How to Profit from the Coming Real Estate Bust: Interview with Author John Rubino
Welcome officially to Dr. Housing Bubble John. In your book, you talk about the housing market having a global impact. What implications does a global housing market have on our nation’s economy?
Thanks for having me on, Doctor. Love your site.
Today everything is connected. For the past decade American consumers have been borrowing against their homes to buy foreign cars and TVs and clothes and toys. So
Now we can’t borrow against our homes any more because, after a long stretch of unrealistic price increases (as readers of your “Real Homes of Genius†series are aware), prices are falling off a cliff.
This affects the global economy in two ways. First, American consumers will buy far less stuff from overseas, so we’ll see the massive trade surpluses of China and Japan melt away, along with many jobs and much tax revenue.
Second, because our trading partners have accumulated trillions of U.S. dollars—which is what we give them in return for all the nice stuff they sell us—they lose when the dollar falls. They understand this and are desperately trying to swap those dollars for stronger currencies and real assets, which is pushing the dollar down even further. This process is gathering steam and will culminate in a “death spiral†for the dollar and most other paper currencies. It’s going to get very very ugly on a global scale.
You published your book in 2003, during the height of the housing boom. Why did you decide to publish the book during this time?
Early this year in May, the Fed Chairman Ben Bernanke stated that the subprime collapse would be contained and spillover was highly unlikely. Clearly this isn’t the case. Why do you think the Fed got it wrong and what are the long-term implications of a housing market with little or no subprime?
At history’s big turning points the people in charge are always clueless. Generally they’re just too close to the trees to see the forest—and of course their paychecks depend on the status quo, which colors their perception just a bit.
This time around, the financial mainstream bought into some amazingly wrongheaded ideas, like “debt doesn’t matter,†“the government can be trusted to maintain the value of the dollar,†and “in any event, the value of the dollar really isn’t important.†Ben Bernanke still seems to believe that last one, based on his recent Congressional testimony when he answered one of Ron Paul’s brilliant questions with the opinion that if someone lives in the
As for a market with no subprime, one of the drivers of this bubble was banks’ willingness—with government encouragement—to lend to anyone with a pulse. This created a lot of new demand for low-end houses, which allowed existing homeowners to sell for a good price and move up to mid-range houses, which allowed those owners to step up to McMansions, etc. Take away subprime demand and the whole thing grinds to a halt. People can’t buy because they can’t sell.
Many of the things you talk about in your book have come true; the housing decline, the issues in the credit markets, and a declining dollar. One of your chapters focuses on the two pink gargantuan elephants in the room that no one seems to be talking about, Freddie Mac and Fannie Mae. In light of what is happening, what impact will the current housing market have on these two giants?
What do you say to those that say that talking about the housing market in a negative light creates a self-fulfilling prophecy?
It’s flattering to think that you and I have the power to affect a $20 trillion industry. But the reality is that prices got too high, debt burdens got to heavy, and lending standards got too loose. By 2004 a crash had become unavoidable, and now there’s nothing the press can do about it one way or the other.
It has always been the case that bulls make money, bears make money, and hogs get slaughtered. Many readers on this site are concerned about preserving their wealth. What recommendations would you have for someone looking to prosper through this market downturn?
First, sell your house for whatever you can get. It’s going a lot lower, especially if you live in one of yesterday’s hot markets. Use the proceeds to pay off variable rate debt. Avoid any investment that depends on a stable dollar. Long term bonds, because they pay you the same number of dollars each year, will decline in value as the dollar falls. Bank and brokerage houses, because they’re owed massive amounts of dollars, will get creamed. They’re nowhere near their bottoms, despite the last few weeks’ carnage. If you’re financially experienced, consider shorting the market by buying put options on the big stock indexes like the SPY or QQQQ. And of course buy gold and silver. As forms of money that can’t be printed in infinite quantities by desperate governments, they’ll rise in value as the dollar tanks.
Foreign stocks and bonds are the real question mark. Since they’re denominated in currencies that are going up against the dollar at the moment, they’ve been doing well in dollar terms. But I’m worried that 1) when the U.S. stock market tanks, it will pull down the world’s other markets, and 2) foreign countries can’t tolerate the impact a rising currency will have on their economies, so they’ll start pushing down the value of their currencies. This is called “competitive devaluation†and it will devastate the value of most paper currencies. So…foreign stock and bond funds are, at best, short-term trading plays rather than long term investments.
