housing optimism

[ERICOPOLY]

http://finance.fortune.cnn.com/2011/03/28/real-estate-its-time-to-buy-again/?source=yahoo_quote

 

Home-building stocks still near the bottom, like PHM for example.

 

I know a lot of you think housing is going to drop another 20% or something, but Buffett has stated that he thinks recovery will start to happen in 2011 and he is spending money in his businesses to prepare for it.

 

 

In Northern Virginia, Chris Bratz, an engineer, and his wife, Amy DiElsi, a publicist, are planning to leave their rental apartment and become homeowners for the first time. The main reason? Buying has simply become a far better deal than renting. "The market got completely inflated, then it crashed, so prices are coming back to where they should be," says Chris. As the couple have watched prices fall, they have also watched the rent on their apartment spiral upward, reaching $2,700 a month. They calculate that they should be able to purchase a townhouse for between $400,000 and $500,000 and pay less per month for a mortgage.

Wheaton reckons that we'll see a flow of around 1 million foreclosures a year, at a fairly even pace, from now through 2013. That figure is frequently cited as evidence that the market is doomed for years in most foreclosure markets. Not so. The reason is that the vast bulk of those units, probably over 600,000, according to Gleb Nechayev, an economist with real estate firm CB Richard Ellis (CBG), are being converted to rentals either by investors or their current owners. Those properties are finding plenty of renters, since the rental market is still extremely strong across the country. Remember, the millions who lost their homes to foreclosure still need somewhere to live.

 

This guy is funny:

Castleman claims that this recovery will look like all the others: It will bring a severe shortage of housing. He invokes the livestock business to explain. "It takes three years between the time a bull mates with a cow and when you get a calf ready for market," he says. "That's how it is in housing too. We'll get a big surge in demand and the drywall companies will take a long time to ramp up, and it will take years to get new lots approved. Buyers will show up looking for a house in a subdivision, and all the houses will be sold. The builders will tell them it will take six months to deliver a house." But those folks, says Castleman, will be set on buying a place. "And they'll want it so bad they'll bid the prices up!"

 

[Guest Bronco]

The US government has thrown the kitchen sink at inflating home prices.  But long-term, what is the cost of doing so?

 

I constantly wonder how the economy can truly be strong on its own without the banking sector doing well.  Which one will give? 

 

Emotionally, I am looking at the consumer goods stocks more than I have in a long time. 

 

Just my 2 cents though.

[Smazz]

There were too many homes related to jobs just a few years ago.. since then NET jobs are down yet homes are still being built.

 

There are alot of drunken sailors out there - I may seem like a prude for not joining into the party but i'll keep for sobering days.

[ERICOPOLY]

A question (Devil's advocacy):

How will things look when the dumb money follows suit (if this is what the smart money is doing)?

 

http://www.berkshirehathaway.com/letters/2010ltr.pdf

 

Last year – in the face of widespread pessimism about our economy – we demonstrated our enthusiasm

for capital investment at Berkshire by spending $6 billion on property and equipment. Of this amount,

$5.4 billion – or 90% of the total – was spent in the United States. Certainly our businesses will expand abroad in

the future, but an overwhelming part of their future investments will be at home. In 2011, we will set a new

record for capital spending – $8 billion – and spend all of the $2 billion increase in the United States.

 

[Myth465]

There were too many homes related to jobs just a few years ago.. since then NET jobs are down yet homes are still being built.

 

There are alot of drunken sailors out there - I may seem like a prude for not joining into the party but i'll keep for sobering days.

 

I dont see housing coming back. A generation of Americans will not invest in the market and A generation will not invest in housing now. Maybe it stops going down but I dont see any easy or quick returns until things stabilize. The economist letters section had an interesting back and forth on this (listed below).

 

Everyone is currently trying to kick out the legs from under housing (removing Fannie, Freddie, removing mortgage deductions, removing easy credit, ect).

 

http://www.economist.com/node/18438228

 

In the slumps

 

SIR – Your special report on property (March 5th) made scant reference to two important determinants of the American residential property market: the underlying demographic impacts on demand and supply, and the serious shortcomings of a fixed-rate mortgage market. While the demand function for first-time buyers is frequently analysed, the fact that Americans make their largest home purchase at the average age of 45 is rarely considered. Once one appreciates this fact, and that the apex of the baby boom was 1961, it should be no surprise that the peak year of inflation-adjusted home prices was 2006, after 15 years of increasing demand.

