Don’t Hold Your Breath for Residential Real Estate.

Discussion in 'Trading news and analysis (syndicated content)' started by John Thomas, Oct 19, 2012.

  1. John Thomas

    John Thomas syndicated content Official Contributor

    Don’t Hold Your Breath for Residential Real Estate. Every few weeks I get a warm and fuzzy feeling when I see my old house for sale in the Wall Street Journal. I’m sure you’ve seen it. It’s the 8,500 square foot, four bedroom, seven bathroom white elephant perched on a mountain peak, with a dramatic waterfall pouring into a marble swimming pool, and panoramic 360 degree views of the San Francisco Bay Area.

    I picked it up for a song from the Sultan of Brunei in 1998, when crude crashed to $8/ barrel, and he was dumping properties to meet a cash flow crisis. The actor, Steve McQueen, had owned the property once, and the local teenagers used to park out front and make out, taking in the stunning view of the Golden Gate Bridge and shimmering city lights. If I told you what went on in the elevator, you wouldn’t believe me!

    But one day in 2005, my gardener, José, mentioned that he had just obtained a $500,000 loan to buy a new place in which to house his seven kids, along with a home equity loan to cover the first year’s mortgage payments. How would he make the next year’s payments on a $25,000 a year income? The broker said the value of the house would go up, and he could then increase his home equity loan to cover that too.

    I knew I had to sell my home immediately, hitting the bid for a tidy $12 million, along with the rest of my real estate holdings around Fog City and Lake Tahoe. At the closing, I couldn’t help but notice that my broker, Olivia, was drunk with greed, with 360,000 dollar bills in commissions dancing in front of her eyes.

    Regretfully, I had to let José go. I have been renting ever since, and just renewed lease for another two years. It turns out that you can now rent palatial mansions for about one third of the cost of carry, and that’s inputting a 30 year mortgage cost at 3.4%. The last price I saw for my former “Xanadu” was $7 million, and I know that a cash offer well below that would talk. I could also lease it for $19,500 a month, which wouldn’t even cover the taxes and the maintenance.

    I’m not a person who normally wishes ill on people, but really, what were these buyers thinking? When people urge me to buy it back, I lie down and take a nap, and when I wake up, the feeling has refreshingly gone away.

    If you strip away the industry fig leaves, and ignore the paid apologists, the excesses in this sector are truly of Biblical proportions. “Official,” shadow, and bank inventories, and another 1.5 million imminent option arm induced foreclosures, probably mean there is a decade’s worth of supply out there. The demographic pressure of 80 million retiring and downsizing baby boomers easily adds another five years. A capital constrained Fannie Mae is taking down 75% of the new mortgages in the secondary market, the FHA is taking almost all of the rest, and there is no way the socialization of the mortgage market can continue indefinitely. And guess who is number one on the Tea Party’s hit list after Obamacare?

    Residential real estate is at best a push, and worst case will drop by a third again if my 2013 recession forecast pans out. This is why banks, already choking on foreclosed properties, will only lend if you hold a gun to their head. They know there are more big hits to their capital coming their way in the form of tsunamis of more bad loans.

    Only buy a home if your wife is nagging you about living in that cardboard box under the freeway overpass. But expect to put up your first born child as collateral, and bring in your entire extended family in as cosigners, if you want to get a bank loan. Plan on keeping that house for at least ten years, when the demographic headwind is expected to veer to a tailwind.

    I heard that Olivia lost her commission and everything else in the stock market crash and committed suicide. I never found out what happened to José. And no, I won’t be uttering the word “rosebud” on my deathbed.




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