Use access key #2 to skip to page content.

amassafortune (29.22)

It's Time For Residential Real Estate



February 07, 2012 – Comments (9) | RELATED TICKERS: EMR

I didn't think Bernanke could do it, but residential real estate is finally a relative value.

Stocks continue to drift up, but will only expand P/E multiples with uninspired recent corporate earnings. Even Emerson, one of my favorites since 1987, posted a shoulder-shrugging quarter. There are great opportunities in biotech and molecular genetics, but picking the winners today would be like picking the Big 3 autos out of the fifty largest auto companies in 1915. 

IPOs, as usual, have had retail investors chasing like dogs after a steak on a bumper. Facebook will soon do the same, I'm sure.

Gold has had an eleven year run. It will see $2,000+ again, but the charts indicate a likely pull-back soon.

Prime Iowa ag land can sell for more than $13K per acre. Rural Ohio and Pennsylvania land that could be had for $1K per acre five years ago, now commands $3,500 per acre, especially if it's within the Utica or Marcellus shale areas.  

High yield bonds have continued to rise along with the risks they represent.

Art and collectibles have held value or increased which is not common during a recession. 

Offshore growth is negagive in Europe, slowing in Australia, and all BRIC countries will see moderated growth. Those investments are maturing or even shrinking.

Even investors content to ride out this historical period of central banking intervention, knowing full well their dollars are eroding due to overprinting, now see some snares being set for them. The Fed has been discussing the issuance of negative yield instruments.

The Fed believes they have cheapened the U.S. dollar to the point that stubborn citizens who still shun risk markets will accept a predetermined annual loss of funds just to remain in cash. Once again, banks will receive the discounted proceeds and happily dump that cash into risk assets. 

Retail account rule changes already allow institutions to lock up cash availability in some accounts. This is why they asked you for a specific election of sweeping options in your accounts. Mary Shapiro just announced an expansion of this trend into money market funds that will allow the accounts to "break th buck" so the value of dollars held can be reported at less than $1.00 each. This will free up fund managers to enter the negative yield space.

This is part of the ultra-low rate bias of the Fed, the desire to give member banks even cheaper cash, and another action to nudge even very conservative savers into risk markets or to spend the cash before it loses even more value.

These steps take a little more freedom out of the free market, which explains the growing political trend against the powers of the Fed. If the Federal Reserve were even 90% correct it would not be a problem. Much of what we have endured for the past four years is an attempt to fix the massive real estate mistakes, and oversight fail, of the Fed between 2003-2007.   

That leaves residential real estate in all its glory and with all its shadow inventory. On a relative basis, with low rates for those who qualify and deeply discounted pricing from the 2007 high, residential real estate is a comparitive bargain.

If one looks at a house as the sum total of raw land, utility upgrages, materials and labor, the standing structure gain investment potential as its price falls. Now that so many other asset classes have risen, and rental units have 90%+ occupancy in most U.S. regions, residential homes deserve a look. I, like many today, no longer consider my prime residence an asset, so be careful. 

I think Bernanke won, or will soon win his battle to reinflate residential real estate. The downside is that he is probably, once again, creating unintended consequences by prodding markets in directions they would not naturally go without Fed intervention. 

9 Comments – Post Your Own

#1) On February 07, 2012 at 2:49 PM, FOOLSBILLY (< 20) wrote:

right on, brother.



Report this comment
#2) On February 07, 2012 at 3:06 PM, foolkiwi (< 20) wrote:

Excellent post. +1

Report this comment
#3) On February 08, 2012 at 12:48 AM, Starfirenv (< 20) wrote:

Amass, I agree but anticipate the falling knife that is res RE accelerating.   Also concerned about chain of title (or lack of thanks to MERS). Also, I'm not sure I believe in "unintended consequences".  A couple items of interest from just today-

Banks pay homeowners to walk-

Why? (Big surprise here)-

Ever think about moving back to Mx?   +1 rec.  Best

Report this comment
#4) On February 08, 2012 at 3:22 AM, amassafortune (29.22) wrote:


I still see some falling prices in my area, too, but they seem to be short sales that have been on the market for six months or more. Falling prices seem to less widespread these days. I think by the end of this year enough investors will have gone through a similar analysis and the numbers will show the bottom is in. 

If I remember correctly from a recent article, 31% of homes are owned free and clear. Most of these were paid off before the crash and can be easily documented as not involved in robo-signing/MERS entanglements.These seem to be selling easier, which may be one reason banks are getting off the fence to move distressed properties.

Banks had been slow to refinance because mark-to-market allows them to hold the asset at the 2007-08 top-of-the-market value. They use that number as part of their bank capital requirement. The resulting foreclosure risk is balanced by derivatives.  

Two possibilities:

1. Buyers are onto the fact that they can avoid any future clawback risk by buying a home owned free and clear for several years. The owned-home segment may already be on an uptrend and banks are missing out. 

2. The banks' plan is backed by derivatives and the mess in Europe threatens a default that will test that highly-leveraged, unregulated market. If the $15 trillion mess of 2008 threatened banks with 10% capitalization requirements, how will the $60 trillion derivitives market fare with no capitalization requirements?

