Daily Speculations The Web Site of Victor Niederhoffer & Laurel Kenner Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter;  a forum for us to use our meager abilities to make the world of specinvestments a better place.

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Real Estate

March 2005

3/22/2005
The Elephants Return, by Jack Tierney

The president of the Old Speculators' Assn., the semi-mythical organization behind this Web site, comments that as commodity bubbles continue their inexorable journey to perdition, thinking Americans are putting their money in a "real asset," their home...and they have been rewarded handsomely. Or have they? With comment by Tony Corso.

September 2004

9/24/04
"Guaranteed to Happen", Real Estate Going into Boom Because of Increased Government

Yishen Kuik Contributes:

I seem to recall a while back there was a post about how real estate around a capital city tends to rise with an uncontrolled budget. In particular, Brussels was discussed.

Courtesy of the IHT, a post on rising Brussels real estate.

December 2003

Word From New Hampshire (and a Note on Cars) (F. Belsak)

REAL ESTATE -- RESIDENTIAL
Lately we've been seeing a lot of residential (and to a lesser extent, mid-development subdivision/builder) bank auction and foreclosure events here throughout New Hampshire. Being 1-3 hours from greater Boston, NH has traditionally been a "canary in a coal mine" for the property market. Job-poor away from the MA border, with many 2nd and vacation homes, and people living off their investments. Plus high property taxes due to the otherwise weak tax base in rural parts. The number of such auctions per week seems to be going up at a brisk pace. Are banks/mortgage companies flushing their junk just because we are nearing EOY? A friend with contacts at banks tells me there are a ton of non-performing mortgages. My CPA tells me that the nominally well to do (what I think of as upper-middle management types) are having trouble carrying their 2nd/vacation homes and expensive toys.

Today everybody, even people with no business doing so, seems to want to buy a house if they aren't in one already. Everyone surely has heard about the frequency of cash-out refinancings and equity loans and such like. Not to mention savings-poor leveraged consumer statistics. With these trends having gone on for several years, perhaps it is no surprise to see a foreclosure trend.

Friends in home construction and real estate brokerage say that the further out metro Boston markets are soft in the $500K-$2M band. Homes-for-resale inventories are high.

COMMERCIAL REAL ESTATE DATA POINT
A relatively recent and startling potential bottoming commercial RE data point happened. Lucent's 100+ acre North Andover MA facility was bought for about 20 cents on the dollar of only the improvements Lucent made in recent years.

Any ideas for investing in depressed commercial real estate? REITs? ETFs? My gut feel is to wait for peaking mortgage rates and sparsely attended auctions, combined with public antipathy towards real estate, ie it could take 3-4 years to get there.

USED CAR ADS AND LOTS AS A CONSUMER HEALTH INDICATOR
Look at the classified ad sections of a big city newspaper. Consider the number of ads for high end versus practical/family/tradesman vehicles. The Boston Globe for several years has had inordinate numbers of ads selling Mercedes, BMWs, Porsches, etc compared to Ford/Chevy/Toyota/VW/etc lines. Further confirmation: friends in the local auto-mile used car business observe that lots selling 2-3 year old higher-end H/W are hurting compared to the 5-6 year and up aged car lots. Investment result: bought a high end used minivan ('99 T&C with all the goodies) for less than 1/3 of its new ticket.

Used cars seem to be suffering from aggressive lease programs of yore combined with upper/middle income consumer problems.

November 2003

Henry Gifford writes:

I see an opportunity in the real estate situation now. Buying a piece of real estate with leverage and renting it out seems like a good idea, assuming you buy something in a place people want to live. You buy with 6% money, which amounts to selling a dollar bond. If interest rates go up and the aforementioned resulting drop in prices occurs, the monthly cost to a new purchaser is offset by higher interest rates, so a new purchaser's monthy cost is (about) the same as yours, so the lower prices do not put downward pressure on rents. More importantly, the lower prices do not hurt your cash flow. The inflation (narrowly defined by me as a lowering of the value of money) that normally accompanies higher interest rates raises the dollar price of the real estate over the next few years. If/when the price surpasses what you paid you sell at a profit. Inflation almost guarantees a price rise in the long run.

If you buy for cash inflation does not make you a profit, you sell for a higher number of less valuable dollars and pay tax on the "profit." If you bought with leverage inflation reduces the value of what you owe, making you a profit. Higher interest rates increase the value of your loan, while lower interest rates decrease the value of your loan.

So what is the risk of loss from the value of your loan (to you, not the bank) going down as interest rates drop? None. You simply refinance at the lower rate. Transaction costs are significant, but not prohibitive as refinancing rates attest. It's like having a free put option.

A few months ago I too wondered how the US government will engineer a soft landing for the real estate market. Soon I saw a headline "Bush Boom." The newspaper claimed we are in a historically strong economic boom created by Bush's tax policies, etc. I smiled and figured that soon there will be reports that the government has determined that higher interest rates are necessary to "cool off" the growth to prevent "overheating" of the economy. I started calling around about refinancing all the real estate I own, and stepped up my search for more to buy with leverage.

11/30/3
Omid Malekan:

I've tried for the last two years to get a grasp on the real estate market, and frankly I can't. I think my equities background biases me in too many ways. But the one conclusion I have come to is that applying ideas and lessons from more liquid and less physical markets like stocks or bonds is a really bad idea.

Several people today have mentioned a real estate bubble and an inevitable collapse. So let's look at hypothetical scenario, and say that as rates rise residential prices in major markets take a 20% hit. First of all, in many hot spots a 20% decline takes us to where we were 1.5 years ago, so anyone who bought their house further back than that is still fine. As for those who have recently purchased a new home, many of them sold another house, so they are net profitable on one transaction and losing in the other. But unlike 401k accounts, real estate prices are not marked to market daily or quarterly, since every house is different and the only true market is the one for your specific house. Other than those who are looking to sell a house and are thus getting bids, for the majority of homeowners the decline will be something they read about in the paper.

Even as people read about price declines and are frightened by them, most will take zero action so long as they can keep paying the mortgage payments. After all, their house isn't just an investment, its also where they live, the determinant of where the kids go to school, and the source of countless other non-financial decisions which will make people less likely to sell in a panic than they would if their stock or bond portfolio was tanking.

When a stock market bubble was growing, companies could theoretically add supply indefinitely, making the pain even sharper when the bubble burst. But in the major urban markets where real estate has gone up the most, there are serious frictions which impede supply. Land is the biggest one, followed by onerous regulations and labor. It is easier for the IB team at Goldman to do another IPO than it is for Boby's crew of carpenters to put up the frame to another house. To me, the frictions mean that above average growth doesn't necessarily translate to a collapse of prices, but rather many years of little gain, as was the case in the mid nineties in many places.

There is one place where I see serious declines down the road, and that's in activity. Everyone and their mother seems to have gone into residential construction over the past few years, and though I know little about the economics of national home builders, I am fairly certain that many of the smaller players will eventually have to find a new line of work. Along the same lines, people in the gym have been trying to convince me to go into the mortgage creation and brokerage business the same way that they were trying to convince me to become a stock broker 4 years ago. I see some ominous parallels between mortgage brokers now and stock brokers back then, and would bet that 3 years from now there will be half as many mortgage brokers with profitable jobs. And just as time revealed how during the boom years many companies involved with stocks were wrought with fraud and scandal, I can't help but wonder which mortgage player is going to blow up in the years to come.  Timing is of course everything, and I thought Fannie was over finished 18 moths ago, so my track record has been rather poor. (11/29/3)