 

The average age at which Americans make their largest home sale is 60. Since the number of Americans born in 1976 is almost 25% lower than the number born in 1961, and the bulk of aggregate property value is in the largest homes, it is therefore reasonable to assume there will be no demand and supply equilibrium in the American market until approximately 2021.

 

 

Moreover, in addition to the 25% of homeowners with negative equity, a similar proportion have insufficient positive equity to refinance their high fixed-rate mortgages. Until home equity improves and/or a vibrant variable-rate market develops, there will be many reluctant homesellers.

 

The outlook for homeowners is unavoidably grim. Fed funds will therefore probably remain very low until home prices rise materially. Meanwhile, those who borrow at 100 basis points over fed funds to buy attractively priced liquid securities will probably make out like bandits.

 

Ian Ellis

President

MicroCapital

Southport, Connecticut

[Parsad]

I think if you are buying real estate for the long-term, you will do perfectly fine right now.  It won't be smooth, but there are alot of bargains.  As we said in our annual letter this year that went out to our partners recently:

 

A very interesting dichotomy within the investment world presently, is how investors are treating two very different asset classes.  You have many people hoarding gold and other precious metals, now that they are at decade highs, yet very few people are buying real estate which is at decade lows…even multiple decade lows in some municipalities!   You can literally buy a mid-level executive home in a nice area of Detroit for less than a new BMW 3-series.  Condos that a couple of years ago were selling for several hundred thousand dollars in Las Vegas and Scottsdale, are now selling at one quarter or less of those prices and real estate agents still can’t get rid of them.  Ah, the mind of the investor!

 

As long as you aren't overly leveraged and you can handle more economic stress, you will be rewarded if you are patient with residential real estate in good markets throughout the U.S.  Just make sure you buy cheap, are significantly net positive from the rent, and have cash on hand for expenses, repairs, property taxes, etc.  Cheers!

[ERICOPOLY]

Found the quote from Buffett's 2010 letter to shareholders:

A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some

point. Consequently: (1) At MiTek, we have made, or committed to, five bolt-on acquisitions during the past

eleven months; (2) At Acme, we just recently acquired the leading manufacturer of brick in Alabama for

$50 million; (3) Johns Manville is building a $55 million roofing membrane plant in Ohio, to be completed next

year; and (4) Shaw will spend $200 million in 2011 on plant and equipment, all of it situated in America. These

businesses entered the recession strong and will exit it stronger. At Berkshire, our time horizon is forever.

[Guest Bronco]

Yeah - I think that with these $500 - $800k homes - once the bottom is in (say it is now), how will these homes go up when interest rates go up?  We will be back where we started.

 

On the flip side, IMO - the only way out of this mess in the US is to print, print, print.

 

So to Parsad's long run thesis (although I am not describing bargains) - you may be paying back loans in future years with massively inflated dollars.

 

We are not in a Ron Popeil economy - set it and forget it.  We are closer to a Vancouver Canuck economy - on thin ice.

[Smazz]

A question (Devil's advocacy):

How will things look when the dumb money follows suit (if this is what the smart money is doing)?

 

 

Thats why you have to think for yourself on every transaction. Smart $ took a chunk of USG. I know WEB is smarter than I but i couldnt see the logic in that one.

 

[ERICOPOLY]

Buffett is investing in Mitek, ACME, Johns Mansville, and Shaw.

 

So he is basically investing in a home building recovery. 

 

Which is why the homebuilding stocks came to my mind.

 

 

 

[Myth465]

Buffett is investing in Mitek, ACME, Johns Mansville, and Shaw.

 

So he is basically investing in a home building recovery. 

 

Which is why the homebuilding stocks came to my mind.

 

 

 

 

That should be pretty straight forward and much easier to bet on. Its a function of housing starts, needs, and available homes. Once excess capacity is soaked up homes will need to be built.

 

For me there are easier ways to make money.

[Parsad]

We are not in a Ron Popeil economy - set it and forget it.  We are closer to a Vancouver Canuck economy - on thin ice.

 

Well, any combination of losses and wins (2 wins for us, 1 loss for you or 1 win for us, 2 losses for you, etc) and the hunt for the "President's Trophy" is over. 

 

Really just about impossible now for Detroit and Washington.  Philly has a slim chance, but that window is closing rapidly.  After that, Vancouver makes its run and eventual win of the Stanley Cup...this is the year of the Sanj, ok!  Cheers!

