For the past five years, I’ve been supporting my startup habit by buying and selling real estate. Some time in 2006 I decided all that was over, and got out of all my stuff except some land in Texas and the house I live in. I think I was very lucky, because I found a seat before the music stopped. That’s because
But a lot of friends of mine are reluctant to give up, and keep saying things like “Phoenix keeps growing. People keep coming here,” or “There’s a fundamental undersupply of housing in the Bay Area, so we will be okay.”
Well yes, in the long term all of that is true.
But if you are asking for my advice about what to do right now, especially if you are investing, I would say “sit on your hands and stockpile cash.”
Here’s the problem with this current real estate cycle: yes, there is excess inventory. Ordinarily, that would be a good time to buy. However, several things are happening:
1)3-year adjustable mortgages will all adjust this year from 2005(high point of the last cycle), leading to more foreclosures, leading to more inventory
2)this leads to FEAR on the part of banks and mortgage banks.
3)this leads to a credit crunch
4)The lack of liquidity doesn’t allow anyone to leverage anything
5)Real estate is only a good investment because of leverage.
Everyone “in the know” knows this, and CNBC is wildly talking about it. The government will do its best to straighten it out before the next election cycle, but they may not be able to do it. Timing is bad.
This week’s WSJ had some good articles that were analyzed by my friend Barry Ritholz, a respected authority on the financial markets who writes a blog called “The Big Picture. I’d subscribe to his blog for a while if I were you, and also the Housing Doom Blog.
Problem is, anything that happens in America affects every other market now, because the universe is global. Deutschebank was bailed out this week by the American Fed. I have been around long enough to know that these collapses occur little by little, and that you can’t predict them. I hate to keep bringing up the end of the 80s, but when the S&Ls collapsed everything followed them until real estate fell to less than fifty cents on the dollar. And that’s when the buying opportunity occurred. That hasn’t happened yet.
There is a year of sitting it out ahead of us before it will be good to do the contrarian thing. During the next year, it will be quite difficult to get a mortgage or a loan.
What’s the current play? My friends with big money seem to be starting small banks That way they will be able to lend before everyone else and grab good market opportunities. Myself, I am going to be a founder of a 4-state community bank that favors entrepreneurs.
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I don’t think you can forecast that the foreclosure rate will go up more than it has. We don’t even know who owns these loans and what they might do to protect their position. We just found out this morning that China owns a shitload of these sub-primes. Now is it in the best interest of those who own the notes to foreclose and reduce the value of their inventory or is in their best interest to work out some other solution which props up the market until it naturally settles within a couple of years. Now if it were heavily regulated companies that owned the mortgages, that would be one thing because of their regulations, but we now find out that many of these sub-prime loans may be held by institutions that aren’t regulated at all and who in fact, like the Chinese, may take a much longer term view of this. Can you predict what the Chinese will do with these loans? When the news came out this morning, a few of the pundits basically said they had no clue what the Chinese would do.
So, if you’re wrong about the foreclosure rate, the rest of your argument falls apart.
Now the oldest stock market strategy is buy stocks all the time and over the long haul you’ll make 10 or 11%. It’s called price averaging. Why would you not think that same philosophy wouldn’t work in real estate? If you are in real estate for the long haul, you don’t jump in and out of business.
Deep down, you must be a market timer in your heart. Very risky business going about it that way. You’re the person looking for the next big wave hoping to make a killing – you want to chase the bubble. And like all of us, myself included, you’ll find the arguments to support your strategy.
Not a market time, just a person who lost big at the end of the ’80s and thus is still working. But I love your ideas, and the one about China is a shock, although not a surprise. China owns us in many ways, doesn’t it?