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Residential Real Estate is Dead Money for the Next Decade
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 8,000 square foot, four bedroom, seven bathroom white elephant perched on a mountain peak, with a dramatic waterfall pouring into a marble swimming pool, an elevator, 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. The parties! Oh, the parties!
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? 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 the 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 dancing in front of her eyes. Regretfully, I had to let José go. I have been renting ever since. 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 five years 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. The market for jumbo loans no longer exists.
Residential real estate is at best a push, and worst case will drop by half again if the “W” recession 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. 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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Couldn't agree more. Might we see Ron Paul's face on a bill when the next iteration of the Federal Reserve comes about?
thomas j.
Woah. Imagine that. Some untimely accident befalls our beloved Dr. Paul. It would be very Fed-like to re-create history in their Orwellian way and put the good Doctor on one of their pieces of fancy toilet paper. Imagine Bernanke exclaiming in his memoirs what a fantastic man Dr. Paul was: "Yes, if it wasn't for him we wouldn't have seen that we needed even more stimulus! Posthumous Nobel prize!"
After reading this column, I understand so very clearly why people hate Wall Street. It's the arrogance, the condescending tone and the bullshit all wrapped up together. Game ain't over yet, Mad Hedgie, and Jose and Olivia may have the last laugh, at least as far as you're concerned. Be careful. Karma is a bitch, and you're overdrawn at Banco Karma.
Actually, this reader found it to be very "tounge in cheek" and a wicked-good read...
Perspective..it's all about perspective. Some people had foresight and others just didn't.
House of CARDS and a financial Katrina are in the wings--
Yeah, I guess Jose and Olivia were perfectly innocent at the time they let visions of dollar signs compel them to buy a home and encourage loans that couldn't be afforded.
Don't hate on MHFT just because he was intelligent enough to recognize that the bubble was getting ready to pop and managed to find a bunch of fools who were dumb enough to think that "real estate NEVER goes down!" to take it off his hands.
Forget karma, the slope of hope is an even bigger bitch.
A question for you if I may. You have solid credit, and I understand that if you wanted the old casa back you could write a check. But I ask this question, could even you borrow $5mm (without pledging other liquid collateral)??
If your house was in Westchester NY, you could not borrow $5mm, you would have to pay cash. There is no money for these big buys here.
Ten years ago I got divorced and lost the 'big house'. Two years later I bought it back. So I bought the farm, twice. Economically dumb, but oh the parties....
You can get all the cash you need out here IF you
don't need it.
Oh, and I think Olivia's still alive.
She'd survive a nuclear holocaust !
madhedgefundtrader is still a liar......could this article be about him?
http://www.lawfuel.com/show-release.asp?ID=3686
Buying it back won't seem so dumb if hyperinflation kicks in. Everyone will be lined up to buy real estate; it's an inflation hedge --- always has been ever since Manhattan was bought for whatever.
You can see from this chart that house prices spiked during the late 1970's during high inflation. The key thing is to get a fixed rate mortgage now at low (real) rates.
http://www.ritholtz.com/blog/wp-content/uploads/2009/09/200909251.gif
Your idea would work great if we didn't just have the greatest real estate bubble in US history. And since bubbles don't re-inflate, that means that real estate will very likely under perform in the coming (hyper)inflation.
If hyper-inflation kicks in, won't you then be paying a correspondingly hyper-inflated amount of property taxes and maintenance costs, mitigating the rise in price?