“And they shall grind the face of the poor…” – Isaiah
The markets were closed yesterday. Which was a good thing. The lights were out in Congress. Economists went to barbecues. Central bankers stayed home with their families. And investors didn’t bother to check their blackberries to find the latest prices.
In other words, it was a good day. We didn’t hear anything stupid or see anything idiotic. At least, not in the world of money. Or, that part of it within the 50 states. Besides, we were too busy to pay any attention anyway.
We went to a wedding in Manhattan. One of the people we met was a professional real estate investor:
“Everybody wants to get into real estate,” he began. “I don’t mean homeowners. Nobody wants to buy a house to live in. But people keep asking me to place money for them. They want to get into real estate.
“It makes sense. Prices have come back down to a reasonable level. You can just look at the long-term trend, over the last 40 years. Prices today are right on the trend-line, after coming down about 30%. In Florida, where I work, they’re down 50% for a lot of properties.
“So, you can put money in real estate again. And you can get a fair deal.
“And you can be pretty sure that your money won’t disappear. That’s why I’m getting so much interest from investors. What else can you buy? Some guys want to buy real estate because they’re afraid of inflation. Other guys want to buy it because they’re afraid of deflation. Some think the stock market is going crash. Others think the bond market is ready for a beating. Some think their investments are going to be hammered by depression. Others don’t know what the Hell to think.
“Even gold investors are scared. I mean, it’s been a long time since you could buy gold without worrying. I read your Markets and Money years ago. I bought gold too…when the price was about $800. I figured I couldn’t go too far wrong. But now the price is up at $1,900 and I’m not so sure.
“Yeah, the logic of it is simple enough. The economy has too much debt. It goes into a spell of debt-deleveraging. The authorities react by printing money because they can’t do anything else. So, the price of gold goes up.
“Sounds simple. But what we’re seeing is that it doesn’t work like that. At least, not quite that easily.
“As you say, the economy turns a little Japanese. So bonds go up. The dollar goes up. And other investments get killed. And as long as bonds and the dollar are going up…as long as we’re on the trail to Tokyo…gold doesn’t really have much ooomph behind it either. It could go down to $1,500…or even $1,000…and stay there for years.
“I don’t know any more than you do. But you have to admit that there’s now some risk, say, over the next two to five years, in buying gold. Maybe it will go up in the long run. But the long run could be a long time coming. And I’m going to retire in a couple years…so I don’t want to see my portfolio down a third or cut in half just before I retire.
“And I’m sure as hell not going to get locked into US bonds either. Maybe they will go up some more. But that’s a big risk too. Because Ben Bernanke could turn on those helicopters at any minute.
“So what are the alternatives? Stocks? Uh uh. Too risky. Bonds? Same thing. Gold? Normally, that would be a good choice. But it could be down a lot just when I need it. I can’t tell my wife that ‘it will be good for the long run’ when we might need the money sooner than that. Besides, you don’t get any dividends or interest – none – from gold.
“That leaves real estate. That’s why people want to put money in real estate. It’s priced at fair value – statistically. So, you can buy it without worrying too much about it going down. And it’s not like gold. You can get income from it. Everybody is looking for rental properties with a decent stream of income.
“And you can get such good financing. I’m seeing mortgage rates the lowest I’ve ever seen them. Of course, they’re for single family, owner-occupied housing. But people are mortgaging their own houses at under 4%. The money is practically free because the real inflation rate has got to be over 3%. Nobody knows what it really is, but I figure prices are going up around 4% or 5% so I figure the money is interest-free. Plus, sometime between now and when the mortgage loan finally gets paid off, inflation rates are bound to go up…and then not only will they be getting the loan interest-free, they’ll also be able to pay it off with much cheaper money. So, the capital value of the loan will depreciate…in fact, it could disappear.
“The smart money is taking this cheap mortgage money and using it to buy rental units. If they can get a net rental yield of 10%, they’re way ahead of the game. And that’s do-able.
“But there are two problems.
“First, it’s hard to find good deals. A friend of mine just got a 20-unit property down in Pompano Beach. It looked good on paper. But he’s getting eaten up in maintenance and repairs.
“There are a lot of deals coming through…but not many good ones. And there are a lot of people looking for good deals. You’ll hear about the good deals – because people talk about them. But you won’t be able to get one, because too many people are competing for them.
“The second problem goes back to that trend-line. Real estate went way over fair value in the last decade. Now, it’s back to fair value. You know, normally, real estate just tracks inflation, nothing more. Yeah, you get a little extra by being in the right place – like South Florida. But, overall, it just keeps up with inflation.
“But there’s no law that says that real estate has to stick to its trend-line. Or more specifically, that it just goes back to the trend-line and stops there. If it can go way over trend, it can also go way under trend. And that’s what I think we’re going to see.
“The guys who are buying real estate now, they’re going to be a little shocked and disappointed when the see that prices just keep going down.
“I know this is one of your themes too. Prices in Japan didn’t go back to trend. They went down and just kept going down. They ended up 80% below the peak. And they actually bent the trend-line down. Maybe it will go back to the trend. But I don’t think so. The population of Japan is going down. And they don’t get married. And they don’t have children. So they don’t need starter houses…or family houses…or any kind of houses. Just apartments for old people. That’s not a way to get higher real estate prices.
“The US is not in that position. Not exactly. But a lot of the demand at the starter house level was coming from Hispanic immigrants. And the numbers show that the Hispanics aren’t coming the way they used to. In fact, they’re now going the other way…they’re going home.
“Not only that, but we’re seeing more grown children move back in with parents…and more parents moving in with children. This will mean less demand for separate housing units.
“So, we’ll probably first have some over-shoot to the low side of the long-term trend-line, which will take prices down another 20% to 40%. And then, we might have a permanent bend in the trend-line, as the number of new households actually begins to go down.
“You think the middle class is having trouble now…just wait until their main asset is down 80%.
“I still think real estate is one of the safest places for money. But just don’t expect to make a lot of profit…and don’t expect it to be easy to find a good property. Remember, the profit is made when you buy. It’s hard to buy well. I spend all my time looking; but the good deals are hard to find.”
And more thoughts…
According to the Judeo-Christian religion, God gave man the days of the week and the weeks of the year.
But he held back something – holidays. He kept the seventh day for Himself, for example.
And now man has gotten into the act too. He’s created holidays of his own. Yesterday was one, intended to celebrate ‘labor,’ but really just a way of throwing a bone to the trade unions.
Still we respect it…just as we do all holidays. Which is to say, we were happy for a change of pace. But, there is always reckoning to be done anyway.
Friday, stock markets were walloped…after investors realized that they have a Great Correction on their hands, not a recovery.
The Dow was down more than 250 points. Gold shot up $47.
So, from our point of view…one went in the direction we expected. The other did not. Gold should not be going up…unless there is something we don’t understand, which is very likely.
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