US passes a tipping point

The US market has passed a tipping point. I’ve been preparing market research and due diligence with my man on the ground – Brian Payton. Here’s a bit of an overview, as my gift to you.

If you want the full run down – and insight into Brian’s proven system, it’s not too late to get in on our special FREEDOM CASHFLOW USA event.

Here’s the most exciting chart you’ll see all week. This is household formation in the US. It’s spiked big time.

Households are back!

When you leave your old place (your parents or your ex-partner’s) and start a new household, you ‘form a household’.

What we saw in the US is that around the GFC, household formation tanked. I doubt this was so much about couples sticking it out ‘for the good of the budget’ as it was about kids just staying at home longer.

Kids just couldn’t afford to get their own place, or were pushed into more study by a weak job market.

Or maybe the outside world was too scary compared to the comfort of the family nest.

And you can see it in the ownership statistics as well.

Total home ownership in America has fallen to the lowest level since the mid-90s in recent years. Brian says that this is becoming a hot-button topic in American politics. Everyone’s angry about it. We can expect to see some policy action in the near future.

But that fall has been driven by a collapse in home ownership in the under-35 segment. At 36%, it’s the lowest level on record.

Downturns always hit first home buyers hard.

But it seems we’re turning a corner. As the first chart shows, household formation has spiked in recent months.

It seems the outside world doesn’t seem as scary as it once did. Kids are emerging from their parents’ basements and going it alone.

And they’re feeling a lot more optimistic because the labour market in the US has turned. Suddenly, the employment outlook is positively sunny. In January, the labour market posted the biggest employment gain in 8 years!

That’s translating into more job-stability, and improving wages. Income is currently growing at around 6% pa, also one of the strongest results in recent times.

So I think this marks a turning point in the US property market.

The initial recovery in prices was driven by investors. Bargain hunters like Warren Buffett (and me!) were active in the market, which in their eyes (and now with the benefit of hindsight) had significantly over-corrected.

But now we’re seeing households start to get in on the game too. And this will be driven by first home buyers and the younger generations – which have effectively been sitting on the sidelines for the last 8 years.

And they’ll be spurred on by politicians trying to correct the ‘tragedy’ of falling ownership rates.

We’ve already seen a good start. The government is rolling out 3% deposit loans through Fannie Mae and Freddie Mac.

In Australia, we’re talking about caps on high-LVR lending. In America, it’s official government policy!

But after 8 years on the sidelines, and a whole lot of foreclosed mortgagees effectively in the penalty box, there’s a massive amount of pent up demand just waiting to be unleashed on the market.

It is true household deleveraging may not have finished. But we’ve seen household pay back a tonne of debt, and debt-to-disposable income ratios are back around levels last seen in 2004…

Could it go further? Maybe, but there’s no way we’re going back to 90s levels. That was at a time before financial sector liberalisation had kicked in, and interest rates were double digits.

So to me, you’d have to think that deleveraging is all but over. That will put a floor under household borrowing, and add growing support to house prices.

Mortgage credit already seems to have turned a corner as well. It’s posted negative growth pretty much since the GFC, but in recent months, has started growing again.

But still, there’s a long way to run here as well.

All this suggests to me that there’s still plenty of upside. It’s still very early days in the recovery.

And for my money, you’d have to think that the existing segment is the one to gun for.

Existing homes (compared to new homes) had much more support through the GFC. There were much bigger declines in new home sales than existing homes.

This means we should see stronger price support in the existing segment. It is likely that there’s still a bit of slack to work through in the new home market.

The other thing to keep in mind is that although household formation is up, this doesn’t translate into an increase in purchasing demand straight away.

Because most people don’t go straight from mum and dad’s basement into their own property. They often spend a few years in rental accommodation or sharehouses before taking the plunge.

That means we should see a surge in rental demand come through before the surge in buying demand kicks in.

That’s good news for investors, because that should give rental prices and yields a boost in the immediate term.

And capital growth in the longer term.

Make no mistake about the opportunity that’s on offer here. The great recession caused a massive shakeout in US property.

You always want to buy at the bottom, and it doesn’t get more bottom than this.

(Well, ok, you really wanted to get in a couple of years ago – when I did, but there’s still a lot of juice left in the deal.)

And it’s exciting because some of the price points are so accessible. You can get quality properties in some areas for like $50K.

And have them pay you yields of 20%!

Show me any market in Australia where you can do that.

There is still a massive BUY over US property. My advice is to get in while you can.

But, as always, make sure you know what you’re doing.