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It's Time For Residential Real Estate



February 09, 2012 – Comments (0)

Location: Amassafortune's CAPS Blog

Author: Amassafortune

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 negative 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 upgrades, 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. 

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