate. This is especially true for many inherited homes (plenty of opportunity for wealthy parents to transfer the home tax-free to the children, or use their capital to provide a tax-free gift for buying a home).

      And in Europe you can add to that the influx of millions of migrants who are all entitled to a free home. I’m sure politicians love this to keep pressure on the housing market (and even more on the rental market, where migrants with their unlimited government-provided housing budgets crowd out almost everyone else). It could happen in the US as well (although not under Trump I guess …).

    • Petunia says:

      My in laws passed away in the last couple of years. My mother in law was in a hospice for almost two years. They owned a condo worth less than 50K. Medicare will get everything they had, which wasn’t much. It is disgusting that a couple that raised five children and worked hard their entire lives, can’t even leave the little bit they have to their children and grandchildren. It isn’t about the money, because obviously they didn’t have any, it is about the rapaciousness of the system that is disturbing.

      • Bryan says:

        They had a lifetime living in the richest country the world had ever seen during the richest time in that country and they only saved $50,000 for retirement. Why do you think that I as a taxpayer should subsidize them so that you can get the little money they did save?

        • JerryBear says:

          You sound like one of the 1% who is totally out of touch with how the 99% actually lives.

  5. Randy says:

    I don’t think Dent’s interpretation is correct. The annual numbers jumped from an annual rate of 511,000 based on March sales to an annual rate of 619,000 based on April sales. This is typical National Association of Realtors numbers. Based on seasonally adjusted numbers the sales jump from March to April represents a 23% jump in annual figures based on one month experience. Everyone gets all excited about this new fabulous trend. Well, it’s not; not based on the most simple analysis (which is all I’m capable of). The NAR always does this, they find phoney ways to inflate the numbers. Back in 2007, the chief economist said the downturn is only temporary and we’ll pop right back in 3 or 4 months. That’s NAR for you. But Dent is trying to sell his book so he picked up on an incorrect theme that the dumb money is filling in for the smart money that’s getting out. The only money that’s been in housing in the past years is cheap billions given to housing speculators who are trying to rent the damned things out.

    • Randy says:

      The whole thing has been a dead cat bounce. There’s no life to it.

      • VegasBob says:

        Here in my retirement community in Southern Arizona, one realtor has held 3 open houses over the past 2 months for a 40K 1BR condo with not even a nibble. The unit next to me at 42K has already had one sale fall through.

        So I’m not so sure this new real estate bubble has much life left in it.

        It should be interesting to see whether the stock market or real estate blows up first…

        • nhz says:

          There seems to be a lot of life all over the world in the speculation hotspots where the free money for the elites ended up. Often the big price jumps are in just a fraction of the country and outside those RE hotspots price gains are tiny and prices are still below the top of 2008 (or 2000, in some countries).

          I’m pretty sure the stock market will blow first, if only because it is FAR more liquid (despite central banks owning an ever bigger chunk of the pie).

  6. frederick says:

    exactly Randy İ wouldnt buy into it thats for sure but if they do more QE İ suppose everything can go higher into bubble territory

  7. Silly Me says:

    It would be nice to see how many of the buyers are from China. Many Chinese are salvaging their illegal revenue in North-American real estate.

    As incomes have collapsed in the US, not much disposable income has remained. We are witnessing the death of our country in a worldwide race to the bottom.

    • Chhelo says:

      We just sold a townhouse we purchased to put our 2 sons through college. We kept and had rented out for a few years past then.

      Decided to sell and use the proceeds to pay off our mortgage on our home. Quest to live a debt free life from here on out. All we owe now is property taxes (immorally very high in Texas), utilities and upkeep.

      Townhouse appraised at US$150,000 and we sold for US$160,000 to a Chinese investor buying properties close to the university. All cash deal that closed in 2 weeks.

      Looks like even Texas real estate is in the Chinese crosshairs.

      • Wolf Richter says:

        Thanks for the info on the buyers. We’re hearing more and more of this. Texas has become a destination for Chinese buyers. And many intend to send their kids to school there.

      • EVENT HORIZON says:

        I have always been bothered about the concept that foreigners, non-citizens, can buy real estate in our country.

        Should not American land be owned by Americans? Call me odd, but there is something bothersome about Chinese buying “our” homes and houses, etc.

        Maybe we can let them do it, but charge a huge “tax”, like 100% of the purchase price/appraisal and this money is used to decrease property taxes on one’s primary home.

        • Intosh says:

          Don’t expect the government to work for its people — it’s about the money. In Canada, rich Asians own the best land (Vancouver). All about the money. Doesn’t matter you people worked hard to build your country, those traitors see no problem letting foreigners come in and grab the best spots. Ironically, Chinese call these traitors: crooks who sell off their country.

          (Of course, it’s not only rich Asians, but also rich Russians and rich middle-eaterners.)

