Housing's Still Overvalued & Silver's Still Cheap

(Sell your House and Buy Silver!)

Silver Stock Report

by Jason Hommel, July 1st, 2009

So far, out of 80,000 readers, nobody has asked me when the housing collapse will end.  Funny.  I might be regarded as knowing something about that, since I called it in advance, well before the peak, 5 years ago:

Overvalued Housing, Bonds & Stocks July 2, 2004

The lack of questions is a sign that the housing collapse has a long way to go, because, generally, people are still in the first stage of mourning the death of the housing boom:  denial.  Nobody can ask "When will the housing collapse end?" if they can't admit the phrase "housing collapse".

After Denial, next in the stages of mourning comes Guilt.  Then Anger.  Then Depression.  Then Acceptance.

Unfortunately, people don't start asking questions until they get to the anger phase, and they don't start doing anything about it until the acceptance phase. 

Let me help you get there more quickly.

Denial:  Wake up!  Housing prices will NOT soon stop going down, since in many locations, 10% of all properties are 90 days past due on their mortgages, and those foreclosures have not yet hit the market, and they will.

Guilt:  You should have known!  Government intervention into the economy always creates distortions, and government sponsored home loans through Fannie Mae and Freddie Mac and corruption at all levels gave everyone with a pulse and the ability to lie to qualify for a home loan, that extra and excessive buying power created the top, and this was easy for anyone to see.  Why didn't you see it?  Were you asleep?

Anger:  But good intentioned democrats who wanted to help their poor constituents achive "the American Dream" of home ownership did nothing of the sort, they helped enslave poor people into debt, not true ownership, due to government meddling.  It's the government's fault!

Depression:  But what can you do about it?  Nothing!  No matter how much you work on your yard or keep your neighbors mowing their lawns, or no matter how much you write your congressman, and regardless of electing Obama, home values will continue to go down, and there's nothing you can do about it.

Acceptance:  Well, there is one thing you can do.  Sell your house!  Get out of the way of this oncoming train wreck in motion.

The government is doing everything they can to stop it, but they will fail.

Everyone should know by now that the government is buying up the "toxic assets" of the banks, meaning, the mortgages that are worth more than the homes are worth.  Government bought at the top, and they bought the worst of the "assets". 

The housing crash will end when the government finally sells all of their housing, and "exits" the market.

That's what marked the bottom of the gold market.  When the governments of the world were hell-bent on selling as much gold as possible, back in 1999-2001, when gold bottomed at $250/oz.  They are still selling gold, but not as much, since they are running out of gold to sell.

Government intervention always distorts markets.

Housing topped, because of excessive government-backed loans.  See, government was really buying housing on the way up, creating the top.  The continued government buying, through bailouts, means we are still at the top. 

Government buying created the top.

Therefore, government selling will create the bottom.

Tell me when the government, or Fed, will sell all their "toxic" mortgages, or forclose and sell the houses that back them, and I'll tell you when the housing market will bottom out.

Government dumping of all mortgages and housing could be a long way off--perhaps decades.

If we are fortunate, housing prices will drop 50-75% in 4-8 years, and it will be over quickly.  That is unlikely, and would require the election of somebody like Ron Paul as President.

More likely, due to continued government intervention, as is taking place, the housing collapse could last another 20-30 years. 

Yes, 70% of home sales are either short sales or foreclosures.  However, this only means that some banks are selling.  Most of the government mortgages are not being sold, and most of the homes owned by people are owned with mortgages, meaning, on leverage, and these are not yet being sold either.  Just wait until the public starts dumping homes, AND the government starts dumping at the same time.  Then, you will really see a housing crash.

A "normal" housing market will have most homes selling for far LESS than construction costs.  After all, homes deteriorate, and a 20 year old faucet is not nearly as nice, or functional, as a new one.  People know how to "write off the depreciation" of a home on their taxes, but this generation does not yet seem to understand that real homes, do, in actual fact, depreciate, as a normal function of real life!

If a new car can lose 20-30% of the value the moment it "drives off the lot", why is that not also applicable with homes?  It should be the norm.  When it's not, it's a bubble.  Housing is still a bubble.  Grossly overvalued.

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I've been reading and writing about silver for 10 years now.  Sometimes, it's hard to "come up with something new" about silver, and so, sometimes I touch on real estate, or oil.  But I think I have an new and important insight to share. 

My education about silver has mostly come from other men who are writing today, who have 20 to 60 years of experience in precious metals, and it comes from my reading of history, and, of course, from my readers. 

The historical perspective is important, but sometimes, things get forgotten by historical writers as people forget over time, and yet, knowldge is gained over time as humanity advances.

Back in the depression in the 1930's, silver was valued at around 29 cents per ounce, yet that silver was turned into U.S. silver coinage that was valued at around $1.40 per ounce!  That silver thus formed the "backing" for the currency; as it was the currency, but it also formed the backing for the paper currency.  In other words, paper could be "redeemed" or "exchanged" for silver currency, and thus, it was said that silver "backed" the currency.

