It’s Housing Day over at Business Insider today, which is running duelling slideshows from Bill Ackman and Gary Shilling in the wake of yesterday’s dreadful home-price numbers. Both of them are a little dated—Ackman’s is from November 3, while Shilling’s seems to be from October, although it’s not entirely clear. Since then, prices have fallen, which would do little to change either of the analyses, but also interest rates have risen significantly, which puts a substantial dent in Ackman’s math.
Ackman’s logic is pretty simple: you can get a lot of leverage in the housing market, and if you make a highly-leveraged bet and prices rise, then you can get enormous returns. At the heart of his thesis is the idea that valuations are low and will rise in future—but to my eyes at least, there are problems with both legs of that argument.
The “valuation” section of the slideshow is a relatively small part of the whole. It says that home prices are 28% off their peak; that houses are more affordable now than they have been in a long time; and that buy-vs-rent calculations work out in favor of buying with relatively low home-price appreciation rates between 4% and 6%.
The first one seems meaningless to me: why should home prices be low at 28% off the peak, as opposed to say 18% off or 38% off? In fact, a glance at the Case Shiller graph shows that prices are still roughly double what they were for most of the 1990s.* And more generally, when the first part of a valuation argument is percentage-off-highs, I always get suspicious, because that’s always a really stupid metric on which to base a buying decision.
The affordability calculations, too, are a temporary phenomenon related to artificially low mortgage rates and the fact that the US government is currently providing substantially all housing finance. What I’m not seeing is any analysis by Ackman showing that houses will remain affordable in a future of higher rates and private-sector financing—the future when, I assume, he’s looking to exit his residential-property position.
Finally, required appreciation rates of 4% to 6% seem high to me, not low: they say to me that buying is still more expensive than renting unless you assume capital gains on your purchase. Ackman, here, comes close to assuming the very thing he’s trying to demonstrate.
As for the reasons for future gains in house prices, there’s a bit of basic demographics, in that the number of households in the US is going to rise over time, and is going to outpace the amount of new homebuilding. That’s reasonable.
Ackman’s other main argument is based on the assumption that homeownership is going to bottom out at 66% and stay there, rather than continuing on the long cyclical decline which started in 2004. If he’s wrong by just a single percentage point, a lot of his mathematics starts looking very shaky. I suspect that as America moves out of the suburbs and exurbs and into denser forms of living, we’ll see a steady decline in homeownership, which in any case is now seen as being more of a liability than an asset. It’s no longer a road to riches: it’s a road to possible foreclosure, bankruptcy, and an inability to move to where the employment opportunities might be.
Ackman is a speculator, and he’s forecasting a return of his speculative mindset among the population at large—where people buy homes because they’re confident in the future and think that those homes will rise in value, and also because they fear not being able to afford a house in future. That mindset fuels housing bubbles, not sustainable home-price appreciation. And investing in bubbles is always very dangerous, and generally ends in tears. Maybe Ackman can make money doing it—but that certainly doesn’t mean that homes are a good buy right now for the rest of us.
Ackman does have one intriguing idea about what might drive house-price appreciation: institutional investment in single-family home rental properties. He’s right that such things barely exist as a financial asset class, and that even a small global allocation to them could change the demand dynamics substantially. But being a landlord is hard work, especially in suburban and exurban neighborhoods, and I’m not convinced that it scales well: my guess is that the cost of hiring a good rental agent is always going to wipe out returns, and that the only way to make money by renting out single-family homes is for the owner and the rental agent to be the same entity.
If you then turn to Shilling’s presentation, things start looking positively depressing: he brings up reasons for pessimism that many of us never even consider, along with the much more obvious ones. At the top of the list, of course, is unemployment, which poisons everything. No one wants to buy a house if they don’t feel secure in their job, and people don’t feel secure in their jobs if unemployment is over 9%, where it’s likely to stay for the foreseeable future. And these graphs just speak for themselves:
This last one is the most powerful, to me: for all the wheel-spinning that we’ve seen of late in the mortgage-refinance market, the number of people shopping for new homes has been declining steadily for the past five years. I’m sure that Bill Ackman would look at that chart and extrapolate all manner of fabulous mean-reversion, but I can’t see where the new demand is going to come from. Buying a home is no longer the American Dream; people are much more interested in being free of debt. And while Ackman might look at the enormous leverage in the housing market and see opportunity, most Americans I think are now much more aware of the downside risk.
