Christmas, and then inevitably New Year’s has come and gone. While the stock market seems to have stabilized, business media types continue to latch on to all manner of bad news. It does strike me as completely ironic that I wake up and look out of my bedroom window to see that my neighbor’s attractive “Five-Four and a Door East Cobb Georgian” home is still standing in spite of all the bad news.

Perusing my usual news outlets, I found three articles, and naturally, I wanted to give you my contrarian spin on them. The first comes from Bloomberg®. The headline reads, “No Recovery for Real Estate as Speculators Dominate Sales.” Sounds pretty terrible. I might as well go fishing. Just remember though, we are all about transactions. We make money when there is a transaction.

The article is based on interviews with the now famous “Nobel laureate economist Joseph Stiglitz” and “Yale University Professor Robert Shiller” (Yale University being in bold typeface – of course!). The thrust of the article is that investors are responsible for the majority of residential real estate purchases right now and that is a bad thing. The proposition put forth is that investor buyers are bad because they are just renting the homes right now, but intend to sell them as soon as the market comes back. The article labels them, “speculators.” Come again?

Let me see if I understand this. Nobel laureate[1] opines that, “We’re creating a shadow inventory of homes that will be right back on the market as soon as the economy and the housing market begin to improve . . .” Yale Professor opines that, “You don’t have it in strong hands, you have flippers . . .” These are not bad things. Would you rather have private individuals owning that asset and making productive use of it in this economy or would you rather have the asset sit, unutilized, as a drag on some struggling bank’s balance sheet – or even worse, in some government owned inventory?

With all due respect, the fact is that people with capital are investing in an asset class they see as attractively priced AND that will give them cash flow during the time they are holding it. Then, they can sell it later. The beauty is that this “shadow inventory will do EXACTLY what the market needs it to do – dampen prices during a time of recovery in the housing market. This will go a long way to keeping inflation in check – and brothers and sisters, we will need that brake with the amount of “funny money” that Washington is pumping into the economy. Remember this too – while we have seen that real estate as an asset class is not immune from falling values, like all assets including securities and commodities – it is a good hedge against inflation. Unlike securities (basically contract rights which are nothing more than promises in writing – and I don’t care who is making the promise, even if it is Uncle Sam) the dirt never disappears.[2] Just aks yourself, “What asset that I own lost the most value in the shortest period of time over the last two years?” Was it securities or was it your home? Even if the value of your home lost twenty percent in the last two years, I will bet that your 401(k) lost forty, fifty or even sixty percent in the last twelve months. That has to do with the illiquid nature of real estate as an asset class. Where we got in trouble is that we converted the value of our real estate assets into debt, and then spent it on all manner of non-income producing goods like MGBs.[3]

The important thing to see is this – people with money have determined that now is a good time to buy this asset class because they see room for appreciation. My University of Georgia and Wake Forest University School of Law and future Nobel Laureate Nominee (I swear that makes me so much more credible!) opinion is that this means we have hit the housing bottom. So, the real lesson we should be gleaning from the facts available in the press is that selling pressure will be with us for some time, dampening inflation in real estate. Now, that is bad exactly why? It’s not – don’t take leave of your common sense. THE FACT IS THAT THESE REAL ESTATE INVESTORS ARE DOING MORE TO PUT PEOPLE IN HOMES THAN ANY GOVERNMENT PROGRAM EVER WILL. Unlike government, investors cannot afford to hold assets if they are not producing income – or show promise of a reasonable capital return over the next twelve to thirty six months.

The next story comes from Housing Wire, “Mortgage App Volume Falls, But Household Apps Rise.” “Lenders have been faced with a veritable refinancing boom in recent weeks, leading the MBA’s [4] app index to soar as borrowers flooded the market with applications.” People are making efforts to stay in their homes, even as the press tells them that the value of their homes is plummeting. PEOPLE UNDERSTAND THAT THEY CAN EITHER RENT OR OWN, AND IT IS BETTER TO OWN BECAUSE YOU ARE MINIMIZING YOUR HOUSING EXPENSE BY RECOUPING SOME OF THAT EXPENSE IN THE FUTURE WHEN THEY SELL THE HOUSE. They believe (correctly) that over the long term, real estate is a good investment – even with the interest cost of the mortgage. In addition, owning is tax favored under our current system. It is not rocket science. It is common sense.

Probably the most encouraging article, again from Housing Wire® is the following, “PennyMac Funds Buy Mortgage Portfolio From FDIC.” Another story about PRIVATE money buying up mortgage assets. This particular deal involves $558 million in residential mortgage loans acquired by the FDIC through its acquisition of failed banks. I don’t know if the FDIC managed to turn a profit for the American taxpayer, and frankly, I don’t care. The bigger thing to notice is that private individuals with cash are investing in real estate assets. When Shiller tells us that he sees real estate values dropping another 20%, it just does not jibe with other facts we see in the vast forest that is the economy of the United States of America – still the best, safest place in the world to invest.[5] And besides, just the way “UNITED STATES OF AMERICA” looks in type is way cool![6]

Another quote, “More than a few huge hedge funds and distressed asset specialists are lining up captive servicing operations, of course, with the distinct goal of buying distressed mortgages and then actually keeping the borrower in their home.” Huh? Are these the same bad greedy hedge funds and investors that “created”[7] the mortgage meltdown? Remember Gordon Gecko? Greed is good? It is a rather inarticulate way of saying that basic capitalist principles have a way of creating positive side effects for society. Basic human self-interest REQUIRES the good will of other members of society to work, and people make deals that provide mutual benefits for all parties. If you are truly greedy, then you are not a capitalist, but a crook. Remember that corny rule that goes, “Covet not thy neighbor’s goods?” Just ask Bernie Madoff. I wonder how he will like wearing orange jump suits?

