Don’t Let Future Market Bubbles Ruin Your Retirement

by Rebecca in Retirement with Comments Off on Don’t Let Future Market Bubbles Ruin Your Retirement

If you have a gold IRA in your retirement portfolio you are probably more aware of economic trends than most people. Your gold investment—whether it’s gold bullion, gold coins, or gold stocks—will protect you from the ravages of a bad economy. Still, you know it’s better to be prepared with an eye on the economic forecast.

There are a couple of disturbing trends right now that might or might not affect your gold investment planning. You may want to add to your gold IRA or just sit tight and see what happens. Either way, you’ll have the knowledge to make the right decision for your retirement portfolio.

Is a Housing Bubble Forming Again?

We all remember the chaos of 2007-2008 when the housing bubble burst. No one emerged unscathed except those few who saw it coming and compensated for it. There were a lot of warnings but few people were paying attention. Now it looks as if there might be another housing bubble forming.

A housing bubble happens when there is a precipitous increase in the price of housing. Investors think the prices of their properties will increase so demand for housing increases as more people look for good investments. This continues until eventually they price themselves out of the reach of most consumers. The bubble pops, prices plummet, and property becomes worth less than what the investor owes on it. Equity in one’s house becomes more valuable as the prices rise but when the bubble bursts the owners are often “upside down”, owing more than the house is worth.

What Precedes a Housing Bubble?

The housing bubble of 2007-2008 contributed significantly to the financial crises of that time and indeed, decreased consumer wealth by an astounding $7 trillion. This type of bubble generally happens every 13-15 years. Rental prices are one indicator that a bubble is expanding; houses and apartments get more costly to rent and the cost to income ratio increases until people begin relocating or downscaling drastically. The price of housing right now is 25%-60% higher than the economy can reasonably justify. Prices in many major cities are so high that over half the renting population can’t afford a basic 2-bedroom apartment.

What about the Mortgage Market?

In 2015-2016 saw more and more mortgages offered to people who may not be able to afford them. One company advertises that you can “blast off” with a mortgage with just the push of a button, presumably on the keypad of your phone as you negotiate with an automated mortgage line. Lending standards aren’t as low as they were prior to 2008 but they are more lax than they should be in order to maintain a healthy economy.

Buying a house should result in a debt to income ratio of no more than 43% but most mortgages being underwritten today result in a much higher and unhealthy ratio. For instance, if a person makes and annual income of $90,000 they can reasonably afford a house priced at around $300,000. In states like Florida, California, Arizona, and even Tennessee, the average mid-level house is priced at nearly twice that much. The middle class consumer is being priced out of the market in many areas. Not to mention the current U-6 unemployment rate of 9.2% that economists say is much more realistic than the reported rate of 4.7%. Circumstances just like these forewarned savvy investors of the inevitability of the last housing bubble bursting.

On the other hand some market watchers theorize that builders are simply facing challenging conditions such as lack of skilled labor and affordable land on which to build. Thus, demand for housing exceeds supply which drives up prices for new homes and supports higher prices for existing properties.

Whether or not a housing bubble is forming, now is a good time to focus investment strategy on tangible, solid assets like gold. Investing in gold in doubtful financial circumstances like the present is always a good plan. Many investors are backing off the real estate market and are buying more gold instead. Gold never loses value and is always a wise investment.

Then there’s the Auto Bubble…

Right now a housing bubble isn’t all we have to worry about. There is a new economic threat sometimes referred to as the “underwater car”. Just like the subprime mortgage debacle, there is now an overabundance of auto loans given to consumers with bad or shaky credit. You have probably heard the commercials—bad credit, no credit, just go to this dealer and drive off in the car of your choice. We’ll make you a deal even we can’t refuse!

The average car loan in 2016 is 68 months and subprime loans are as long as 8 years. 1/3 of all vehicles under lien have negative equity. While this is not unusual in the auto industry—a vehicle depreciates the moment it’s driven off the lot—the vehicle is as good as worthless halfway through the life of the loan. Borrowers are trading in their cars and trucks before they pay them off, rolling over the loan balance into the new vehicle’s financing. This is an endless cycle of debt that keeps growing.

One in five borrowers in the auto loan market are now 60 days or more behind on their payments. Delinquency rates are higher than they were in 2010.

What Happens if the Auto Bubble Pops?

While an auto bubble is a problem, it’s thankfully not enough to drastically affect the economy as much as the housing bubble in 2008. It’s still a sign of an economy headed for trouble, much like the tickle in your throat signals the onset of bronchitis or another illness. The lenders affected by this subprime loan bubble are going to be hurt and the fallout will not be pretty. Many financing establishments will fail as they’ll certainly deserve to. If there are any repercussions because of this particular bubble bursting, you’ll be happy that you have gold in your retirement portfolio.

Take Precautions Now

In both these economic bubbles the value of property goes down while the level debt stays the same. That is not good news for the economy but you can minimize its effect on your own finances and retirement plans. Your gold IRA will have just as much value as it had last year and the year before even if you don’t decide more gold investment is called for. Gold bullion and gold coins in your retirement portfolio will always keep their value no matter what the economy does.

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