No matter what happens in the housing market, Bill Ackman is always going to have more wealth than he can ever spend in his lifetime. But for those of us without his ability to make large speculative bets, housing is a very scary asset class, while renting is cheaper and much more flexible. I wouldn’t be at all surprised to see the US homeownership rate fall a lot in coming years, back down below even its long-term mean around 64%. And if that happens, prices—both to rent and to buy—are almost certain to fall from current levels.
*Update: Thanks to ckbryant, in the comments, who points out that this is true only in nominal terms, not in real terms.
As we've been saying, there are two different worlds from the perspective of the economy, and here's a look at the two different worlds from the eyes of the media. - Ilene
Tinsel Tuesday – Market Decorations Make Us Merry
Courtesy of Phil of Phil's Stock World
I figured out how to get bullish!
Just read the Wall Street Journal. On the front page we have "Nuclear Pact Adds Backers" above the fold along with a fluff piece on the weather in Europe. There are 3 other featured articles on the front page of the World’s most widely-read financial paper and one is a fluff piece on the Jimmy Stewart museum, one is on the obscure concept of betting people are going to die (very fun and interesting but "The World’s biggest financial paper"?) and the last is on the SEC looking into Mark Hurd’s exit from HP. On the left is "What’s News" with about 30 summaries of articles in the paper so one would think you could look this over and have a really good idea of what’s going on in the World.
I see that "Spain said its regional governments are on track to meet their budget targets" and Dow component Boeing (who fell off yesterday) announced a "$1 Billion commercial satellite deal with the Mexican Government" and Blackstone is starting a $15Bn fund and TD is buying Chrysler Financial for $6.3Bn and (and this is a real XMas gift to Wall Street) "A Senate deal to fund the federal government until early March doesn’t include money to enact the health-care overhaul or stepped up regulation of Wall Street" and also that North Korea held their fire during a South Korean artillery drill. Wow! All seems right with the World, doesn’t it?
If I just read the WSJ, I find no reason to be bearish at all. Certainly there is no mention of Spanish Bond Yields rising 37% in a month to 5.5% at today’s $4Bn bond auction. There is no mention of China’s Vice Chairman of National Development saying that China "needs to prepare for a long- term fight against inflation" or that oil imports into China are expected to fall off next year as their economy cools down. You would think the fact that BAC, JPM and four other lenders facing a suspension of foreclosure activity under court order in New Jersey would be a news story or perhaps some mention of the 29-year high in sugar prices would be of interest to investors along with the limit-up trading in cotton to record highs for no particular reason other than the fact that it’s a commodity and speculators will buy pretty much anything in the current frenzy.
Gold is up for the third consecutive day, China’s money-market rates jumped to a 2-year high as banks raised their reserve ratios (this one didn’t even make the WSJ’s on-line Asia section, but you can real all about the World’s most expensive noodles!). Pimco said "Untenable Policies Will Lead to Eurozone Break-Up" according to the London Telegraph with Andrew Bosomworth stating: "Greece, Ireland and Portugal cannot get back on their feet without either their own currency or large transfer payments. The euro crisis is not over by a long shot. Market tensions will continue into 2011. The mechanism comes far too late."
Of course that’s nothing compared to Meredith Whitney’s dire warning of a financial meltdown driven by the collapse of US municipal bond auctions – a topic we discussed last Wednesday. And Meredith is just full of holiday cheer compared to David Rosenberg, who puts a fair value on the S&P at no more than 1,120 and makes many excellent points that the market is now 10% overvalued and gives "10 Signs that the Holiday Retail Season is Going Worse Than People Realize" or John Hussman, who has certainly channeled his inner Phil with "Things I Believe" too!
