Cheap Mortgages Do Not Make Real Estate Cheap

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Real estate (globally) has had a huge run since the 2012 lows in the US. There are bubbly RE markets all over the place. There is an article here by Mark Hanson, which lays out the not-so-bullish scenario in RE. There may be a cheap RE market here and there, but most RE is not remotely cheap. And if we're supposed to buy cheap, and sell dear, how can anyone look at this market as an "opportunity"? And the whole idea of valuing an asset as cheap, because of the monthly payment is ridiculous. So because mortgage rates are cheap today, then the underlying asset is somehow a bargain. What in the world is that about? What happens when mortgages are at 10%, do these people have any conception that bond yields can actually rise persistently for decades? And the same goes for the valuation of any asset as of today, in terms of, is it cheap relative to the low yields of today. Who comes up with this stuff? What a mess the central banks have created with their wizardry.

There were incredible bargains 5 years ago, for the primary residence, or for the business of RE. That is no longer the case, and people are once again losing their minds in the RE market. Taking on a mortgage today is a bargain in the big picture, but the houses themselves are not even close to cheap. And most people don't even get that a mortgage means debt, which means leverage. They also have no conception of how dangerous debt is, and how powerful the other side of the leverage is. They only see the mild mannered Dr. Jekyll. They can not contemplate the Mr. Hyde part. But just like in the masterpiece by Robert Louis Stevenson, it's the evil face of leverage which actually has the most power. So in a rising market for RE, there is ZERO focus paid to the other side of the debt, only to the "benefits" of the debt. It was barely 10 years ago, when millions of people "discovered" Mr. Hyde, and what debt is actually all about - RISK. There are some people who are masters of using debt, like Donald Trump (supposedly), but most people are not (including myself). And the notion of putting it "all in" on one asset, any asset, is baffling. RE is just an asset, just like everything else. So just like there is nothing magical about the stock market, or gold, or whatever, there is nothing magical about RE as an asset. Its' price goes up and down also. RE probably has more delusional permabulls than any other market. And even with all of the upwardly price distorted markets out there thanks to the brilliant economic PhDs, there are some bargains still out there, but (in general) RE is not one of them. If someone is a true professional in RE, there will always be a business for him/her. Instead of having capital tied up in RE at these prices, go where there are still a few relative bargains - for instance agriculture, clean tech/energy, PMs, and some individual countries. And for many people at these RE prices, may it be a better plan to just rent, and then put their capital into the truly cheap assets instead?