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Sunday, 21 January 2018

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Bill’s real estate bet

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This topic contains 3 replies, has 2 voices, and was last updated by  Rob Marstrand 4 years, 6 months ago.

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    CLIVE R.

    “We have to be prepared for when it does happen. How? Probably the best way is to buy real estate with long term, ultra low, fixed-rate mortgages. Non-recourse, if possible. In September 2011, we recommended you increase your family’s allocation to real estate to take advantage of this unique situation. It was a better investment then. Still, now is not a bad time to invest in bricks and mortar.”

    This idea of Bill’s is so appealing that I thought I would try it, a few months ago. I couldn’t make it work. I bought my house in New Hampshire, in 2010 because I like the house and it is part of a 100 acre farm which provides good food for six months of the year. It has been a great place to live, but a bad investment. The market price has declined by 40%. I hoped it would decline only 20% because the housing market had already taken a hit. Next year I may be able to get my property tax reduced… maybe. If so, I’ll lose less over time.

    “US real estate is an ideal investment for this non-recovery world. Here’s why: It is relatively safe. In the case of a financial Armageddon, real estate is still valuable. It doesn’t go away.”

    Land may be safe, but real estate (buildings) burn, with their contents, in revolutions. Both are almost impossible to liquidate when there is the slightest whiff of trouble. Moving them is even more difficult. Over the last century, there were lots of Russians, East Germans, Chinese, Africans, South Americans… who found out the hard way about “real estate”. All they have left is worthless title deeds. The US may be a little more stable… until it is not. It wasn’t so long ago that fine Southern families moved from their land with nothing more than their good manners and empty stomachs. Factories in the North needed cheap labor.

    … and the parasites? OMG. Real estate taxes, insurance companies with their “requirements”, lawyers, accountants, contractors, all those regulations… and that is before dealing with the realities of physical maintenance. Houses and property are sitting ducks for extraction purposes.

    “Average US home prices have risen about 12% year-over-year. But they are still reasonably cheap – depending on where you buy. If central banks succeed in tapering, real estate and rents will probably both rise.”

    It seems to me that real estate is being bought with funny money. The “investors” take their bonuses, short term profits and steal the money in the form of “salaries” and handling fees, but when the Taper sharpens it teeth, surely the buying will stop and prices will drop? An increase in interest rates will also dampen enthusiasm, especially if there is no real growth. Perhaps inflation will eventually increase nominal prices, but I don’t anticipate much demand from a declining population.

    “If they don’t, your mortgage gives you a free “option.” If yields rise after 32 years of trending in the other direction you will get a windfall. If they don’t, you will still have your rental income (or personal use). If you have financed on a non-recourse basis, you are in an even better position. You have made a one-way bet. You can only win.”

    Unless the property price declines! I could not find a bank that would give me more than a five year fixed mortgage. After that, it “floated”. No thanks. I paid cash for my house rather than have to deal with all the parasites who climb aboard as soon as a bank is involved.

    I am stuck in my house unless I want to take a loss now, but property prices could decline more, just like the stock market, gold or anything else that has not yet had its day of reckoning. Only in the fantasy world of T.L. Friedman are house prices destined to increase with more government subsidies and mortgage interest tax breaks.

    It’s over. Populations in advanced economy countries are declining with the decline of cheap energy (oil). The Fed doesn’t really care about house prices and they can do nothing about it short of sending everyone a check for $100,000 a year. They could! They have our addresses from our tax returns. Krugman would be thrilled, but even the smug bearded Ben is not likely to do that. The Fed cares only about the Government and keeping interest rates low to reduce the cost of their obligations. That manipulation will work only as long as other nations accept our debt but a bit of trade “re-balancing” could make some people really unhappy. Interest rates will probably rise… slowly, not like the 1970s because baby booming is out of fashion.

    “Can you lose? Of course! If property prices fall and continue to fall… and rental rates fall too… you will lose money. Maybe serious money. (Unless you have a non-recourse mortgage.) This is a possibility. But it suggests a level of deflation I believe would be intolerable to the authorities.”

    Of course the authorities don’t want a decline. They have all their economic models based on GROWTH. It worked as long as there was cheap energy. Populations increased and everyone had two houses, cheap food, a car or two, a lawn and it was onward and upward. Things are different now. Energy is becoming more expensive and complicated. There are no more gushers. The intolerable deflation is beyond the control of the authorities. They are going to get it whether they like it or not, probably in a place they won’t like.

    “That is when Bernanke or his successor would be likely to resort to Overt Monetary Financing, aka “helicopter money.” This has already been widely discussed in the press. Central bankers are already considering it. In an emergency, it wouldn’t be long before they would use it. Then, like my parents in the 1970s, your mortgage will seem like a gift from heaven.”