We are, then, getting to the root of my problem – I read too much! I wake up early every morning and read my various papers and web sites and, from that, I formulate a short-term and long-term investing premise. Perhaps I have forgotten what the Great Emancipator once said:
robert shumakeJohn Roberts Leaves CNN for Fox <b>News</b> - NYTimes.com
Executives at CNN confirmed Monday that John Roberts, who served as the morning anchor for the network since April 2007, would be joining Fox News as a national correspondent.
New Edition of Huckleberry Finn to Drop N-Word: Instant Reactions
Auburn University professor Alan Gribben, along with NewSouth Books, plans to release a newly edited edition of the Mark Twain classic, with every instance of the N-word replaced with the word.
Shakesville: Brett Favre <b>News</b>
Brett Favre News. [Trigger warning for sexual assault, which applies to both links] [Link includes descriptions of sexual assault] Associated Press: "Two massage therapists sued Brett Favre on Monday, saying they lost them their ...
robert shumake detroitJohn Roberts Leaves CNN for Fox <b>News</b> - NYTimes.com
Executives at CNN confirmed Monday that John Roberts, who served as the morning anchor for the network since April 2007, would be joining Fox News as a national correspondent.
New Edition of Huckleberry Finn to Drop N-Word: Instant Reactions
Auburn University professor Alan Gribben, along with NewSouth Books, plans to release a newly edited edition of the Mark Twain classic, with every instance of the N-word replaced with the word.
Shakesville: Brett Favre <b>News</b>
Brett Favre News. [Trigger warning for sexual assault, which applies to both links] [Link includes descriptions of sexual assault] Associated Press: "Two massage therapists sued Brett Favre on Monday, saying they lost them their ...
robert shumakeIt’s Housing Day over at Business Insider today, which is running duelling slideshows from Bill Ackman and Gary Shilling in the wake of yesterday’s dreadful home-price numbers. Both of them are a little dated—Ackman’s is from November 3, while Shilling’s seems to be from October, although it’s not entirely clear. Since then, prices have fallen, which would do little to change either of the analyses, but also interest rates have risen significantly, which puts a substantial dent in Ackman’s math.
Ackman’s logic is pretty simple: you can get a lot of leverage in the housing market, and if you make a highly-leveraged bet and prices rise, then you can get enormous returns. At the heart of his thesis is the idea that valuations are low and will rise in future—but to my eyes at least, there are problems with both legs of that argument.
The “valuation” section of the slideshow is a relatively small part of the whole. It says that home prices are 28% off their peak; that houses are more affordable now than they have been in a long time; and that buy-vs-rent calculations work out in favor of buying with relatively low home-price appreciation rates between 4% and 6%.
The first one seems meaningless to me: why should home prices be low at 28% off the peak, as opposed to say 18% off or 38% off? In fact, a glance at the Case Shiller graph shows that prices are still roughly double what they were for most of the 1990s.* And more generally, when the first part of a valuation argument is percentage-off-highs, I always get suspicious, because that’s always a really stupid metric on which to base a buying decision.
The affordability calculations, too, are a temporary phenomenon related to artificially low mortgage rates and the fact that the US government is currently providing substantially all housing finance. What I’m not seeing is any analysis by Ackman showing that houses will remain affordable in a future of higher rates and private-sector financing—the future when, I assume, he’s looking to exit his residential-property position.
Finally, required appreciation rates of 4% to 6% seem high to me, not low: they say to me that buying is still more expensive than renting unless you assume capital gains on your purchase. Ackman, here, comes close to assuming the very thing he’s trying to demonstrate.
As for the reasons for future gains in house prices, there’s a bit of basic demographics, in that the number of households in the US is going to rise over time, and is going to outpace the amount of new homebuilding. That’s reasonable.