What’s your take on the tens of thousands of Real Homes of Genius in high priced metro areas?
Down 80% by 2010.
You also talk about the dollar’s decline and it is clear that in the past few years, the dollar has depreciated compared to other major currencies. How can a worker paid in US dollars, protect their purchasing power throughout the next few years?
A currency crisis makes everything uncertain, including most jobs. So besides investing to avoid dollar exposure as I discuss above, Americans should be paying off debt and building up their families’ balance sheets. Live smaller now, prepare for hard times, and if they don’t happen you’ll at least have the peace of mind that comes from not owing anyone anything.
There has been an argument that we are now entering a gold, oil, and commodities bubble. With gold over $800 an ounce, oil near $100 a barrel and the price of other commodities soaring it seems like another bubble. Is this argument valid or is there an economically fundamental reason for these record high prices?
Bubbles are more than just rising prices. They’re also characterized by:
1) Time-tested business practices being replaced with “innovations†that look like scams to reasonable eyes. In the housing bubble, for instance, zero-down, adjustable rate mortgages replaced the old 20% down 30-year fixed.
2) Regular people making fortunes doing things that experts normally find difficult. Daytraders in the 1990s and condo flippers in 2005, for instance.
In gold and oil we see neither of those things. In fact, most people still have no idea what gold is or why it’s going up, and their understanding of oil ends at the gas pump. When the person cutting your hair starts telling you about the emerging oil Brazilian oil company or Tanzanian gold miner you’ve got to buy, then it’s a bubble.
In the short run though, we could easily see a nasty correction in commodities. If the
We’d like to thank Mr. John Rubino for his time and expertise. Please make sure to visit his site Dollar Collapse and read his books,  How to Profit from the Coming Real Estate Bust: Money-Making Strategies for the End of the Housing Bubble and The Coming Collapse of the Dollar. There is no sense in complaining about reality if you are not willing to do something about it. Educate and empower yourself for the coming years.
Did You Enjoy The Post? Subscribe to Dr. Housing Bubble’s Blog to get updated housing commentary, analysis, and information.
Subscribe to feed
21 Responses to “How to Profit from the Coming Real Estate Bust: Interview with Author John Rubino”
Looks like I need to seriously consider buying some gold. I need to buy enough to fill my bathtub, at least. It’d be nice to swim in my gold like Scrooge McDuck while the economy collapses around me. One question lingers: will my floor also collapse from the weight of all that gold????
I find it ironic, Americans are always looking for the quick fix. It may be because of our form of government, but that is another discussion entirely. A few examples where we don’t have patience might be Saddam Hussein, the energy crisis (I know Dr. it is not a recognized crisis yet), and global warming. We expect our politicians to have the quick answer too, and I think that is why they are so good at twisting reality and in the end of course, not being able to deliver on promises made. This latest crises, the housing bubble, like most, have no quick fixes, except for those that will do more damage long-term. We don’t seem to ever want to take our medicine… I guess that is just human nature. Your post implies buying gold, oil, foreign currencies etc, but the majority of us need $$ just to get by each month.
first !!!!
80% seems agressive, especially in nominal terms.
in real terms, thats more reasonable, but still pretty agressive….
i think some more reasonably priced stuff will resist more, or some premium areas will (rich still want to live with rich, and pay a premium for it)
for the USD collapse: not sure… now its in the newspaper and mainstream, it might be bottoming… remember JPY didnt collapse immediately in the aftermath of the 90s nikkei & property bubble, on the contrary, it went UP…
and a whole lot !!!
go to Europe and see how EURO is expensive…
@ Jason—
If you ever get a chance, watch the 1924 silent classic “Greedâ€. In it (I kid you not) the greedy female lead strips so she can roll around and sleep with all of her gold coins.
@ Dr:
Good interview. I’m glad I’m not the only one who thinks that the “debt is a good thing†people are nuts.
My opinion about day-traders is well established, so I’ll leave out the four-letter words.
@ All:
Personally, I think gold is about maxed-out. I know this because I was considering a gold buy, and I am a perfect reverse-barometer when it comes to commodities.
