Does Real Estate or Gold Have a Brighter Future?

Includes: GLD, SLV
by: Doug Eberhardt

Every once in awhile, I keep tabs on what's going on with real estate. I have friends and clients who will ask me my thoughts and I try to analyze what's going on in real estate with a non-biased approach, as opposed to your typical real estate agent. I approach gold and silver the same way, sometimes giving reasons why short term, the price may fall. There are many more reasons why gold and silver will be much higher in the future compared with real estate. Anyone who is thinking about buying real estate now better have a good reason because the data show the propensity for still lower prices ahead.

This article will look at what could possibly drive real estate prices lower in the next few years and is meant to help people look seriously at why they even need to be buying a home in an economy that is destined for more trouble.

I'm not unbiased about the future of the U.S. economy. The data tell me there are many problems that will surface, most with the word "unsustainable" associated with them. The data also tell me gold is the place to be when compared with real estate.

The areas I will look at today concerning real estate are the unemployment outlook and consumer confidence. In a future article I will address Bank accounting and derivative practices and revisit whether our economy is still turning Japanese, which has experienced 15 year lows in real estate prices.

The Unemployment Outlook

Is Unemployment Improving Or Are The Unemployed Just Not Counted Any Longer?

It is well known by some that there are two unemployment figures, the government's current numbers and the government's old numbers, when they count those who want a job but are "discouraged" and haven't found one in the last 12 months or longer. Government will always do what's in its best interest. For examples, eminent domain, changing the consumer price index (pdf) or changing the way it calculates the number of unemployed (pdf). We The People be dammed.

So what is the real employment situation like? Why do the numbers for "long term unemployed" only go to 27 weeks with the Bureau of Labor Statistics? What do their own statistics tell us (the stats they haven't hidden from view yet)?

The following table reveals the truth. The long term unemployed have grown about every month since March of 2008, the beginning of the financial crisis. Where have all these unemployed people gone? Did they get jobs or just disappear into never never land, never to be counted again? Notice they make up a greater and greater percentage of the unemployed.

Historical data for this table

Ask yourself, can short term employment statistics improve if you no longer count the long term unemployed? Of course they can. And that is the only reason the unemployment rate has fallen of late.

Use of Food Stamps Paints A Clearer Picture

If the unemployment rate is falling, why are there more and more people applying for food stamps? Food stamps are now used by 44.1 million people, or 13.1% of the population, up from 9% in October 2007. Idaho is up 42% from 2009 and Nevada saw a 25% growth in use. Nevada's unemployment led the nation at 14.2% in January, compared with 3.9% in November 2006 according to the Wall Street Journal article. Is it any wonder Nevada real estate shows no sign of recovery?

Government programs, paid for by tax payers or budget deficits, have resulted in some growth in a few sectors of late. But all of these are temporary in nature. To think real estate is going to all of a sudden improve because of temporary government programs that provide jobs in construction or green related fields is fantasy thinking. These jobs will end and the unemployment numbers will rise.

(Click charts to expand)
The chart above shows that 92% of the funds from the 2009 Reinvestment Act have been exhausted. Will the government have the Fed print more money to continue this employment project? At what cost to the U.S. dollar? 582,089 jobs were created in October through December in 2010 from this program. What happens when the last 8% of the funding from the 2009 Recovery Act is exhausted?

A government can only play the game of stimulus for so long. Sooner or later it has an effect on the currency. That's why you need to be diversified into gold and silver to counteract this past and any future stimulus.

It takes a job to own a home. If the number of unemployed is still increasing, along with the number of Americans on food stamps, what does this do to demand for real estate?

Consumer Confidence Waning

December 2010 saw house prices fall and consumer confidence slip. By February 2011, we saw consumer confidence actually rise, hitting a 3 year high.

You may recall that 3 years ago, the beginning of the financial crisis was upon us and it has taken consumers three years to actually feel good again. The stock market was breaking out higher and when people opened up their 401k statements, their perception was that they were wealthier and they felt better because of it. But advisors in February were not feeling confident according to the Advisor Confidence Index (ACI). The consumers are always the last to know (not all of you of course).

The same people feeling the euphoria about seeing their 401ks recover are now wondering whether they should get out of the stock market this time, before any more problems arise. I'll save that analysis for a future article.

By mid March of 2011, 68% of Americans felt that the U.S. is in a recession, according to a Rasmussen poll. The March 29th Consumer Confidence report showed a fall 8.6 pts to 63.4 from a high in February of 72 as expectations about jobs and income growth worsened.

Recall that in March of 2008, the Consumer Confidence report hit a 16 year low, dropping to 70.5. Subsequently the bottom fell out of the market as everything crashed. What would a second coming of a financial crisis do for real estate? What would it do to the price of gold this time? Real estate and the stock market crashed in 2008. Physical gold finished the calendar year higher.

Consumer confidence has a lot to do with the future economy. If consumers are not out there spending because they are pessimistic about the future, this does not bode well for businesses in general. Another round of layoffs could come, putting even more pressure on real estate prices. Meanwhile, gold is the only asset that has appreciated in price the last 10 years running. Yet only 1% of pension funds are invested in gold. Those with 401ks are not given the opportunity to invest in gold, but there are ways to do it by simply talking to the plan administrator and demanding it.

With the employment picture bleak, and consumer confidence trending lower, it doesn't bode well for the future appreciation of real estate. Is the American Dream of owning real estate still alive when there is no future appreciation in sight? At least with an investment in gold you have full liquidity at any point in time. The best laid plans of mice and men (and women) may be to own gold now, and sell it when it is much higher and real estate prices have fallen to a level that will rise with the rebounding economy. This is still years away, which I'll analyze further in a future article.

Disclosure: Long Physical Gold and Silver