Lower Lows in the Cat-Like Real Estate Market

Cash is still king.

Cash is king because non-cash is a commoner and a loser…it’s losing its value. An article in yesterday’s Financial Times, for example, tells that:

“US inflation expectations at lowest point in year.”

In other words, forget inflation. Forget price increases. It’s cash…cash…cash.

Cash on the barrel…cash in hand…cash and carry. You got cash? You da king!

People expect cash to be more valuable. And if we’re right…it will be more valuable.

Stocks, for example, fell yesterday. The Dow dropped 179 points.

And gold. It lost $34.

Another article in yesterday’s financial press told us that “it’s a great real estate market…if you’re rich.”

Why? Because the rich have cash. They’re the kings, queens and jokers too. And now they can use cash to buy other assets at a discount. They get more for their money. When inflation subsides so do prices. And nowhere have they ebbed more than in the real estate market.

A friend sent us an investment opportunity…a 12-unit apartment building in Florida, a block from the beach. What does something like that go for? Well, in the glory days of the bubble in real estate, it might have sold for $3 million. Today, it’s available for $750,000 — with owner financing at 5%.

Let’s see…if you can get $800 per unit per month…whoa…this could be a good deal. Because you can probably cover the cost of operating and maintenance and still get better than a 5% yield. If that is true, over time, you get the building for free.

But the problem with real estate is that every deal is different. Every toilet backs up in its own unique way…and every roof leaks in a different spot. If you don’t know what you’re doing…don’t do your homework…and can’t manage a property, including collecting the rent from people who don’t have much money, you probably won’t do very well.

Here at Markets and Money we prefer the public markets, where the tenants don’t give you hard-luck stories and the paint doesn’t peel. But what we see in the public markets is a lot worse than what we see in the real estate market. Where can you get a yield of 5% outside of housing?

All over the investment world — except for US government debt — yields will probably go up. Cash in king. But cash is probably going to become even more powerful. In real estate, for example, the bad news is not yet fully priced-in. People assume that prices will hit a bottom and then begin going back up again. They figure they just need to buy at the right time and all will be well. But as we keep pointing out, markets are more like cats than like dogs. They play with their prey…killing them slowly while having some fun at it.

Real estate has already been whacked hard. It’s down 30% to 50% depending on where you look. But is that all there is? Is that the end of it? We don’t think so. The trends that worked so happily together to boost real estate to bubble levels have now become surly and uncooperative.

  • Household income is going down, for example. It is almost back to 1990 levels, erasing 20 years of gains. Who wants to ‘move up’ the real estate ladder when his income is going down?
  • And the rate of new household formation is going down. Instead of setting up new households of their own, the young…and not so young…are moving back in with mom and dad. The unemployment rate for young people is 20% — near Great Depression levels.
  • Population pressure is easing. The rate of immigration, for example, is also going down. There are reports of illegal immigrants returning home in such numbers that there are now more leaving than coming. Besides, with so few jobs opening up, who wants to go to all the trouble to sneak into the country?
  • Most important, the Great Correction is far from over. We’re expecting a long period of stagnation, de-leveraging and depression. Prices don’t go up in a credit contraction. They go down. What we’ve seen so far is probably just the beginning of a long trend that will probably take prices down another 50%.

But wait, we know what you’re thinking. At today’s levels, houses in America are not over-priced. They’re about in line with the very long term trend. They’re about where they should be. And at today’s ultra-low interest rates — mortgages are below 4% — housing is a good deal.

Maybe so. But Mr. Market doesn’t care. Just as he didn’t mind pushing up prices to dizzying heights he also doesn’t mind pushing them down to dreary lows. He’s an equal-opportunity deceiver. First, he made people think that housing always goes up. Now, he’ll make them think that it always goes down. And when he’s finished, you’ll be able to buy a house for about half today’s price.

Of course, then…you won’t want to. Because you will have learned an important lesson that you can pass on to your children: ‘Don’t buy a house. Rent. It’s cheaper.’ Then, perhaps house prices will begin to rise again.

In the meantime…and perhaps for a long time…cash is king.

And more thoughts…

“Your problem is that you’re a prescriptivist.”

Among the many things couples may argue about is why they argue at all. Some argue about money. Some argue about the children. But some disagree about what they disagree about.

The subject set off declarations in the Bonner household recently. One of the team suggested that the reason for much of the (minimal) discord in the family was the tendency of the other member of the team towards prescriptivism. He had taken the term from linguistics, where two schools of thought have fought bitter battles. On the one hand, some linguists insist that language should follow certain prescribed forms. Saying ‘ain’t,’ for example, is thought to be incorrect. Other linguists — the descriptivists — believe the rules should be derived from actual practice…not imposed. They see nothing wrong with saying ‘ain’t.’

Back at home, the other member of the team denied the “prescriptivist” charge vigorously.

“You make it sound like I lack imagination.”

“Well, I’m not saying you lack imagination. I’m just saying that you insist on having things just so. And ‘just so’ happens to correspond with the way you want them…and how you think they should be.”

“What’s wrong with that?”

“Well, nothing, if the way you wanted them was interesting and imaginative.”

“I’ve learned over the years spent with you that there’s a reason why things are normally done the way they are usually done. You always want to experiment with things. New ideas. New places. New ways of doing things. You even dance funny.

“…all very well, but it’s really just another form of egotism. You turn your back on 2,000 years of accumulated experience…and then insist that your own innovation…or your way of looking at things…is superior.”

“Well, at least it’s not hidebound…backwards looking…and conventional. And I don’t dance funny. I just don’t get much pleasure out of doing the same stupid motions that everyone else does, over and over, all night long. I like to experiment.”

“Well, it ends up being eccentric, quirky, and not very nice.”


“Take architecture, for example.’

“Oh no…”

“Yes, take architecture. The classical column was designed thousands of years ago. It has withstood the test of time. Its proportions are graceful and beautiful. It tapers up from the bottom. Not the other way around. If you turn it upside down, you will have an original shape. But it will not be very nice. It will be stupid and ugly.”

“I don’t turn columns upside down.”

“No, but you do other things. And they don’t always work. And I prefer to have things that look nice. Things that work.”

“You’re just a rigid, stuck in the mud, prescriptivist.”

“Sticks and stones…”


Bill Bonner,
for Markets and Money

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail Markets and Money.
Bill Bonner

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