Ackman’s other main argument is based on the assumption that homeownership is going to bottom out at 66% and stay there, rather than continuing on the long cyclical decline which started in 2004. If he’s wrong by just a single percentage point, a lot of his mathematics starts looking very shaky. I suspect that as America moves out of the suburbs and exurbs and into denser forms of living, we’ll see a steady decline in homeownership, which in any case is now seen as being more of a liability than an asset. It’s no longer a road to riches: it’s a road to possible foreclosure, bankruptcy, and an inability to move to where the employment opportunities might be.
Ackman is a speculator, and he’s forecasting a return of his speculative mindset among the population at large—where people buy homes because they’re confident in the future and think that those homes will rise in value, and also because they fear not being able to afford a house in future. That mindset fuels housing bubbles, not sustainable home-price appreciation. And investing in bubbles is always very dangerous, and generally ends in tears. Maybe Ackman can make money doing it—but that certainly doesn’t mean that homes are a good buy right now for the rest of us.
Ackman does have one intriguing idea about what might drive house-price appreciation: institutional investment in single-family home rental properties. He’s right that such things barely exist as a financial asset class, and that even a small global allocation to them could change the demand dynamics substantially. But being a landlord is hard work, especially in suburban and exurban neighborhoods, and I’m not convinced that it scales well: my guess is that the cost of hiring a good rental agent is always going to wipe out returns, and that the only way to make money by renting out single-family homes is for the owner and the rental agent to be the same entity.
If you then turn to Shilling’s presentation, things start looking positively depressing: he brings up reasons for pessimism that many of us never even consider, along with the much more obvious ones. At the top of the list, of course, is unemployment, which poisons everything. No one wants to buy a house if they don’t feel secure in their job, and people don’t feel secure in their jobs if unemployment is over 9%, where it’s likely to stay for the foreseeable future. And these graphs just speak for themselves:
This last one is the most powerful, to me: for all the wheel-spinning that we’ve seen of late in the mortgage-refinance market, the number of people shopping for new homes has been declining steadily for the past five years. I’m sure that Bill Ackman would look at that chart and extrapolate all manner of fabulous mean-reversion, but I can’t see where the new demand is going to come from. Buying a home is no longer the American Dream; people are much more interested in being free of debt. And while Ackman might look at the enormous leverage in the housing market and see opportunity, most Americans I think are now much more aware of the downside risk.
No matter what happens in the housing market, Bill Ackman is always going to have more wealth than he can ever spend in his lifetime. But for those of us without his ability to make large speculative bets, housing is a very scary asset class, while renting is cheaper and much more flexible. I wouldn’t be at all surprised to see the US homeownership rate fall a lot in coming years, back down below even its long-term mean around 64%. And if that happens, prices—both to rent and to buy—are almost certain to fall from current levels.
*Update: Thanks to ckbryant, in the comments, who points out that this is true only in nominal terms, not in real terms.
As we've been saying, there are two different worlds from the perspective of the economy, and here's a look at the two different worlds from the eyes of the media. - Ilene
Tinsel Tuesday – Market Decorations Make Us Merry
Courtesy of Phil of Phil's Stock World
I figured out how to get bullish!
Just read the Wall Street Journal. On the front page we have "Nuclear Pact Adds Backers" above the fold along with a fluff piece on the weather in Europe. There are 3 other featured articles on the front page of the World’s most widely-read financial paper and one is a fluff piece on the Jimmy Stewart museum, one is on the obscure concept of betting people are going to die (very fun and interesting but "The World’s biggest financial paper"?) and the last is on the SEC looking into Mark Hurd’s exit from HP. On the left is "What’s News" with about 30 summaries of articles in the paper so one would think you could look this over and have a really good idea of what’s going on in the World.
