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The New Housing Bubble

By LINDON, Utah - August 15, 2019 No Comments

The real estate market is back in a big way, but that also means that home buyers need to be wary. The Case-Shiller Home Price Index repeatedly hit record highs in 2019, so there is a real risk of buying into a bubble. We might even see a repeat of the Crash of 2008 if it looks like taxes are going to rise. As the new housing bubble grows, it increasingly makes sense to keep saving and wait to buy later.

Most Americans expected that President Trump would be great for the real estate market, and we were right. The median home price is now around $320,000, up over 50% from the lows reached back in 2009. Housing construction is booming, especially in the Western United States. Here in Utah, we led the nation in new home construction with 2.2% annual growth. We can't keep up with demand despite this building boom, and prices keep rising.

The Case-Shiller 20-City Composite Home Price Index is probably the best overall measure of housing prices, and it keeps hitting new highs. The home price index zoomed up from 100 to 200 during the original housing bubble. After the crash, the index remained stuck below 150 between 2009 and 2012 before taking off. As of May, the Case-Shiller Home Price Index stood at a record high of about 216. We are back in bubble territory, and we know what happened last time.

Home buying can be dangerous because the government subsidizes the same high leverage in real estate that it outlaws in the stock market. Americans are required to fund at least 50% of an initial stock investment with cash. Putting down just 5% on a home mortgage is common, and 20% is considered conservative. Never forget that housing prices plunged more than 30% during the last crash. Millions of hard-working Americans saw their home investments wiped out and turned into liabilities.

Doing the right thing is usually difficult, and putting off homeownership is no different. Rising rents and the temptation to chase past gains make it that much harder. High rents are a sure sign of high prices, and they both fall together too. Paying high rents is ultimately far less expensive than trying to get out of an underwater mortgage. One solution is to save up until you can afford 20% or even 50% of the purchase price of a home. That way, you can avoid bankruptcy if there is another crash.

I certainly understand the fear that inflation will eat into your savings before you can buy a home. Fortunately, a savings plan that includes precious metals can protect you from inflation and market crashes. Gold and silver are real assets like houses, and they are still undervalued. Remember, the home of your dreams will eventually be within reach. It might happen sooner than anyone expects because the new housing bubble could collapse at any time.