Nice article on hedge funds buying up foreclosures. It is probably cheaper to buy these Fannie/Freddie properties than building new multi-units. With the high occupancy rate and the ability to raise rents in this market, it's probably going to be a winner for the hedgies. They also get cash flow sooner than waiting for units to be built.

I agree with your "unintended consequences" note.

Take care and thanks for the feedback.  

Report this comment
#5) On February 08, 2012 at 11:10 AM, Teacherman1 (< 20) wrote:

This is bringing back memories of the 80's for me.

It is similar to what I did in a more limited way, when my partner (at that time) and I bought a lot of houses from a bankrupt residential REIT.

They were under court order to sell all of the properties by a certain date for whatever they could sell them for.

We bought houses in our area (because we were familiar with the market there, and because we had to "manage" them), in lots of anywhere from 10 to 40 at a time.

To get the best overall price, we had to buy some dogs along with the good ones.

The key was to know how to "dump" the dogs and keep the others for awhile.

We were able to sell the dogs, sometimes at a small loss, and some we got set up under a special section 8 program available through local govt. programs, and then sold them to other investors looking for cash flow.

The ones we kept, we did quick "facelifts" on, and got renters in them, and were able to get them converted to mortages after a period of time.

Along with our own money, we also put together a group of investors, some local (mostly doctors), and some from out of state. California was a good place to get them because their prices were so high there, that these properties looked like they were being given away.

We had the program set up in various ways, where we would either sell some properties outright to investors and sometimes managing them for a fee, sell an interest in a group while retaining an interest ourselves as well as a management fee, sell to investors while retaining a share of the profits in lieu of a management fee, and held some longer term for eventual resale ourselves.

Surprisingly, it took only about 3 years for the market to turn and for us to get out with a very good profit.

The way the REIT got into trouble was they tried to cover too large an area of the country and got into areas they did not know and lost management control because they did not have a good program in place to oversee such a large and diverse group of properties.

If I were younger, I would consider doing this sort of thing again, but on a more limited basis.

Just walking down memory lane and throwing this out as an idea for some "young turk" who wants to "amassafortune":).

Be advised, you need to have, or know people who have the money to make it work, and you need to know what you are doing.

Hope everyone has a good week.

Report this comment
#6) On February 08, 2012 at 1:22 PM, leohaas (30.12) wrote:

I am not so sure about the relative value of real estate. Sure, if you still have the stratospheric prices of 2006 in mind, real estate is a great deal. I am not so sure that comparison holds any value.

Comparing with stocks is appropriate. Both real estate and stocks run the risk of losing money. Investors want to be compensated for that risk, and if you think that P/E ratios are kinda high and earnings reports are uninspiring, I can see a preference for real estate over stocks.

Comparing with cash (which yields 0 or near 0 even if you put it into a savings account, CD, or money market fund) real estate is probably not a bad deal. It should, since you are taking risk of losing money.

But what I am missing in your blog is an assessment of the foreclosure glut. A niece of mine "owns" a home in the Orlando area. I use this term loosely, because she stopped paying her mortgage well over a year ago. She lives for free in the house until the bank forecloses on her. Like her, there are many more in the same situation. I don't see the real estate market perk up until this glut of yet-to-be-foreclosed homes is sold off. Until then, every new foreclosure creates a new low "comp", driving down the value of the whole neighborhood, resulting in more folks being under water by larger amounts, in other words: more incentive to just stop paying. Rinse and repeat.

Short of bulldozing the glut, I don't see the real estate market going up. I finally sold my home and will wait at least a year before buying again. My cash is earning 0.6%. That beats losing money in a leveraged investment...

Report this comment
#7) On February 08, 2012 at 1:38 PM, outoffocus (22.86) wrote:

I'm almost ready to nominate this for post of the day.  Excellent analysis! But I still believe in trying to stop the first crash, Bernanke only set the tone for an even bigger crash, kinda like how Greenspan set the stage for the 2008 crash.  Except instead of creating a bubble in real estate, he created a bubble in bonds.  Theres NO WAY that bubble can pop and not have devastating effects.  So we'll see.  But I agree about residential real estate in many areas.  I see foreclosures in my area seem to be selling for MUCH more realistic prices. 

Report this comment
#8) On February 08, 2012 at 4:11 PM, Teacherman1 (< 20) wrote:

I thought you were talking about the GSE's proposed REO to Rental program.

Even though the lion's share will go to bigger companies, there are almost always a few scraps left over for the hungry.

You might be able to pick up a few "outliers" that were included in one of the bigger players package that is too far out of their area to keep up with, and too small for them to bother with.

Like I always say, you make your money when you buy, so getting them at the right price in the right place could pay off for someone with hustle.

Report this comment
#9) On February 17, 2012 at 12:18 AM, Starfirenv (< 20) wrote:

Interesting read in support of your premise- although no mention of the mess that is MERS.

Report this comment

Featured Broker Partners