I see that "Spain said its regional governments are on track to meet their budget targets" and Dow component Boeing (who fell off yesterday) announced a "$1 Billion commercial satellite deal with the Mexican Government" and Blackstone is starting a $15Bn fund and TD is buying Chrysler Financial for $6.3Bn and (and this is a real XMas gift to Wall Street) "A Senate deal to fund the federal government until early March doesn’t include money to enact the health-care overhaul or stepped up regulation of Wall Street" and also that North Korea held their fire during a South Korean artillery drill. Wow! All seems right with the World, doesn’t it?
If I just read the WSJ, I find no reason to be bearish at all. Certainly there is no mention of Spanish Bond Yields rising 37% in a month to 5.5% at today’s $4Bn bond auction. There is no mention of China’s Vice Chairman of National Development saying that China "needs to prepare for a long- term fight against inflation" or that oil imports into China are expected to fall off next year as their economy cools down. You would think the fact that BAC, JPM and four other lenders facing a suspension of foreclosure activity under court order in New Jersey would be a news story or perhaps some mention of the 29-year high in sugar prices would be of interest to investors along with the limit-up trading in cotton to record highs for no particular reason other than the fact that it’s a commodity and speculators will buy pretty much anything in the current frenzy.
Gold is up for the third consecutive day, China’s money-market rates jumped to a 2-year high as banks raised their reserve ratios (this one didn’t even make the WSJ’s on-line Asia section, but you can real all about the World’s most expensive noodles!). Pimco said "Untenable Policies Will Lead to Eurozone Break-Up" according to the London Telegraph with Andrew Bosomworth stating: "Greece, Ireland and Portugal cannot get back on their feet without either their own currency or large transfer payments. The euro crisis is not over by a long shot. Market tensions will continue into 2011. The mechanism comes far too late."
Of course that’s nothing compared to Meredith Whitney’s dire warning of a financial meltdown driven by the collapse of US municipal bond auctions – a topic we discussed last Wednesday. And Meredith is just full of holiday cheer compared to David Rosenberg, who puts a fair value on the S&P at no more than 1,120 and makes many excellent points that the market is now 10% overvalued and gives "10 Signs that the Holiday Retail Season is Going Worse Than People Realize" or John Hussman, who has certainly channeled his inner Phil with "Things I Believe" too!
We are, then, getting to the root of my problem – I read too much! I wake up early every morning and read my various papers and web sites and, from that, I formulate a short-term and long-term investing premise. Perhaps I have forgotten what the Great Emancipator once said:
robert shumake detroit
robert shumakeJohn Roberts Leaves CNN for Fox <b>News</b> - NYTimes.com
Executives at CNN confirmed Monday that John Roberts, who served as the morning anchor for the network since April 2007, would be joining Fox News as a national correspondent.
New Edition of Huckleberry Finn to Drop N-Word: Instant Reactions
Auburn University professor Alan Gribben, along with NewSouth Books, plans to release a newly edited edition of the Mark Twain classic, with every instance of the N-word replaced with the word.
Shakesville: Brett Favre <b>News</b>
Brett Favre News. [Trigger warning for sexual assault, which applies to both links] [Link includes descriptions of sexual assault] Associated Press: "Two massage therapists sued Brett Favre on Monday, saying they lost them their ...
robert shumakeJohn Roberts Leaves CNN for Fox <b>News</b> - NYTimes.com
Executives at CNN confirmed Monday that John Roberts, who served as the morning anchor for the network since April 2007, would be joining Fox News as a national correspondent.
New Edition of Huckleberry Finn to Drop N-Word: Instant Reactions
Auburn University professor Alan Gribben, along with NewSouth Books, plans to release a newly edited edition of the Mark Twain classic, with every instance of the N-word replaced with the word.
Shakesville: Brett Favre <b>News</b>
Brett Favre News. [Trigger warning for sexual assault, which applies to both links] [Link includes descriptions of sexual assault] Associated Press: "Two massage therapists sued Brett Favre on Monday, saying they lost them their ...
robert shumake
If your thinking about purchasing a foreclosed property there is a lot to take into consideration before you put your plans into motion. Due to the mortgage crisis, there are plenty of properties that are available, but there are different stages of foreclosure and the more you know, the better you can make an informed and rational investment.