That guy is being unreasonable.
200K bungalows in Orange County, where every third familiy makes 100K+ a year? Not going to happen, not unless there is huge job loss in high tech industries.
He predicted a real estate bust in 2003? Housing bubble didn’t even take off in California until mid-2003. Before that, housing boom was a normal reaction of the market to low interest rates.
@Jason If you have enough money to buy a bathtub full of gold, you can pay a little extra to reinforce the basement of your mansion 🙂
I don’t think his analysis is particularly consistent. He’s weary of foreign stocks because he’s afraid the U.S. market will drag down the rest of the world. But if you really had a worldwide recession it would drag down demand for commidities also.
Actually – regarding the comment about Brazilian oil companies – sold my house and bought the PetroBras ADR’s (the Brazilian oil company) for $9 in 2003.
Last week they announced a major oil find off Rio in the Tupi field which could bump up Brazil’s reserves by 40%
It’s currently around $100 (after a 2:1 split in 05). equivalent to around $200 now.
bubble, bubble, toil & trouble…..
I don’t see how he mentions anything about profit. Buying gold/oil commodities/stocks is certainly not on just anyone’s strategy, in fact for a person who believes in the investment principle of diversifying it is very risky.
There is really little one can do to fight inflation. And yeah, 80% drop in housing is not going to happen.
A few contra-contrarian thoughts:
A weaker dollar means more exports. Arguably the dollar was overvalued under Clinton (and Robert Rubin) Some devaluation is warranted and beneficial.
Fannie-won’t it only default if the underlying collateral backing its bonds turns out to be riskier than expected? Why would prime borrowers default? Some will but enough to drive the GSE’s into insolvency? I’m skeptical.
Also, China buys dollars primarily to strengthen our currency. They know they will take a loss and they do. And they have no reason to hurry up and destroy our currency but good reason to help stabilize it.
Lastly, If you can afford your house, keep it-don’t sell into a declining market if you don’t have to.
Obviously this is huge bust and there will be economic consequences but there are reasons not to subscribe to a totally apocalyptic view.
From reading this commentary and all the other economic analysis out there, one thing seems sure: nothing seems sure. We’re apparantly entering an age of economic instability that (at least from my reading of history) seems unprecedented–inflation here, deflation there, war, terrorism, shortages and mayhem! BTW, median household income in Orange County is under 60k. In 2005 one million $$ in OC wouldn’t buy much, in some areas a 30 year old 2bd 1ba with no garage…and many of the 100k plus jobs were real estate related and will disappear…yeah, 200k seems right.
@oilwelldoctor,
I do agree that the energy crisis is real. Even if we curb our consumption, what is to stop China and India? They are booming and their environmental regulations are well, less restrictive than our own. So even if we get our house in order, how are we going to enforce these regulations globally? People won’t address the issue until gas hits $5 a gallon.
@FI trader,
I think the 80 percent was in relation to the fantastic Real Homes of Genius homes on this site. In many middle class cities here in SoCal, we have already seen 15 to 20 percent reductions. It is very feasible to see 40 to 50 percent reductions (adjusted for inflation) in 3 to 4 years.
@SD Scientist,
Goldman Sachs had a report showing the disconnect hitting in early 2004. Orange County is a vast place; it includes cities such as Santa Ana, Garden Grove, Stanton, Anaheim, and others that you wouldn’t associate with the “OC.†Not your $100k areas. This isn’t Mountain View California here. What of New Century Financial? Ameriquest? Or many of the other sub-prime wizards? Also, California has 543,194 licensed agents. Numerous reports show that housing since 2000 has contributed to 30 percent of all employment growth. How much of the OC employment is tech related?
@sporadic,
Good points. The problem with Fannie Mae and Freddie Mac as you know with proposed legislation, is they may take over risky loans especially if caps are lifted. They are already having problems. If the current mortgage mess is transferred to them, forget it. Just look at the ABX markets. All these companies are holding their breath underwater hoping they can weather the fall and winter season and get back on their feet in spring. Not going to happen. Only way is by a massive devaluation of our currency; even knocking it lower. Plus, China’s currency is massively undervalued, anywhere from 20 to 35 percent. In regards to selling your home, you have a few options. If you live in 1 of 40 states of this country and don’t plan on moving, stay put. Prices aren’t out of whack everywhere. If you live in overpriced coastal bubble regions you have two options. One is to sell and sit on your profits. If you decide to sell you already missed the peak but we are going lower. How low? Who knows. Or, you can sit tight and watch your equity evaporate. Whether homeowners wanted to in many high priced metro areas they became unsuspecting speculators. Now do you take your profits off the table or do you think prices will keep going up?