The point of these three stories is to please heed your common sense and look at the motivations of the “nattering nabobs of negativity”[8] Substantial private (productive) money is coming into residential real estate. Those people don’t put money where they do not believe that there is opportunity for a return on investment. That signals a bottom and a climb out of this three-year correction. Smile and look to the future – oh – and save more next time. Me? I am buying up parts for my MG.

[2] O.K. – maybe in a catastrophic asteroid strike – but then remember E=MC² – it doesn’t disappear – it just changes form. Do stocks and bonds do that? Maybe they just go to another dimension.

[3] MGB – a little two seat British car produced from 1962 until 1980. In spite of the fact that they have bad electrics and lots of rust, people like me buy them (one is in a million pieces on my wife’s side of the garage right now! Nothing makes one more popular with one’s spouse!) and restore them. Trust me, this is definitely a way to take money and turn it into non-income producing expenditure. Think about buying a car one piece at a time!

[4] Mortgage Bankers Association

[5] It has to do with that whole rule of law and private property thing. Crazy.

[6] Yes, my wife thinks that I am on the lunatic fringe too if that thought recently crossed your mind.

[7] PLEASE! O.K. – just for you conspiracy theorists, this is what happened. Hedge funds created the mortgage melt-down so they could siphon off exaggerated profits and then come in and buy artificially depreciated assets. It was the largest short sale in history.

[8] Remember Spiro Agnew? ]]> http://maxsell.net/residential-real-estate-attracts-private-money-guest-post-by-brian-dubuc/feed/ 9 http://maxsell.net/another-point-of-light/ http://maxsell.net/another-point-of-light/#comments Fri, 14 Nov 2008 21:54:29 +0000 bdubuc http://maxsell.net/?p=783

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Recent news stories about the federal plan to support the U.S. financial system explain that the Treasury Secretary Hank Paulsen has shifted the focus of this effort from purchasing suspect mortgage backed securities to other non-real estate backed securities and bank capitalization.  The question is why?

If you are looking for that pony in the pile like I am, the answer is obvious – the toxicity of mortgage backed securities was not nearly as bad as was feared.  The stock markets seem to think so too.  Yesterday, real estate stocks were way up.  Huh?

If you also believe that the stock market is a harbinger of things to come, then this is good news.  Of course, we could have a massive sell off today of real estate stocks.  The other explanation is that the initial investment in those CDOs and MBS issues was enough to contain the fire, and now the blaze has moved to other sectors of the financial world.  I just like my theory better, because I just know that I am going to find that pony.

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I like to read Bloomberg.com.  Their articles are more analytical than you will ever find at CNBC.  However, while perusing an article on durable goods numbers, the typical doom and gloom from economists bemoaned the 1.1 percent September drop in orders.  Of course, in August, the drop in orders was 4.1 percent.

Why the long face?  Even with my University of Georgia Political Science degree, this tells me that the drops in orders is in a declining curve.  I might be that eternal optimist looking for that pony – I know it’s there somewhere, but looking at the different dots, I see a better future.

One other thing that really confuses me too about media reports – these numbers are snapshots that have absolutely no relevance whatsoever without context.  Yup, there is no question that the real estate market is down this year.  However, that is this year.  It won’t be down forever, and rather than biting my nails and looking for more bad news, I tend to look at the tea leaves to determine when we might see another upturn.

It makes more sense to be ready for the opportunities when they come than to be so busy crying in my soup that I miss the next wave.  It is a lot more fun to be sitting on the surf board looking for the next wave – just be careful of sharks!

Be vigilent – that wave is coming – look at the curve for declining home sales over the last several months.  pretty soon that curve will look just like a smile!

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Even though it is raining outside (and we need it in North Georgia), it is a great day. Bloomberg is reporting that September homesales increased both month over month and year over year for the second month in a row.  This is important as the numbers show that foreclosures and REOs are continuing to drive price declines. The reason it is important is because it shows that market forces are correcting the imbalance in the number of available resale homes. The supply of resale homes dropped to 9.9 months from 10.6 months in August. Alan Greenspan (who agrees with me on this) is of the opinion that we will see more “normal” market conditions in real estate by the second half of next year.

This makes sense since the peak in the real estate market was in 2005. That means we have been in this “bear market” since then. Once resales stabilize and the number of REOs and foreclosures as a percentage of the total resales falls, we will begin to see new construction number recover. That is probably a year to eighteen months away.

My point is that what we hear in the media is always based on trailing indicators. Indeed, the September numbers are now almost two months old. The media also has reasons to hype bad news (depending on your preferred conspiracy theory – to either sell commercial air time or to support a candidate for political office) and ignore good news. They also poorly analyze various trends. When you connect the dots, you will see that the market – not the government – is driving a recovery.

Brian M. Dubuc
Attorney at Law
Dubuc and Associates, LLC
bd@dubuclaw.com