Let's start by looking at the different stages of foreclosure:
Pre-foreclosure - during this time, although the homeowner still owns the home, they are 90 days late on their mortgage payments, and have received a notice from their lender that if the payments that are in arrears are not paid they will face foreclosure proceedings. In order to prevent ruining their credit and/or losing any equity they have in the home, the homeowner will be extremely motivated to sell quickly for a good price. In some instances, their lender may agree to a short sale in which the lender agrees to accept less than what is actually owed on the existing mortgage. It is important to remember that if the homeowner owes more than the property is worth ( often seen when a homeowner acquired the Pay Option Arm) the bank may not entertain offers that are below the fair market value of the home. It is not a bad idea to search public records, at the county recorder's office. You will be able to find out who is on title, if a notice of foreclosure has been filed, if there is more than one mortgage, and if there are any other liens on the property. This will give you an idea on what type of offer to make. Keep in mind that a lender will not agree to a short sale unless the homeowner has no equity and are unable to repay the difference between the sales price and the existing loans. Very often the sellers need to provide a letter of hardship. Make sure you have your financing in place, it is a good idea to provide a commitment letter from your lender to the seller's lender, this way, they know you are serious and have the funds available to move quickly. It's not a bad idea to include in your offer the right to a home inspection and make your offer contingent on the results of it. You want to know if there is something wrong with the home before you are obligated to buy it.
Buying a home at auction- if you're not an experienced investor, this is the one you might want to stay away from. Although when a home is sold at auction, the bidding starts low ( the balance of the existing mortgage) the bidders are the ones that decide what the property is worth and very often there are big discounts. You may be biting off more than you can chew. Unlike pre-foreclosures and REO's, you probably will not have the opportunity to research the property. Very often, investors get a list of properties only a week or two before the auction, and have little to no time to research the title, and more times then not, you cannot inspect the property. Because of this, you are unaware of any damage and the extent and you may also be held responsible for existing liens on the property that you are not aware of. ( including other unpaid mortgages and unpaid real estate taxes) Clearly, this is not the choice if you are new to real estate investing, or are a first time home buyer looking to get "such a deal" on your first home.
REO - or real estate owned property by a bank or lender. If the home is not sold on the auction block, the bank will hire a local realtor to put it on the market. When buying a REO, you may h ave the upper hand. Banks want to unload the home and get as much money they can. A good tip to remember is that the longer the home is on the market, the bank will be more willing to negotiate a price with you. Before you make an offer on a REO, have your financing in place, and, make your offer contingent on the results of an inspection report and an attorney review of the purchase agreement ( where applicable). Banks will take you more seriously when they know that they can recoup some money, because banks don't like to own property, having your financing in place will put you in the drivers' seat and make it easier to persuade the bank to pay for closing costs and repairs that may be needed
robert shumake detroitJohn Roberts Leaves CNN for Fox <b>News</b> - NYTimes.com
Executives at CNN confirmed Monday that John Roberts, who served as the morning anchor for the network since April 2007, would be joining Fox News as a national correspondent.
New Edition of Huckleberry Finn to Drop N-Word: Instant Reactions
Auburn University professor Alan Gribben, along with NewSouth Books, plans to release a newly edited edition of the Mark Twain classic, with every instance of the N-word replaced with the word.
Shakesville: Brett Favre <b>News</b>
Brett Favre News. [Trigger warning for sexual assault, which applies to both links] [Link includes descriptions of sexual assault] Associated Press: "Two massage therapists sued Brett Favre on Monday, saying they lost them their ...
robert shumake detroit
robert shumakeIt’s Housing Day over at Business Insider today, which is running duelling slideshows from Bill Ackman and Gary Shilling in the wake of yesterday’s dreadful home-price numbers. Both of them are a little dated—Ackman’s is from November 3, while Shilling’s seems to be from October, although it’s not entirely clear. Since then, prices have fallen, which would do little to change either of the analyses, but also interest rates have risen significantly, which puts a substantial dent in Ackman’s math.