@All,
It is clear that housing will be going lower in high priced areas. It will be a double whammy since primary job growth in many of these cities was closely tied to the housing, construction, and finance industries. Guess what will happen now that housing is going down? You don’t have to guess, just look at the defunct mortgage operations across business parks in Orange County.
I’ve said it many times that no one should put all their money in one basket. Many homeowners in California have the vast majority of their wealth in home equity. This is the same as having 60 percent of your assets in gold or oil futures. The problem is any one that bought a home in the last 4 years in California is speculating whether they want to or not; prices do not justify economic fundamentals, that is clear. Knowing this, do you sell and pocket your profits knowing that housing will continue to go lower? Or do you stay and see equity go down? I understand housing is emotional for most folks. A place to raise a family. Somewhere for community. But California has seen triple digit gains in a matter of 7 years. I’ll take a wild guess but people in Kansas, North Dakota, or Tennessee are raising families and building communities as well. So that can’t be the primary reason. Then it boils down again to location. Jobs are here. No argument there. But do incomes support current price levels? A family earning $100,000 a year will put a lot of their income toward a standard $500,000 home. We’ve gone over the statistics hundreds of times and only a small fraction of the California population can afford homes at current price levels.
We are hitting a new paradigm. No longer can you put money into saving bonds, expect a pension from your company, or expect Social Security when you retire. There is no such thing as a 100 percent guaranteed investment. You can leave your money in the bank at 1 percent and let inflation gnaw it away. As a basic, have 3 months of cash for emergencies (yes, unfortunately you can’t pay for food and water with Euros), make sure you are diversified in your 401(k) if you have one – this is crucial since many folks unbeknownst to them have heavy weighting in REITs or industries linked to housing, have 10 to 15 percent in precious medals, and if you own a home make sure your rate is fixed. If you want to venture into more lucrative areas I’d recommend stock options but you should be well versed before entering this domain. Also, bread and butter rentals are a way to go but why talk about $100,000 homes when we can talk about $500,000 boxes?
@Layne
Family income is the one that matters, “households” include single people and these typically don’t create demand for houses. Median family income in OC is $80k. Median family income in Irvine is $104k. There is a lot of high tech industry there (particularly biotech). Its not quite Bay Area but it’s considerably more affluent than LA.
now that my un-bubblicious suburban Dallas house is paid off, I bought a ranch thinking that beef is a commonly exported commodity (hence an increasing value against the weakening dollar) that can be produced by individuals. Also, what is your take on the Australian dollar against the US dollar going forward? Thanks for your very informative blog.
Just in case you are curious about the technical worker argument for Orange County:
Data for 2005 for Males:
**12 percent in construction
8 percent professional, scientific, and technical services*
**7 percent finance and insurance
6 percent accommodation and food services
5 percent administrative and waste management services
4 percent educational services
4 percent healthcare
Data for 2005 for Females:
12 percent healthcare
12 percent educational services
**8 percent finance and insurance
8 percent professional, scientific, and technical, services*
7 percent accommodation and food services
**4 percent real estate and rental and leasing
3 percent administrative and waste management services
Even a basic cursory look at the market would tell you tech won’t save Orange County. Looking at the data, doesn’t seem like the tech argument holds any water. More people will be impacted because of industries tied to real estate. And this data is 2 years old so I imagine the housing related fields have grown.
http://pics3.city-data.com/county/Orange_County-CA.html
@markintexas
Australian dollar is propped up by carry trade. Every time there is a crisis of confidence in the markets, traders start unwinding their carry trade bets and australian dollar starts sinking. In August subprime meltdown brought it below 0.8. The way to go may be to load up on yen and wait for the next market crash.
@Dr.
At the first sight this data seems inconsistent with high percentage of high-earning families in the county. I’ll take another look later.
