I have long been of the opinion that buying a house in the current market economy is a wrong move – and that renting until the real estate market finishes tanking is a better move.

However, a lot of people have been lulled into the market by the Federal government homebuyer tax credit, and the fact that there are a number of homes for sale right now that look like steals compared to what they were priced at only a couple of years ago.

That’s dangerous thinking…and I’ll show you why.

My number one mantra in economics is to ALWAYS follow the credit market first and foremost.  EVERYTHING else drives off of that.   I want to show you a Federal  Reserve chart that shows outstanding loans at commercial banks:



The first thing that you should be noticing is that the amount of loans had been dropping precipitously since late 2008 (by about $800 billion).  The next thing that you should notice is that there are two huge spikes up on this chart – one around September 2008 and the other within the last week or two.

What does that latest $400 billion+ spike mean?  If you’ve been reading the Economic Update for any length of time then you might think it shows a large increase in new lending – which is also the equivalent of new money circulating in our economy.  This is the way that the precious metals markets have been interpreting it for the last week or two – and they’re completely wrong.

That $400 billion+ of “new” loans are actually loans that the bankers were already carrying “off balance sheet”.  Basically, they set up “side” companies to hold the bad paper so that they didn’t have to report it to their shareholders or on their SEC (Securities and Exchange Commission) filings.

The FASB (Federal Accounting Standards Board) just released two new rules that are forcing banks to bring some of their “off balance sheet” holdings back onto their “official” balance sheet.  We see that this affected over $400 billion of holdings.

Here’s what should be learned from this move:

1) It is by no means inflationary.  It was existing money (debt) that got reclassified.  The precious metals market is treating it as an increase in the money supply, which would be inflationary and cause the price of gold and silver commodities to rise.  That market will learn soon enough that they have interpreted things wrongly.

2) Most of the “reclassified” money (debt) is based around unsecured loans instead of secured loans.  This means that banks have to cover that amount somehow.  We’ve had a long period of time where people have been “under water” on their home mortgages and simply stopped paying them – knowing that the last thing banks wanted to do was foreclose on them.  This added a tremendous amount of “discretionary” income into the economy, since people took money that used to go for their mortgage and spent it on other items.  They lived in their homes mortgage and rent free – some for over two years.  That party is nearing completion.

Banks are now foreclosing at a furious rate – sometimes in as little as three weeks.  This is just the tip of the iceberg.  We see news reports today that the rate of foreclosures is now at a five year high.  What they don’t really tell you is that they have only been keeping those records for five years.  In other words, they are at an all-time high as far as we know – and it’s going to get worse, much worse.

3) What happens when the vast “shadow inventory” of foreclosed homes begins to get dumped into the real-estate market?  Inventory goes up, while demand goes down.  What effect will this have on home prices?  They will get further demolished.

It is my opinion that many people have made a very bad mistake in chasing the tax credit and feeling “pressured” to get into a new home before the credit expires.  It does not take much of a market move to see that “tax credit savings” disappear before their very eyes.

One should never look at current home prices with respect to the “savings” off of previous home prices.  Instead, the question should be asked as to whether current home prices are still too high in this economy.  The answer is a resounding YES!

Everyone is excited because inflation is being kept “in check” – thinking now is the time to buy before prices begin going back up.  That’s great thinking – if inflation was our concern.

The ravages of deflation have not finished.  In fact, it has barely begun.  Let’s use Japan as an example.  We’re seeing news reports today that the Japanese government is considering a devaluation of their currency by 30% in an effort to stop their deflationary spiral and introduce inflation into their economy.  There’s only one “tiny” problem.  The government of Japan would make matters much worse unless the Bank of Japan (their central bank) printed up a whole lot more yen.  That’s not going to happen.  The international bankers have Japan by the throat, and they’re not about to release their grip.

Japan is us in the coming months and years.

Folks, don’t be fooled by the stock market.  There is absolutely NOTHING backing up the rise in share prices that we’ve been seeing.  Watch the credit market – it tells the real story.

Your comments are appreciated…

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