[Stone19]

Well, any combination of losses and wins (2 wins for us, 1 loss for you or 1 win for us, 2 losses for you, etc) and the hunt for the "President's Trophy" is over. 

 

The President's Trophy is like going to the league awards and winning The Lady Bing.There is only 1 trophy in hockey.That's Lord Stanley

 

Cheers

[Aberhound]

Housing is a pro-business state financed by a 30 year mortgage is better than renting. Interest rates will rise in the future as the rates cannot be manipulated forever without causing inflation. If your rate is locked in you don't care. With growing and high government debt the Fed will likely try to continue to manipulate interest rates which will cause inflation. The same thing happenned after WWII when the Fed set interest rates artificially low to help the government repay the WWII debts. Bonds were a terrible investment until Volcker. Pershing has an excellent write up explaining why housing + a 30 year mortgage is a great investment because it works like a hedge against inflation. If you buy now instead of renting in ten years your mortgage payments will be the same but the rent you would otherwise pay will be much higher. Another way to think about it is that your mortgage will be paid back partly by inflation. Your income should rise with inflation but the mortgage payments will stay the same. Conversely whoever holds the 30 year paper will suffer a big loss. Currently it looks like taxpayers will bear the loss which increases the government debt and its rate of growth and likely will cause the Fed to print more money which debases the currency so we have a self-fulfilling prophesy.

[Guest Dazel]

 

 

I am blown away by the difference in housing sentiment between the US and Canda. Literally it is

night and day and Canda does not have 30 year mortgages. we are taking a look...

 

Dazel.

[Smazz]

 

 

I am blown away by the difference in housing sentiment between the US and Canda. Literally it is

night and day and Canda does not have 30 year mortgages. we are taking a look...

 

Dazel.

Canada has had 30 year mortgages. Some of the majors are just now restricting the 35 yr amorts.

[NormR]

 

 

I am blown away by the difference in housing sentiment between the US and Canda. Literally it is

night and day and Canda does not have 30 year mortgages. we are taking a look...

 

Dazel.

Canada has had 30 year mortgages. Some of the majors are just now restricting the 35 yr amorts.

 

They're effectively ARMs.  The amortization period may max out at 30+ years (40 years only a few years ago) but the rate is often floating or locked in for << 10 years.

 

[ERICOPOLY]

Regarding the focus on how the house might not appreciate if interest rates go up.  

 

It seems like this argument ignores the cash flow benefits from the fixed imputed rent that will accrue to the homeowner "when" market rents soar from all this predicted inflation.

 

It's like we're back to ignoring cash flow again and only thinking of appreciation.  I am at least relishing a little bit of irony here  :)

 

[Parsad]

Regarding the focus on how the house might not appreciate if interest rates go up. 

 

It seems like this argument ignores the cash flow benefits from the fixed imputed rent that will accrue to the homeowner "when" market rents soar from all this predicted inflation.

 

I would suggest you all view housing a bit differently.  For our U.S. boardmembers, tell me if your homeowner's insurance has decreased in the last couple of years, including the replacement cost for your home?  I would imagine not, and if it has, I would imagine your insurance premiums have dropped less than 10-15% at best. 

 

Many of the homes that are for sale in the United States at distressed prices, are actually selling for far less than the cost to actually rebuild the same home at today's prices for materials and labor.  Remember, that those labor costs, and some of the materials cost has fallen as well, yet the price to rebuild many of those homes is dramatically higher than the market price.  It would be the equivalent of a net-net! 

 

If I lived in the United States, I would seriously consider starting a residential property investment partnership.  But unfortunately because I live in Canada, the cost, convenience and time required to do so from here is not feasible, as there would be considerable on-site due diligence and travel required.  But for you U.S.-based managers...you could do quite well paying distressed prices on residential real estate right now.  Cheers!

[ERICOPOLY]

 

Many of the homes that are for sale in the United States at distressed prices, are actually selling for far less than the cost to actually rebuild the same home at today's prices for materials and labor.  Remember, that those labor costs, and some of the materials cost has fallen as well, yet the price to rebuild many of those homes is dramatically higher than the market price.  It would be the equivalent of a net-net! 

 

 

You are right.  The price of existing houses will become competitive relative to the price of new ones (when supply of existing homes is absorbed). 

 

Meanwhile, we'll just say for now that the houses are overpriced based on historical levels -- never mind what they cost to build.

