So, it'll hold up better than other assets. What do you think?
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Blanche Evans says the government will support RE
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I think government wll have an influence, but the devil is the details.
I think it depends somewhat on who gets in 2006/2008.
If the democrats control the house (which looks reasonable) we will probably see more protection for the middle/lower class (in otherwords, greater wage inflation) .. if the republicans go onto controllling everything, we'll probably see less wage inflation than a democrat controlled environment and more asset inflation (than the other guys).
In general though, I do agree... Both governments have to protect housing values somewhat and there are numerous financial laws that can be written to support housing values.
In the end though, I think a lot of this will be to the detriment of the dollar. I am very bearish on the USD, though I wonder how much the USD is a currency for the US and how much it is a currency the for the World.
If it is a currency for the World, then we may see more intelligent cooperation among central banks to ensure a soft landing for the dollar.
This means that gold will continue to be supported at high levels, but once things calm down (better energy, less geopolitical strife).. look for dramatic drops in the price of gold.
Interesting, I think a Democrat / Hillary government could be less unilateral than a McCain / Republican government. We may find that if the democrats take over the house, gold could take a huge hit.
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the biggest govt support for the housing market is the tax deductibility of mortgage interest and real estate taxes. the value of those deductions has been eroding, however, because of the lack of indexing in the alternative minimum tax.
one of the functions of the inflation ahead is to allow for at least nominal rises in wages. that the congress has failed to revise the amt is interesting, given their proclivity for tax reductions. i think it's because the amt and tax deductibility really only affects the middle class, not the truly wealthy who are the main beneficiaries of all the bush tax cuts.
unless the amt is revised, mortgage interest and real estate tax deductibility will increasingly become moot. this means that inflation could actually impede the appreciation of real estate.
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The Government needs a healthy secondary market for Mortgages to keep housing alive.
1. We know lot of folks bought homes with ARMs and other idiotic financing.
2. Infaltion is making Real Estate less glamourous - and more costly - requiring more and more and more cash to stay in the game..
3. Higher costs lead to more bankruptcies and defaults - Believe it or not many Americans who own Real Estate live Pay Check to Pay Check (Millions of them)
4. This leads Banks and other financial entities that buy Mortgage Back securities to get selective about the QUALITY of the Mortgages that back their Paper. REducing the demand for Mortgage Backed Secuities -this reduces the availability of Mortgages at your corner Bank.
Its all about the Financing - Financing is what drives the price of every over priced consumer good - Real Estate, Medical care, Higher Education
So, who will be the schmuck to buy Mortgage Backed Securities to keep the Real Estate Market going???? The Treasury??
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While I believe US housing will see a correction and may even revert to the mean over time, let's not get carried away with housing doom and gloom.
Over the last 4 years US housing stock has increased 60% in value to nearly 20 trillion, but the total debt ratio, including all that equity extraction, has only increased slightly (from 41.8% to 43.6%).
With all the talk of 100% financing, ARMS, negative amortization... we tend to lose site of the fact that those are all fairly recent phenomenons and less than 5% of housing stock changes hands each year. Even for recent purchases the average down payment never went below 15% and it is returning towards 20% (NAR).
Foreclosures ARE increasing as you've read in the headlines, but they could double tomorrow and they'd still be half of historically normal rates in most markets.
Plus it appears we are finally seeing rents increasing as evidenced by the latest inflation numbers.
If the stock market collapsed, the dollar became worthless, and the US went bankrupt, someone will still pay you a premium to rent or buy your well located property. And unlike gold or oil you can benefit today in real estate with an income stream that is better than treasuries.
Bottom line - I'm bullish on real estate vs. other assets, but not drinking the koolaid that it only goes up - we are seeing a correction and it will continue.
Please feel free to tear my arguments apart, I'd love to hear if you think I've got it wrong.
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Not a gloom and Doomer - Just the Facts
Did you see the presentating tha the Senior VP of Fannie Mae made in May 2005? I think the Presentation was made to the National Association of Home Builders - not sure.
Thomas a.. Lawler , of Fannie Mae, points out that:
1. ARM Loans - grew dramatically - they were 30-35% of the loans closed in 2004-2005.
2. Low Doc and no doc loans grew dramatically
3.Sub Prime mortgages increased dramatically, this made up for the drop of in Fannie Mae in particular.
4. Sub prime mortgages mad up 3% of the Mortgages issues - It grew to 13.8 % (Estimated by Fannie Mae) by 2004
Remember, SUB PRIME = Some one who has had a hard time accumulating the cash to buy a home. These people historical don't have good cash flow - Cash flow is required to stay in Real Estate as in investment or a home.
5. The coasts are where the insane appreciation has bee, its where most people live, and its where there is likely to be higher concentrations of foreclosures.
SeanO - I hope you are right - but, the facts don't support your theory.