        • Nicko says:

          Globalization is a two way street. Of course, China plays by different rules, but the number one reason the US is so attractive is precisely the ease of doing business, including buying property.

        • Paulo says:

          We were never to crazy about Americans buying up our BC waterfront. Then again, Floridians say the same thing about Canadians!!

          Like everything, you have to stake your claim early and be lucky.

        • Lee says:

          Don’t know if this is true, but:

          “As if Australia’s property markets didn’t have enough to contend with, considering consumer confidence is falling pre-election and foreign buyers are pulling out of our markets as banks make it harder to get finance, now the Australian Taxation Office (ATO) has delivered another blow for those dealing with properties valued at more than $2 million.

          In a measure to crack down on foreign property owners avoiding foreign capital gains tax obligations, from July 1st 2016 when a foreign resident disposes of Australian real estate (and certain other assets), the purchaser (not the seller) will be required to withhold 10% of the purchase price and pay that amount to the A.T.O.

          But before you say “That’s O.K. – it doesn’t apply to me, I’m not a foreign resident”, you may be surprised…

          All Australian sellers of $2 million plus properties will be classified as overseas investors which means that all buyers of properties worth more than $2 million will have to withhold 10% of the purchase price and rather than giving it to the vendor at settlement and remit this sum to the A.T.O. unless they get a special tax clearance.”

      • Jon Laughing says:

        Only in Amerika do you have to sell your real estate to put kids through college. The land of the free, home of the brave. No responses please from commies or socialists – you probably went to a University in your home country that didn’t have tuition fees.

    • nhz says:

      Wealthy Chinese buyers are a factor in some speculation hotspots in the US, Canada, Australia, New Zealand and possibly some other countries. But the same housing bubble dynamics are present all over the Western world, usually without any significant Chinese buyers.

      Incomes in the West for the 99% have collapsed but debt is cheaper than ever.

      The problem isn’t the Chinese, the problem is central banks and their easy money policies, with oceans of new money sloshing around the world. BTW, I guess that many of the current cash buyers, whether Chinese or other nationality, are crooks and criminals e.g. all those corporate managers who got filthy rich from buying their own stocks with central bank money. And many of the current other buyers who buy with OPP are crooks in another way: they are buying homes they cannot really afford but feel entitled to it anyway. They just think they are a bit more clever than everyone else and will get away with it.

    • Captain KurtZ says:

      Neo-liberalism lead us to neo-feudalism

    • roddy6667 says:

      Word is that the Chinese buyer phenomenon is already fading. Who will rescue the housing market next?

  8. c smith says:

    “But how much longer can this trend continue?”

    Assuming we’re going to enact all the same idiotic, cycle-extending, credit inflating policies we did last time (which is what desparate politicians do), it can last A LOT longer than you think, Mr. Dent.

  9. michael says:

    Creative and low % down financing are a sign post of the end not a start. This means they are running out of qualified bag holders. We are much closer to the end. In six months the data should be clear.

    • nhz says:

      the Netherlands has had zero down (in fact negative down) financing for homes for over one generation now. Along the way more and more crazy subsidies and incentives for home buyers were tagged on. and the bubble is still growing. Sign of the end? Doesn’t look like it …

  10. d'Cynic says:

    This blog is about economy, but economy being the twin of politics, politics inevitably creeps in.
    So the question is, how much did the political index deteriorate since 2008?
    I give a 50-50 chance that the next Lehman moment will come from politics.
    The calendar is thick with events that can upset the apple cart:
    1. Brexit
    2. US presidential elections 2016
    3. French presidential elections 2017

  11. Kreditanstalt says:

    “Inventory (for sale) is falling”??

    That jives with a)housing ownership is being ever more concentrated among the well-off, who do not need to urgently sell; and b) ‘buy-to-rent’ (or speculate) has been sucking up available housing…

    Just more concentration of wealth. Thanks, government/Fed…

  12. Good news says:

    Pathetic resentment at a growing sector.

    The trendline has not even normalized, and you all are saying it cannot be a boom because you cannot afford a house.

    Go back to the tenements, chuckles. You are not even in the game. The economy is just about to take off, and in your misery, you do not even see the upside that is about to happen.

    One clue: tight inventory means there is demand. Just because you are not buying does not mean others aren’t.

    • Wolf Richter says:

      Gosh, I can’t even remember how many hundreds of times I heard and read that sort of language in 2005 and 2006, just before the crash. No one said this in 2012 or 2013. Or in 2002 or 2003. This sort of language shows up at around the peak of a bubble. Thanks for posting it.

    • nhz says:

      there is a big difference between genuine demand (people who need a home to live in, or to rent out for profit) and speculative demand (the 1% buying extra homes to stash their cash, or just for speculation) fueled by central bank easy money policy.

      Once the speculative demand is removed most housing markets will come crashing down beyond imagination.

Comments are closed.