As I talked about, buying real estate as an investment in 2012 in the US is a great idea as it historically relative to other assets is undervalued. Real Estate in 2012 looks to be one of the better long term investments that we have seen in awhile.
First let’s look at price.
Many pessimists point to the large number of foreclosures suddenly hitting the market all at once.
As you can see by this chart, much of the subprime resets lead to people being put in negative equity positions. The negative equity positions resulted in many people walking away. So isn’t that bearish that mortgage resets are hitting?
Not really. First, this time around it is not subprime loans (that are for people with bad credit) that will be facing resets. It is people with better credit, who perhaps are in a better position to refinance their 2nd home if they have one, or sell assets to be able to deal with the problem. Secondly, Bank of america and other large banks are slashing mortgage balances by those underwater. This will drastically help prevent another episode of 2008-2009 in the short term… (although it could push the next bubble even higher and result in an even greater crash at some point). More importantly, you always need to put pricing in perspective.
As stated before, historic valuation extremes point to real estate in 2012 as a good investment. Even considering that average inflation adjusted income using the shadowstats alternate inflation data is at low levels not seen since 1948 if you believe that number (due to high gas prices and high food prices), comparing real estate prices suggest that inflation adjusted real estate prices is near all time lows and still priced at 50 cents on the dollar to 1948 real estate inflation adjusted levels.
Real estate is a bargain compared to historical valuations of stocks and bond yields.
With these charts showing such low valuations, bond yields and interest rates are low which should push investors into spending and risk based investment assets and out of savings eventually. Stocks however, are historically overpriced relative to real estate, making real estate an area more likely to attract capital over the next decade.
Globally real estate in the US is attractive. Here is a global view of real estate. Other areas highlighted include: Europe,Ireland,Germany,Turkey,Dubai,Latin America, Colombia,Ecuador,Uraguay,Paraguay,Cuba,Asia Thailand, Malaysia,Cambodia,Myanmar and Mongolia.
Will 2012 mark the bottom? It is very, very difficult to say what year is the exact bottom. However it is possible. There are people with lots of money buying a lot of real estate in bulk right now. One of the World’s greatest investors, Warren Buffett had this to say in Feburary of 2012
“If I had a way of buying a couple hundred thousand single-family homes I would load up on them.”
Here’s more from Buffett on Real Estate.
He also had this to say
“It’s a way, in effect, to short the dollar because you can take a 30-year mortgage and if it turns out your interest rate’s too high, next week you refinance lower. And if it turns out it’s too low, the other guy’s stuck with it for 30 years. So it’s a very attractive asset class now.” Currently interest rates are very low. If they rise over the next 10 years, you will probably be paying significantly less for the remaining 20 years than other home buyers at that time. If the dollar loses value over time, you only have to pay 3% interest while inflation could cost people more like 6%.
He also said,
“If I was an investor that was a handy type and I could buy a couple of them at distressed prices and find renters, I think it’s a leveraged way of owning a very cheap asset now and I think that’s probably as an attractive an investment as you can make now.”
“If I knew where I was going to want to live the next five or 10 years I would buy a home and I’d finance it with a 30-year mortgage… It’s a terrific deal.”
The other great thing about real estate is you can lock in an affordable rate now. If the economy goes bad, interest rates will drop. If interest rates drop, real estate can become more affordable per month through a refinance. If the economy improves, you can rent out your house at a higher monthly rate than the mortgage. While you only pay 3% interest over 30 years at a fixed payment, you can get a tenant or roommate that can pay increasing amounts as the rents can rise slowly over time.
Rewarding those who are irresponsible creates a moral hazard, why do they punish success and reward failure?
There’s a good argument made that the banks bailing out foreclosure victems through the government program is a bad move. I certainly agree that for the long run of this country, this can pose a dangerous mindset and dependency on other responsible people to bail them out.
However, if there is going to be a bailout and they had done this rather than the direct bank bailout to reward the banker’s failures, you wouldn’t have lost as much equity in your home as your home declined in value from 2006-2012. At least this way they bailout the individual which improves the amount of equity in the home. Now all the irresponsible people and victims of layoffs are going to avoid foreclosure which means FEWER foreclosures to hit the market. Foreclosures hitting the market isn’t a bad thing on it’s own. When a foreclosure hits, someone else buys it at a cheaper price, renovates it and sells it for a higher price and improves the neighborhood value. However, when they all hit at once, banks sell them at less than market value and that puts more people in negative equity positions which lead to more foreclosures and lower home values. Eventually lower prices does make it more affordable. However, with homeowners experiencing a downward spiraling home equity, these people do not spend, jobs get laid off and that results in lower incomes and fewer people able to afford real estate and more people that get foreclosed on and not enough buyers to make up for it and the vicious cycle downward continues.
Additionally, more equity in the home means more spending from the irresponsible which does improves the economy, even if it creates more government dependence.
If you were one of the responsible ones, and paid off part of your home, you can refinance at a lower rate to lower your monthly payment, and with the extra cash per month in your pocket, you may be able to make a payment on another home, and/or get a home equity loan and buy property at these low prices with a low interest rate loan. The irresponsible spenders cannot do that.
Well, this definitely creates a moral hazard and inflates the market and is going to prop up the next real estate bubble to be even bigger and worse when it pops in a decade or two, and perhaps will even build a bubble in the stock market as the economy is artificially improved from all the returned equity and retail spending. The major problem will come when the economy improves, then interest rates rise and all the government expenses that they did to restore confidence now results in a higher debt, but then capital migrates away from government debt into stocks. After this happens in order to attract capital to continue recklessly spending, the government will have to raise interest rates. The debt will skyrocket as a result of skyrocketing interest rates once the debt is rolled to the new higher interest rates. Budget shortfalls will occur, and the government will lose their credit ratings and eventually potentially be paralyzed to help after the bubble that inflates assets causes things to come crashing down to reality.
Until then however, we still have plenty of time to enjoy an improving economy and higher asset prices that will come, and those that are responsible, might as well take advantage of the opportunities that are available to them.
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