Unfortunately, writers in the metals community lost some perspective on that by 1964, and I believe that negatively influenced my thinking for years.

They wrote statements like this, and see if you can see the inconsistency with the facts above: 
"After 1964, 90% silver coins were no longer issued, and silver no longer backed the currency.  Thus, without any possibility of redemption, people were forced to hold unbacked paper money, or trade their dollars for other fiat paper currencies, as there was no safe haven."

Or they would write:

"After 1964, 90% silver coins were no longer issued, and silver no longer backed the currency.  After that, paper money could be exchanged to buy silver only at excessive premiums which discourage trade.  See, when silver was money, you could exchange a $1 of paper, for a silver dollar, at zero cost, paying no premiums."

BUt silver was not valued at $1.40/oz. the entire time that silver was used as currency in dimes, quarters and half dollars for 173 years or so, but as low as $.29/oz!  The silver that you could get, when turning in your paper, was up to 400% overvalued, as $0.29 x 5 = $1.45!

These days, we all know a bit more about silver premiums, which is the extra price you pay, over spot, to buy silver.  In the last year, premiums for silver coins and bars have ranged from about 50% down to about 5% over spot.

My math tells me that 5-50% is much less than 400%. Wouldn't you agree?

Thus, silver has a much lower premium today, than when "silver was US coinage".

I've written on this before, but here's the insight. 

If silver, at 400% overvalued, can "back" the currency, then don't we have a de-facto "private" backing of the currency if you can actually buy silver from private dealers for much less, ranging from 5% to 50% over spot?

Yes, we do.  Interesting thought, isn't it? 

Here's something else.  Over 100 years ago, before the founding of the Federal Reserve which issues all paper money, there were privately issued paper money called dollars.  But who issued them?  Various banks.  Each bank would issue paper dollars that said it was issued by each bank, like the First Bank of Iowa, or some place.  Other banks would redeem those dollars, at varying discounts, depending on how far away the issuing bank was from the redeeming bank, and also depending on the reputation of the bank.  After all, a redeeming bank would have to trust the issuing bank could deliver the gold or silver upon redemption. 

Our markets works shockingly similarly, even today.

Today, coin shops and bullion dealers will redeem Federal Reserve Notes (dollars) at varying discounts, depending on the volume of trade, and also, depending on their supply sources, such as mints, major wholesalers, or public selling.  Some of those supply sources tap directly into the large bullion banks that are the owners of the Federal Reserve and/or who have enormous short positions at the COMEX or in over the counter derivatives, and/or are custodians for the bullion ETFs.

Our markets are so free, that we actually have a de facto private precious metals backing for the current paper dollar.  By "de facto" I mean "in practice but not necessarily ordained by law".

My main point is that anyone can exchange their paper money, for silver or gold, on much better terms today, at much less premiums today, than during the vast majority of the time that silver "officially" backed the currency!

The fallacy of thought was that silver could be bought for "zero premium" when it was money, while today, you have to pay an "unfair 5-10%".  The truth is that when silver was money, government distortions and monopoly pricing created 400% premiums, also called "seniorage".

http://en.wikipedia.org/wiki/Seniorage

Implications?  I don't mean that all of our currency is backed by silver.  The relative amounts are so different, it's shocking.  Dollars in the banks now exceeds $14 trillion, or $14,000 billion, but the amount of money going into physical silver per year, world wide, is only about $1 billion.

I can see the criticism now.  People will say that I'm just trying to justify selling silver at up to 10% over spot when other dealers may have it offered at 5% over spot

Of course I am!  Every business does that.  Quality goods typically cost more. 

But the point is that the free market in silver, or multiple sellers and suppliers (not just government currency), is creating the competition that leads to sometimes absurdly low prices, which is great for all silver buyers today.What quality do I offer?  Speed & reliability, at a very low price!

You might be able to buy silver cheaper elsewhere than from me, but it may cost you more in terms of time, or you might lose it all in a default.  Other dealers still have a 2-5 month delivery delay.  Or the other dealers might default, because they might not have the silver, or might be in debt, or their suppliers might not have the silver. 

What's worse is that some dealers are slower, less reliable, and more costly than I am! 

I have 81,000 oz. of silver that I'm using to deal silver.

Thus, we have the goods, the real silver, ready to deliver upon demand, with zero default risk to you. 

If you want to sell your home, and buy silver, you will be a very wise, and rare, customer.
 
We've heard from a few of our wiser customers, that they've already done exactly that, and they are now renting.  In beautiful Grass Valley, CA, in the foothills of the Sierra mountains, where you would be surrounded by evergreen trees and all the modern conveniences of modern life, with access to high speed Comcast Cable internet, you can rent a million dollar McMansion / Ranch on multiple acres, with 5+ rooms, about 4000 sq. feet, for about $2000/month, or even less.  We saw one for $1700!  Housing must lose about 2/3 of the value, or more, from present day values, to come in line with such rents.

 

Sincerely,

    Jason Hommel