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The Next Bubble Is Here

Written By Brian Hicks

Posted September 17, 2012

What’s that?

Is that the sound of a bubble forming?

In Hong Kong, the price for this asset is up a staggering 90% since 2009.

It’s gotten so bubbly that the Hong Kong Monetary Authority has implemented strict curbs to cool the market.

This asset rose 11% in just six days on the expectation the Fed would announce QE3.

The same thing is happening to our neighbor to the north, the resource-rich nation of Canada…

Last week, Canada’s finance minister also instituted new rules aimed at cooling this asset.

So, what is it?

Is it the white-hot commodities of gold and silver? Financials, banking, or biotech stocks?

None of the above…

Believe it or not, it’s housing.

And the housing story isn’t happening just in Asia or Canada…

The United States is in a bona fide housing bull market.

Foreclosures are down dramatically. Refinancings are in a mega-boom. There’s a backlog jam of homeowners trying to refinance their homes.

U.S. homebuilder NVR is currently trading at $872 a share.


NVR is up 24% year-to-date, up 40% in a year.

In fact, NVR is within 7% of making its all-time high — $938 — reached in July 2005.

That, dear reader, was the top of the mother of all housing bubbles.

It’s even more amazing when you look at the S&P Homebuilders ETF (XHB):


As you read this, homebuilders are trading at year-to-date highs.

XHB is up 52% year-to-date.

Read that again: Homebuilders are up 52% year-to-date.

It’s been the hottest sector in the stock market — up 86% from a year ago!

So, what’s going on?

Well, according to Dr. Mark Perry, the economist who writes the excellent Carpe Diem blog, buying a home is now 50% cheaper than renting.

When renting is more affordable than buying a house, consumers do the rational thing: They rent.

When buying a home is more affordable than renting, consumers do the rational thing: They buy a home.

According to Dr. Perry:

Here’s another reason that the U.S. housing recovery is real and sustainable — buying a home is now 45% cheaper than renting, according to an analysis done by Trulia and reported here by its chief economist Jed Kalko:

Methodology: Trulia looks at homes listed for sale and for rent on its website, and compares the average rent and asking price for an identical set of properties in a metro area, for a direct apples-to-apples comparison. Then, Trulia factors in the total costs of homeownership (e.g., closing costs, maintenance, insurance, taxes, etc) and total cost of renting (e.g., renter’s insurance and security deposit). 

The starting assumptions are that a prospective homebuyer can get a low mortgage rate of 3.5 percent, itemizes their federal tax deductions, is in the 25 percent tax bracket, and will stay in their home for seven years. To account for the opportunity costs, Trulia calculates the net present value of the payment streams for renting and owning.

Conclusion: With a 20% down payment, a 30-year fixed mortgage rate at 3.5% and at the 25% federal tax bracket, Trulia finds that homeownership is cheaper than renting in all of the 100 largest metros by a wide margin. There is no market where the financial decision is even close, so long as you plan to stay in the home for at least seven years, finance with a 3.5% mortgage, and itemize your tax deductions.  

Based on asking prices and rents during the summer of 2012, buying is now 45% cheaper than renting in the 100 largest U.S. metros, on average — that’s a monthly savings of $771.

If you plan to stay in a home for 7 years, which is the average time that Americans traditionally live in a home before moving again, it is more affordable to buy than to rent in ALL of the 100 largest metros in the U.S.

With QE3 now a done deal, the housing/real estate market will continue to boom.

Asset prices are low, the cost of borrowing money is at historic lows, and people still want to own a home.

But you don’t have to buy a home or be a landlord to participate in this real estate boom…

I know of a completely safe and consistent way to collect monthly checks from one of the greatest real estate bull markets the world has ever seen.

My free report details how to do it.

Forever wealth,

Brian Hicks Signature

Brian Hicks

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Brian is a founding member and President of Angel Publishing. He writes about general investment strategies for Wealth Daily and Energy & Capital. For more on Brian, take a look at his editor’s page.