80% drop?! I find that very difficult to believe…I feel a 30-40% drop is realistic over the next 2-3 years…maybe 50%…based on the average income in LA county ($74k or around there?) and where the median home price would need to come back to in order for the average family to truly afford the payment under the old guidelines of 41% max debt to income ratios…80% though huh? I would love to understand more about how that number was arrived at. If that’s true…even if it’s not…what a GREAT time to be able to buy! I’m saving my money and buying everything I can in about 2 years!
I am curious…does anyone understand how the Mortgage Insurance companies are able to afford to back the loans for these big banks? I’ve had short sales rejected by big banks because they stood to make more money through foreclosure and having the MI company pay the difference…I’ve got to imagine at some point the MI companies will not be able to do this anymore…these aren’t all Freddie Mac and Fannie Mae are they?
#1 a 100K per year doesn’t pay for a million dollar home. A friend of mine makes ~ 175k per year and has an 800k mortgage. He is stretched to the limit and took out a HELOC in late 2006 in order to pay for his Orange County Lifestyle.
#2 The fact that every third family makes 100k a year doesn’t account for the fact that 83k is the average household income in Irvine, CA. I believe this is one of the highest in Orange County, the home medians are also near the higest there as well. Bottom line 3x salary is where the average home should be, an average home is not a condo. A 1500 sq foot 2br should be around 250k in Irvine. Where are they? upper 500’s down from mid 600’s in February.
#3 An 80% drop is ridiculous. I would expect more like a 55% drop in prices. That would put things in line with fundamentals.
#4 NO ONE wants to know what will happen to our lovely little society out here if prices go down that much. Stock up on food and buy a gun because the hoodlums from LA who lost their shirts will be coming for frequent visits because the OC won’t be able to pay for nearly the number of public services once properties are revaules and tax revenues go through the floor. The governor is already calling for spending holds (good for him).
If my house drops 80%, I’ll owe $20k more than it’s worth. -I can handle that.
Why should I sell my house? I like my house. If I sell my house, what will I do with the money? Invest it in something that could dissappear over night? The house can drop 95% in value, and it will still be there the next day. It will still have a front porch, four bedrooms and a garden.
I’f I sell, I am competing for rentals with the zillions of others, with a bunch of money that’s worth less every day. Nope, I’m staying put.
Perhaps that cigarette that this “author” smoked in that Orange County bungalow was 80% Hasheesh!
This guy is even more entertaining than the fantastic (derived from the word fantasy) Illusionist himself Mike Whitney.
NOTHING he is saying is original, or unheard of before (except the 80% down stuff.) For a more reasonable, substantial, and uncrazy assessment read Richard Russell.
I agreed most of John said, particularly his position the 80% off its peak by 2010. If he could say 2011, it may be better.
It seems to me that all the person in this thread had a hard time to believe 80% off. Some people will say God doesn’t create more land. How could it happen? Okay, sounds you have a point. Then tell me how come Tokyo housing market lost its 80%+ value in the past 15 years? Did God create more land there?
How much your market losing its stream and has gone down so far at this point of time? What you guys have in your minds? 10% off at this time as NAR hope you believe.
I will do a REAL TIME QUOTE for you to wake up! It is NOW 50% off for some specific markets in Orange county. Please go read my article A Real Case: Who cares about Average Price or Median Price! (II) at my web.
Although I agree most of John’s points, there is one thing I absolutely disagree. When he said selling your house now if you bought it in 2004-2004, he is smart.
When he talked about the future protections, he isn’t saying anything about real estate investment. It seems to me he is on the side advicing NO real estate purchase (sorry, I didn’t read his book so that I don’t know exactly his position).
It it is, I will say: “John, you totally missed it here”. Real estate is a home, but it is also the most tangible asset or investment ( most valuable and useful “commodity”, if you choose to use a stock term). I don’t believe in Gold or other commodities backed by devaluation a fiat currency. Housing is the one last forever. So buy a house when it is cheap as your real hedge against inflation as it is the conventional wisdom.
Go learn how to profit from the downturn housing market by RE investing: What an agent’s life is: incredible? Is it the life you want? http://activerain.com/blogsview/271826/What-an-agent-s
Leave a Reply