Recently by Bill Bonner: Morons and the Economic Elite
And they shall grind the face of the poor ~ Isaiah
The markets were closed yesterday. Which was a good thing. The lights were out in Congress. Economists went to barbecues. Central bankers stayed home with their families. And investors didnt bother to check their blackberries to find the latest prices.
In other words, it was a good day. We didnt hear anything stupid or see anything idiotic. At least, not in the world of money. Or, that part of it within the 50 states. Besides, we were too busy to pay any attention anyway.
We went to a wedding in Manhattan. One of the people we met was a professional real estate investor:
Everybody wants to get into real estate, he began. I dont mean homeowners. Nobody wants to buy a house to live in. But people keep asking me to place money for them. They want to get into real estate.
It makes sense. Prices have come back down to a reasonable level. You can just look at the long-term trend, over the last 40 years. Prices today are right on the trend-line, after coming down about 30%. In Florida, where I work, theyre down 50% for a lot of properties.
So, you can put money in real estate again. And you can get a fair deal.
And you can be pretty sure that your money wont disappear. Thats why Im getting so much interest from investors. What else can you buy? Some guys want to buy real estate because theyre afraid of inflation. Other guys want to buy it because theyre afraid of deflation. Some think the stock market is going crash. Others think the bond market is ready for a beating. Some think their investments are going to be hammered by depression. Others dont know what the Hell to think.
Even gold investors are scared. I mean, its been a long time since you could buy gold without worrying. I read your Daily Reckoning years ago. I bought gold too when the price was about $800. I figured I couldnt go too far wrong. But now the price is up at $1,900 and Im not so sure.
Yeah, the logic of it is simple enough. The economy has too much debt. It goes into a spell of debt-deleveraging. The authorities react by printing money because they cant do anything else. So, the price of gold goes up.
Sounds simple. But what were seeing is that it doesnt work like that. At least, not quite that easily.
As you say, the economy turns a little Japanese. So bonds go up. The dollar goes up. And other investments get killed. And as long as bonds and the dollar are going up as long as were on the trail to Tokyo gold doesnt really have much ooomph behind it either. It could go down to $1,500 or even $1,000 and stay there for years.
I dont know any more than you do. But you have to admit that theres now some risk, say, over the next two to five years, in buying gold. Maybe it will go up in the long run. But the long run could be a long time coming. And Im going to retire in a couple years so I dont want to see my portfolio down a third or cut in half just before I retire.
And Im sure as hell not going to get locked into US bonds either. Maybe they will go up some more. But thats a big risk too. Because Ben Bernanke could turn on those helicopters at any minute.
So what are the alternatives? Stocks? Uh uh. Too risky. Bonds? Same thing. Gold? Normally, that would be a good choice. But it could be down a lot just when I need it. I cant tell my wife that it will be good for the long run when we might need the money sooner than that. Besides, you dont get any dividends or interest none from gold.
That leaves real estate. Thats why people want to put money in real estate. Its priced at fair value statistically. So, you can buy it without worrying too much about it going down. And its not like gold. You can get income from it. Everybody is looking for rental properties with a decent stream of income.
And you can get such good financing. Im seeing mortgage rates the lowest Ive ever seen them. Of course, theyre for single family, owner-occupied housing. But people are mortgaging their own houses at under 4%. The money is practically free because the real inflation rate has got to be over 3%. Nobody knows what it really is, but I figure prices are going up around 4% or 5% so I figure the money is interest-free. Plus, sometime between now and when the mortgage loan finally gets paid off, inflation rates are bound to go up and then not only will they be getting the loan interest-free, theyll also be able to pay it off with much cheaper money. So, the capital value of the loan will depreciate in fact, it could disappear.
The smart money is taking this cheap mortgage money and using it to buy rental units. If they can get a net rental yield of 10%, theyre way ahead of the game. And thats do-able.
But there are two problems.
First, its hard to find good deals. A friend of mine just got a 20-unit property down in Pompano Beach. It looked good on paper. But hes getting eaten up in maintenance and repairs.
There are a lot of deals coming through but not many good ones. And there are a lot of people looking for good deals. Youll hear about the good deals because people talk about them. But you wont be able to get one, because too many people are competing for them.
The second problem goes back to that trend-line. Real estate went way over fair value in the last decade. Now, its back to fair value. You know, normally, real estate just tracks inflation, nothing more. Yeah, you get a little extra by being in the right place like South Florida. But, overall, it just keeps up with inflation.
But theres no law that says that real estate has to stick to its trend-line. Or more specifically, that it just goes back to the trend-line and stops there. If it can go way over trend, it can also go way under trend. And thats what I think were going to see.
The guys who are buying real estate now, theyre going to be a little shocked and disappointed when the see that prices just keep going down.
I know this is one of your themes too. Prices in Japan didnt go back to trend. They went down and just kept going down. They ended up 80% below the peak. And they actually bent the trend-line down. Maybe it will go back to the trend. But I dont think so. The population of Japan is going down. And they dont get married. And they dont have children. So they dont need starter houses or family houses or any kind of houses. Just apartments for old people. Thats not a way to get higher real estate prices.
The US is not in that position. Not exactly. But a lot of the demand at the starter house level was coming from Hispanic immigrants. And the numbers show that the Hispanics arent coming the way they used to. In fact, theyre now going the other way theyre going home.
Not only that, but were seeing more grown children move back in with parents and more parents moving in with children. This will mean less demand for separate housing units.
So, well probably first have some over-shoot to the low side of the long-term trend-line, which will take prices down another 20% to 40%. And then, we might have a permanent bend in the trend-line, as the number of new households actually begins to go down.
You think the middle class is having trouble now just wait until their main asset is down 80%.
I still think real estate is one of the safest places for money. But just dont expect to make a lot of profit and dont expect it to be easy to find a good property. Remember, the profit is made when you buy. Its hard to buy well. I spend all my time looking; but the good deals are hard to find.
Reprinted with permission from the Daily Reckoning.
Bill Bonner is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and The New Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007). His latest book is Dice Have No Memory. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning.