North America’s Real Estate Bubble

Both the United States and Canada are in the midst of serious real estate bubbles. Disturbingly, the Canadian bubble is about to burst while the US bubble shows no sign of slowing down.

The bubbles are taking courses because they have different origins and histories. Canada’s real estate bubble was fueled by high oil prices and a strong currency. Now that oil prices and the Canadian dollar (affectionately called the Loonie) are crashing, the rug has been out from under the real estate boom.

The Canadian bubble is particularly dangerous because the average home in the country now costs around $500,000 while the average income is at $40,000, financial analyst Jared Dillian told Maudlin Economics.

Canada’s Real Estate Bubble could be Bursting

“Debt to disposable income for consumers is 165% which is much higher than it was in the U.S. at the top of our housing bubble,” Dillian said. The average home price in Canada in July 2016 was $480,743 ($367,685.29 USD) and the average salary was $49,000 ($37,476.53 a year), Global News reported.

Dillian thinks that Canada is headed for a real estate crash. The bust may have already begun in Vancouver where home sales fell by 51% during the last half of August, Bloomberg reported. The drop in home sales was caused by a 15% tax on foreign home buyers imposed by the province of British Columbia.

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Many Vancouver residents were outraged by the purchase of large amounts of real estate by wealthy foreigners who effectively priced them out of the housing market in their hometown. Demand for single-family homes also collapsed in Vancouver dropping by 66%.

It is obviously too early to tell if this bubble is really bursting. A likely outcome is that foreign homebuyers will simply take their house hunting elsewhere perhaps to American cities like Miami. That strangely enough will make the US real estate bubble worse.

America’s Strange Real Estate Bubble

The US real estate bubble is driven by scarcity rather than fevered buying. US home prices increased by 33% between 2012 and June 2016, Black Knight Financial Services reported. The average price for a single family home rose to $265,000 in June 2016.

Despite those numbers the US real estate bubble is not that dangerous because it is driven by a housing shortage. Builders are not constructing enough new homes because mortgages are hard to get.

CNBC noted that homebuilders level of production is still blow the historic average. That drives up prices because the only demand for new homes is among the wealthy. It also makes the shortages worse because down payments grow and price many people out of the housing market.

Income inequality and wage stagnation play a role here because more and more middle and working class people are incapable of buying a home. Even with record low mortgage rates. Strong rental demand skews the numbers because more homes are buying taken out of the market by investors and speculators.

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High prices and fears left over from the housing meltdown of 2008, are discouraging many existing homeowners from selling. They’re staying put and refinancing rather than selling out the average homeowner has 44% in his or her place.

A related problem is that the bubble is confined to just a few areas, 14 of the largest cities in the US reported record high home prices, according to Black Knight. The problem was that those prices were in fashionable relatively affluent places including Charlotte, Austin, Boston, Dallas, Denver and Portland Oregon. St. Louis, a decaying industrial center saw home prices drop.

My prediction is that America’s real estate bubble will continue for two or three more years. Then instead of popping it’ll slowly cool down as prices fall to realistic levels. The only thing that could cause a sudden pop would be a Black Swan event such as an sudden drop in the stock market.

One cooling factor is likely to be higher interest rates. Something that the Federal Reserve is likely to do to put the brakes on the bubble.

Stocks to Invest in to Take Advantage of the Housing Bubble

Naturally investors will wonder if there are any stocks to invest to take advantage of the housing bubble. I’d recommend Lowe’s (NYSE: LOW); the housing suppling store is far cheaper than its rival Home Depot (NYSE: HD), but it still offered a decent dividend yield of 1.46% and a return on equity of 33.29% on August 30, 2016.

Lowe’s is also undervalued it had a market cap of $68.03 billion and an enterprise value of $79.06 billion on August 30, 2016. Yet it is also flush with cash reporting $4.735 billion in cash and short term investments on April 30, 2016. That gives it the resources needed to survive a real estate crash.

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Lowe’s is well-positioned to take advantage of the real estate market because all those people converting homes to rentals or fixing up their existing houses need supplies. Yet it is not overpriced like Home Depot, which was trading at a ridiculous $134.11 a share on August 30, 2016. Lowe’s was trading at $76.79 on the same day.

Another good play to take advantage of the real estate bubble is Walmart (NYSE: WMT) which is doing very well right now. Walmart sells a wide variety of household items and it has multiple distribution channels including Jet.com and Sam’s Club. Walmart is also very cheap trading at $71.23 a share on August 30, 2016, even though it had dividend yield of 2.79% and a return on equity of 18.85%.

Smart investors can take advantage of the real estate bubble without buying property. Even though it won’t last, the bubble will generate a lot of profits for shrewd investors.