Ackman’s logic is pretty simple: you can get a lot of leverage in the housing market, and if you make a highly-leveraged bet and prices rise, then you can get enormous returns. At the heart of his thesis is the idea that valuations are low and will rise in future—but to my eyes at least, there are problems with both legs of that argument.
The “valuation” section of the slideshow is a relatively small part of the whole. It says that home prices are 28% off their peak; that houses are more affordable now than they have been in a long time; and that buy-vs-rent calculations work out in favor of buying with relatively low home-price appreciation rates between 4% and 6%.
The first one seems meaningless to me: why should home prices be low at 28% off the peak, as opposed to say 18% off or 38% off? In fact, a glance at the Case Shiller graph shows that prices are still roughly double what they were for most of the 1990s.* And more generally, when the first part of a valuation argument is percentage-off-highs, I always get suspicious, because that’s always a really stupid metric on which to base a buying decision.
The affordability calculations, too, are a temporary phenomenon related to artificially low mortgage rates and the fact that the US government is currently providing substantially all housing finance. What I’m not seeing is any analysis by Ackman showing that houses will remain affordable in a future of higher rates and private-sector financing—the future when, I assume, he’s looking to exit his residential-property position.
Finally, required appreciation rates of 4% to 6% seem high to me, not low: they say to me that buying is still more expensive than renting unless you assume capital gains on your purchase. Ackman, here, comes close to assuming the very thing he’s trying to demonstrate.
As for the reasons for future gains in house prices, there’s a bit of basic demographics, in that the number of households in the US is going to rise over time, and is going to outpace the amount of new homebuilding. That’s reasonable.
Ackman’s other main argument is based on the assumption that homeownership is going to bottom out at 66% and stay there, rather than continuing on the long cyclical decline which started in 2004. If he’s wrong by just a single percentage point, a lot of his mathematics starts looking very shaky. I suspect that as America moves out of the suburbs and exurbs and into denser forms of living, we’ll see a steady decline in homeownership, which in any case is now seen as being more of a liability than an asset. It’s no longer a road to riches: it’s a road to possible foreclosure, bankruptcy, and an inability to move to where the employment opportunities might be.
Ackman is a speculator, and he’s forecasting a return of his speculative mindset among the population at large—where people buy homes because they’re confident in the future and think that those homes will rise in value, and also because they fear not being able to afford a house in future. That mindset fuels housing bubbles, not sustainable home-price appreciation. And investing in bubbles is always very dangerous, and generally ends in tears. Maybe Ackman can make money doing it—but that certainly doesn’t mean that homes are a good buy right now for the rest of us.
Ackman does have one intriguing idea about what might drive house-price appreciation: institutional investment in single-family home rental properties. He’s right that such things barely exist as a financial asset class, and that even a small global allocation to them could change the demand dynamics substantially. But being a landlord is hard work, especially in suburban and exurban neighborhoods, and I’m not convinced that it scales well: my guess is that the cost of hiring a good rental agent is always going to wipe out returns, and that the only way to make money by renting out single-family homes is for the owner and the rental agent to be the same entity.
If you then turn to Shilling’s presentation, things start looking positively depressing: he brings up reasons for pessimism that many of us never even consider, along with the much more obvious ones. At the top of the list, of course, is unemployment, which poisons everything. No one wants to buy a house if they don’t feel secure in their job, and people don’t feel secure in their jobs if unemployment is over 9%, where it’s likely to stay for the foreseeable future. And these graphs just speak for themselves:
This last one is the most powerful, to me: for all the wheel-spinning that we’ve seen of late in the mortgage-refinance market, the number of people shopping for new homes has been declining steadily for the past five years. I’m sure that Bill Ackman would look at that chart and extrapolate all manner of fabulous mean-reversion, but I can’t see where the new demand is going to come from. Buying a home is no longer the American Dream; people are much more interested in being free of debt. And while Ackman might look at the enormous leverage in the housing market and see opportunity, most Americans I think are now much more aware of the downside risk.
