Rise of the Foreclosed Real Estate

Can you hear that slurping sound? That’s the noise coming out of America as big corporations and hedge funds suck up the remaining real estate bargains. As of now, there’s not much leftover from the dregs of the financial crisis. That means things get even more interesting from here. More below!

It’s rare that I like a sound like that, by the way. It usually means I’m getting to the end of my drink. But as an investor, I can’t hear anything more positive. To the doomsayers, I can only say: ignore today’s Markets and Money at your peril.

I say that because the tawdry case of Greece is still pulling people’s attention to Europe. Here’s one example: the Financial Times ran a story with the headline: ‘Greece prepares debt default options’. And around everyone goes (again) with speculations and remedies and opinions. This has been happening for four years now. Yawn.

For my money, you should be looking right to the United States. Let’s put things in perspective. According to the World Bank, in 2013 Greece had a GDP of around US$242 billion.

Now compare that to S&P Dow Jones coming out recently and saying shareholders in the biggest US companies will likely receive $1 TRILLION in cash this year. That’s either through dividends or share buybacks. It’s also worth mentioning S&P 500 dividend growth has averaged 14% a year for the last four years, according to Stansberry Digest.

Can we at least agree the US is where the action that matters is at? There have been so many very interesting (and positive) developments happening over there.

Let’s not forget the crisis of 2008 began in the US real estate market before spreading worldwide. I say that because the reverse is true too. Positive developments in the US mean positive news elsewhere.

What do you need to know? Well, the Wall Street Journal reported last week that the US housing market is seeing ‘green shoots’ across the board. Both new and existing house sales are up in the first two months of 2015 compared to last year. Pending sales figures look bullish for the months ahead.

And what are the factors underpinning this? The WSJ puts it like this:

The economy has added 3.1 million jobs in the past year, marking the strongest pace in 15 years. The Federal Housing Administration, which guarantees mortgages for first-time buyers, has moved to ease borrowing requirements and costs.

In addition, many buyers who went through foreclosures, bankruptcies or short sales during the downturn now have repaired their credit enough to qualify to buy a home again. And low gas prices have helped to boost consumer confidence.’

The second last factor the Journal cites is perhaps the most interesting one for now. In the US, foreclosures and negative credit events stay blackmarked against the borrower for seven years.

That means the five million American families who were foreclosed on between 2007–2014 are coming into the period when they can start with something like a clean slate.

That’s not to say every subprime borrower is going to turn into an ideal credit risk with a saving habit, a 20% deposit and a job for life. But it could be a hefty boost to demand across the country for mortgages. You’d think a reasonable percentage of them would come back into the fold.

That means more loans for the banks and more credit in the economy. Then suddenly everyone thinks times are good again and they start spending…and around the real estate cycle we go. If you want to know what comes next, click here.

At the very least, this graph in the declining number of foreclosures shows us that the US banks have not been recklessly lending like they did in the go-go years before 2007. Check it out for yourself…

Of course, if any American wants to get into a house at today’s prices, they’d better hurry. A lot of them probably don’t know it yet, but they’re competing against two formidable foes. That’s a problem when you might be on one wage with a couple of kids to feed.

One of those foes is the financial resource of Wall Street. The second is the mathematical formulas of the Quant Traders who rule stock market trades these days. They’re uniting to outbid and outmuscle the poor American Joe in property. I’m sure it won’t be long before it’s happening here in Australia, if it isn’t already.

But neither the rise of Wall Street or the high frequency trading computers of the Quants changes the cycle. In the US, the real estate cycle turns, as it always has for the last couple of hundred years.

I’ll have more about this on Saturday.


Callum Newman+,
for Markets and Money

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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