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markets are priced on the margin. equity in real estate may average 40-something but it is not normally distributed - the curve has very fat tails. there are those whose houses are paid off - they do exist. and there are those who took 100% financing with negative amortization. most people will not buy or sell a house over the next few years. as prices erode the population of those who will be selling will increasingly be dominated by baby boomers downsizing, people who must relocate, the financially strapped and bannks or gov't agencies left holding foreclosed real estate. "motivated" sellers all.
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BK - I don't disagree, mortgage companies have been taking on increasing amounts of risk the last couple of years. But as a total percentage of existing loans risk of loss to the lender actually remains VERY low. Keep in mind that anyone who bought or extracted all their equity two years ago or more currently has sufficient equity to pose little or no risk to the lender. Also I can tell you that banks have tightened up significantly now that appreciation has slowed, they know the party's over (I sell 5-10 of my properties a month and at the moment getting the lender to fund is harder than finding a buyer to buy).
JK - I agree regarding the tails, just keep in mind that something like 20% of homes are paid off, vs. less than 5% who are fully leveraged or underwater at current values (keep in mind that less than 5% of homes sell a year, we've had high annual appreciation through at least June 05, and only small percentage of purchases are 100%LTV).
Keep in mind the following:
ARMs include fully adjustable, as well as 3, 5, and 10 year fixed rate options. Even at 35% of all new loans it is still a relatively small percentage of the total market that has refinanced, and only a percentage will default, and of those who do default they will be spread out based on the mix of full,3,5,10 year product.
Low doc / no doc loans require a high credit score and good reserves. While there is certainly some abuse they are mostly used by financially stable individuals who have little "documented" income.
Finally, pretty much all SubPrime loans are ARM's. So this percentage is not additive to the ARM percentage, it simply points out that a portion of ARMs are exceptionally risky.
That said, the current lack of risk is predicated on current values. So the real question is how much of a decline can the present system handle. I see no problem with an across the board decline of 10%. I personaly believe that we may see larger declines due to oil prices, loss of housing related jobs, lack of buyers for our continued deficit spending, etc. That could even lead to an ugly death spiral. But coming back full circle to Eric's question, at the end I'd rather be holding a piece of desireable property (debt free of course) then dollar bills, stock certs or treasuries.
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I think there are places where Real Estate may be an OK investment - but, can never deliver the diversification available to stocks and mutual funds.
But, selecting and finding a decent town is very difficult - you need to do as much selection as you do with a stock. Many Towns have been subsidizing the cost of Schools and Public Safety through financing.
Stocks have an advantage - you can at least put in a 'STOP LOSS ORDER" - no way to do this with Real Estate. Owning Property means you must keep track of how is the Town/City being managed financially. Too many Massachusetts town have been converting Manufacturing to Residential and Retail.
The Cash proceeds for a Town/City from Residential or Retail can never compare to a Manufacturing facility.
Consider Wayland -Massachusetts - they lost a Raytheon facility and the Town is embarking on the building of a Town Center - Retail complex in an attempt to replace the lost revenue. Strip mall to generate the cash flow from a Top 3 Defensen contrator - insanity.
This is the kind idiotic attempt bu Town Bureacrats to demonstrate that they have a grasp of economics -of course they'll use financing to pull the project off....These types of gimmicks are being used Nation wide by Towns to build the Cash flows for Towns.
So, is your Towns fiscal health - good or is it on life support and dependent on ever increasing Property Tax Increases??
How is your Towns Cash Flow - do the home work before you buy
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BK - The ability to diversify and use stop loss orders are good points. A good real estate portfolio is also very capital intensive.
I also agree that choosing the right property matters. They say there are three rules in real estate: location, location and location. I'd add a few more, but thats a good start.
As for my town, I'm in CA so ever increasing property taxes aren't an issue. Assessed value is pretty much fixed at your purchase price. I'd be hard pressed to invest in real estate in a single industry town except in an arbitrage situation.
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iTulip.com is predicting a 15 year correction in real estate in the U.S. Blanche Evans sees a downturn, too, but not severe because of government supports and protections.
Interesting article. She never really touched on any of the economic fundamentals of the unaffordability of real estate. It sort of made her sound like a shill for NAR. Glossing over the fact that all assets return to a mean is very dangerous. I live in SD, and have my whole life. I am a 31 year old software engineer who has a keen interest in real estate and how its tied to the economy. I didn't read a single cogent argument about why we aren't going to have a severe downturn.
For instance she talks about govt supports for the RE industry. Those supports existed during the boom as well, so they are already factored into the market. Its not like the govt is thinking of introducing a tax credit. She also talks about how subjective RE is. That is true, but can you really use that justification for massively rising house prices over a 5 year period in which wages have been basically stagnant? I also loved how she used the classic argument of RE not ever going to a value of zero. Want to bet that if terrorists lit off a nuclear weapon at one of our military bases property values in SD would goto zero? I am not saying its likely, but it is possible. The thing I really didn't like about this interview though, was leverage. You failed to press her on how leverage will affect the millions of people who are deeply in debt on what is quickly becomming a declining asset.
Those are just a few quick thoughts.
Josh
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