[opihiman2]

I rarely post, but I have to pitch in on this one.  My wife and I have been holding off on buying a house for 2 years now.  We have a really good grasp on real estate prices here in California.  A year ago, I remember there was some optimism about the housing market from not only the financial wires, but from some of the posters on here too.  I noticed it in the local housing markets as well.  Prices seemed to blip, even on the Case Schiller index, realtors were starting to be more snobbish again and less desperate, and the supposed outstanding inventory of homes was dropping to between the level of the high and median monthly levels.  Everyone was saying then that it was the TIME to buy.  SHYEAH!  I had to stick to my guns on that one, and it was tough, but I'm glad I did.  Fast forward today and those houses and condos are now selling for 30% less.  I was thinking, "Who is still gonna be able to afford a 700k house around here?"  Those 700k houses in the upper class subdivisions are now selling for under 500k.  Condos and apartments?  $240k down to $170k and below.  This isn't in a crappy inland community.  It's in probably one of the most desirable coastal communities in California. 

 

Just next door, I live next to a house that has been vacant and foreclosed for almost 3 years now (longer than I've been here).  Just up the street is another vacant foreclosed house that has been sitting there for over 2 years.  I've seen another house that has been for sell for over a year down the street.  There are SO much for sale signs around, I don't see how it's possible for that much buyers to exist. 

 

So, do I think housing prices are ready to recover?  No.  I think whenever asset bubbles pop, they take forever to recover.  Nasdaq back to 2000 levels?  How long did it take gold to reach the 80s highs?  Oil, when adjusted for inflation, is STILL below its peak during the 70s oil crisis.  Japan?  etc...  And I've personally seen what happens in a regional housing bust.  It takes FOREVER (and even a major housing bubble) for prices to reach their previous highs.  I'm talking 15-20 years.  There is just way too much headwinds for housing prices to recover.  Interest rates are starting to go up.  When QE2 is over, who knows how high interest rates will hit.  I believe that will kill the housing "recovery".  There is also still way too much inventory out there.  Even by normal estimates, I think there is 2 months of excess inventory.  That's not including the shadow inventory--like what I see around my neighborhood.  Job market?  Who has the income to soak up all this excess inventory?  Although the job market is improving, I doubt these newly employed feel confident enough to buy a home.  And most importantly, prices.  Although prices are much more reasonable now, definitely compared to rents, I think there is still enough pressure to push prices further.  At the very least, I think prices will meander in most markets for several years.  Housing in the bigger cities like San Francisco and New York will probably do better.

[SharperDingaan]

 

Keep in mind that much of the Cdn/US difference is structural

1) US mortgages are often non-recourse, in Canada its recourse. Walk away from your house & we'll take your savings, car, etc. until your debt is fully repaid. 2) Cdn mortgage interest is not tax deductible. As there is no government subsidy to help you carry the maximum mortgage possible, you will carry a lower balance than your US counterpart. 3) Cdn gains on a housing sale are tax free, in the US they are not. In the US a $ is a $, in Canada you're paid to hold your property - substantially reducing your risk. 4) Cdn regulation is much more robust than the US, which materially reduces the extremes

 

There is still abuse on both sides of the border (house as a ATM, inflated valuation, etc.) but its much easier to deal with it north of the border.

 

SD

[Guest Bronco]

SD - I agree that the Canadian system is better, but you can sell a house in the US with no tax assessed.

[jegenolf]

Those 700k houses in the upper class subdivisions are now selling for under 500k.  Condos and apartments?  $240k down to $170k and below.   This isn't in a crappy inland community.  It's in probably one of the most desirable coastal communities in California. 

 

That sounds like crappy inland prices. Where exactly do you live? If it's one of the most desirable coastal communities in CA, I'd like to buy a house there!

[Alekbaylee]

Some fresh news for those considering buying in the US...

 

http://ca.finance.yahoo.com/news/Home-prices-falling-19-major-capress-765065925.html;_ylt=Al0_Q92wfV2Nk9EX9e7nIGdyzJpG;_ylu=X3oDMTE4c3FwaGlrBHBvcwM3BHNlYwN5ZmlUb3BTdG9yaWVzBHNsawNob21lcHJpY2VzZmE-?x=0

 

Home values in Atlanta, Las Vegas , Detroit and Cleveland are now below January 2000 levels. A majority of the metro areas tracked by the index now have home prices at levels dating back to 2003, just as the housing boom began