No matter what happens in the housing market, Bill Ackman is always going to have more wealth than he can ever spend in his lifetime. But for those of us without his ability to make large speculative bets, housing is a very scary asset class, while renting is cheaper and much more flexible. I wouldn’t be at all surprised to see the US homeownership rate fall a lot in coming years, back down below even its long-term mean around 64%. And if that happens, prices—both to rent and to buy—are almost certain to fall from current levels.
*Update: Thanks to ckbryant, in the comments, who points out that this is true only in nominal terms, not in real terms.
As we've been saying, there are two different worlds from the perspective of the economy, and here's a look at the two different worlds from the eyes of the media. - Ilene
Tinsel Tuesday – Market Decorations Make Us Merry
Courtesy of Phil of Phil's Stock World
I figured out how to get bullish!
Just read the Wall Street Journal. On the front page we have "Nuclear Pact Adds Backers" above the fold along with a fluff piece on the weather in Europe. There are 3 other featured articles on the front page of the World’s most widely-read financial paper and one is a fluff piece on the Jimmy Stewart museum, one is on the obscure concept of betting people are going to die (very fun and interesting but "The World’s biggest financial paper"?) and the last is on the SEC looking into Mark Hurd’s exit from HP. On the left is "What’s News" with about 30 summaries of articles in the paper so one would think you could look this over and have a really good idea of what’s going on in the World.
I see that "Spain said its regional governments are on track to meet their budget targets" and Dow component Boeing (who fell off yesterday) announced a "$1 Billion commercial satellite deal with the Mexican Government" and Blackstone is starting a $15Bn fund and TD is buying Chrysler Financial for $6.3Bn and (and this is a real XMas gift to Wall Street) "A Senate deal to fund the federal government until early March doesn’t include money to enact the health-care overhaul or stepped up regulation of Wall Street" and also that North Korea held their fire during a South Korean artillery drill. Wow! All seems right with the World, doesn’t it?
If I just read the WSJ, I find no reason to be bearish at all. Certainly there is no mention of Spanish Bond Yields rising 37% in a month to 5.5% at today’s $4Bn bond auction. There is no mention of China’s Vice Chairman of National Development saying that China "needs to prepare for a long- term fight against inflation" or that oil imports into China are expected to fall off next year as their economy cools down. You would think the fact that BAC, JPM and four other lenders facing a suspension of foreclosure activity under court order in New Jersey would be a news story or perhaps some mention of the 29-year high in sugar prices would be of interest to investors along with the limit-up trading in cotton to record highs for no particular reason other than the fact that it’s a commodity and speculators will buy pretty much anything in the current frenzy.
Gold is up for the third consecutive day, China’s money-market rates jumped to a 2-year high as banks raised their reserve ratios (this one didn’t even make the WSJ’s on-line Asia section, but you can real all about the World’s most expensive noodles!). Pimco said "Untenable Policies Will Lead to Eurozone Break-Up" according to the London Telegraph with Andrew Bosomworth stating: "Greece, Ireland and Portugal cannot get back on their feet without either their own currency or large transfer payments. The euro crisis is not over by a long shot. Market tensions will continue into 2011. The mechanism comes far too late."
Of course that’s nothing compared to Meredith Whitney’s dire warning of a financial meltdown driven by the collapse of US municipal bond auctions – a topic we discussed last Wednesday. And Meredith is just full of holiday cheer compared to David Rosenberg, who puts a fair value on the S&P at no more than 1,120 and makes many excellent points that the market is now 10% overvalued and gives "10 Signs that the Holiday Retail Season is Going Worse Than People Realize" or John Hussman, who has certainly channeled his inner Phil with "Things I Believe" too!
We are, then, getting to the root of my problem – I read too much! I wake up early every morning and read my various papers and web sites and, from that, I formulate a short-term and long-term investing premise. Perhaps I have forgotten what the Great Emancipator once said:
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