Bill Fleckenstein on investing pioneer John Templeton, who is a mega-bear on equities and real estate:
Moving on to housing prices, Sir John comments: “Every previous major bear market has been accompanied by a bear market in home prices. . . . This time, home prices have gone up 20%, and this represents a very dangerous situation. When home prices do start down, they will fall remarkably far. In Japan, home prices are down to less than half what they were at the stock market peak.” Sir John adds, “A home price decline of as little as 20% would put a lot of people in bankruptcy.”
Sir John also had a few words about debt -- a four-letter word that folks seem not to care about: “Emphasize in your magazine how big the debt is. . . . The total debt of America is now $31 trillion. That is three times the GNP of the U.S. That is unprecedented in a major nation. No nation has ever had such a big debt as America has, and it’s bigger than it was at the peak of the stock market boom. Think of the dangers involved. Almost everyone has a home mortgage, and some are 89% of the value of the home (and yes, some are more). If home prices start down, there will be bankruptcies, and in bankruptcy, houses are sold at lower prices, pushing home prices down further.” On that note, he has a word of advice: “After home prices go down to one-tenth of the highest price homeowners paid, then buy.”
Meanwhile, real estate “experts” here in the Midwest continue to tell home buyers that “a home purchase is a great investment.” Dare they speaketh that a home is merely a durable consumer good! The favorite line of misinformed home buyers is: “Our real estate agent said we can turn around and sell the house for $25,000 more than we just paid for it.” So why aren’t we all investing in real estate then, looking for those quick turnarounds? Perhaps because we know better.