    I think it will be very difficult to “induce” inflation with helicopter money. Food stamps, welfare (social and corporate) and “defense” spending cannot last forever at China’s expense. Middle class people are sick of credit. During the last fifty years, credit allowed leveraged investments to grow very nicely. The bigger the credit, the safer the loan. Ask Donald Trump. Now people think they may have to pay back their loans and that makes them upset. Nobody wants more credit. They want less. The mentality has changed. Having “free time” (to talk on a cell phone for example) is much more valuable than having a pile of stuff bought on credit because it will be “more valuable” in the future.

    This is a devil of a problem for us long term investors. I don’t see real estate being a good investment other than as a place to live. Owning gives some liberties that renters to not have, but it does not give the important liberty of “leaving” at a moments notice.

    A big pile of cash appeals to me more than a pile of bricks and mortar… at least until the market has sorted itself out. That may still take a few more years. Then I will buy a pile of gold and who knows what… maybe real estate, or more Choada stock. If I have cash, I’ll be king! I hope my house does not make me a poor king.


    DOUG T.

    Thanks for this contradictory opinion. Bill himself has said many times that the market makes its own rules, and is often times unpredictable. Stable economies and governments are necessary for real estate to be safe investments, as you said. That is why I’m diversifying across every asset class, so I don’t have to take the big loss.

    There is no safe place to invest. I’ll agree that times are changing also. Materialism is becoming less important to more free time and socialization across the world. Perhaps that will be a good thing, and someday humanity will no longer need governments or central banks.


    CLIVE R.

    Diversification has been a standby for generations. I wish it were that simple now. 

    The problem is that every asset class I look at looks like a mess, and they are all related, from Jackson Pollock paintings to Treasury bonds. When one crashes the rest will follow. I see no place to hide. Cash is a terrible option, but the best of the bad lot.

    Yesterday, a friend sent me two charts. They certainly got my attention.

    One chart showed the increase in the money supply of over 2000 % since 2008. WOW!!! It was about flat before 2008. It shows as an increase in banking reserves, not loans to businesses.

    The other showed the velocity of money since it was first recorded in 1959.  It looks as if it has fallen off a cliff, starting about 2000. It is in free fall now and much lower than at any time since 1959.

    Those two pictures were very alarming to me and support the concerns that I have from other ways of looking at what is happening. Munch’s “The Scream” comes to mind.

    The two charts show me that the money from monetizing is going into the banks and financial assets, but not being lent into the “real” economy. There is no multiplier effect and no underlying strengthening of the economy and also no increasing tax revenue. Chris’s report this week about the BIS is saying the same thing. The central banks’ only trick of monetizing is simply not working. FIscal policies have made things even worse.

    Inflation? Mandated costs are up and optional prices are down.

    Keynesian economics? Boo. Abused and discredited. Not working, other than to support moribund industries and insiders, punishing healthy businesses. Krugman and Friedman need to shut up. They are not helping.

    The emerging economies are already reflecting this in their stock markets. Russia looks so good when Rob analyzes it, but it too is crashing, like everywhere else.

    My suspicious side says that the real estate market in the US is being pumped by “funds” with funny money, government money (yours and mine), in an attempt to lure the public into the real estate game again. It ain’t working. When the monetizing stops the real estate speculation pump will spring a leak. The de-leveraging could make some really bad days in all the markets. I see no good reason for the stock market to be as high as it is now. Future earnings? C’mon. Future losses is more like the reality.

     The photo of all those people in China standing outside a “gold” shop leads us to believe that they are all there to buy gold “on the dip”. I think they may be there to sell it if they have housing debts to pay off as the Chinese real estate bubble pops.

    The bond market looks set for flat lining or rising interest rates.

    I am not a doomsday thinker. I don’t have cans of beans or guns stashed away. I do have some cigars and whiskey, but not more than a month’s supply. I am just trying to look at the reality of what I see and don’t want to be a Pollyanna about it. This situation is worse than I have ever seen. The propaganda machines are in full blast good news mode trying to turn things around. Nothing is working.

    That’s why I think everything is headed for a massive deflation. Cash is trash says the propaganda machine, buy gold, buy anything, diversify, be a good American and spend, spend, spend. 

    I don’t buy it. I think that cash is the one thing everyone will not only want, but need.

    Governments and central banks? Like the poor, I’m afraid we are going to have them with us for a long time. Bitcoin? Nah. Maybe a bit.


    DOUG T.

    Besides the skills Ive developed over my lifetime, time and freedom are the most important assets I have, and each are becoming in shorter supply each day. We cant create more time, but we can create more freedom. Perhaps a worldwide depression would cast worldwide doubt on all governments and central banks ability to manage the world, leading to an interconnected humanity through commerce, absent of central planning.

    Maybe its time to short governments and central banks, and go long on those companies pushing free trade, skills, and the internet. Just need to figure out which ones will be the stars.

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