Real Estate
Q
What is the current situation for Real Estate?
A
Posted November 25, 2007
2008 is going to be a tough year. Except for a few regions, the majority of adjustments are likely in front of us, not behind us.
Credit inflation can hit any class of goods -- Financial assets (like the Nasdaq bubble), commodities (1970s & '80s), or Real Estate (2005). Credit inflation is an increase in credit which substitutes for real savings. Real savings provides real resources by deferring consumption, but credit inflation is created and underwritten by the Fed in conjunction with the U.S. government. Bottom line: The Fed created the bubble in Real Estate.
Real Estate -- In 2008, a much larger number of homes will likely hit the market and will be priced to genuinely move (rather than taken back off the market). Banks are motivated to make deals with borrowers to keep from foreclosing and delaying the mark-to-market, but foreclosures will accelerate, forcing many homes onto the market and raising questions about bank solvency. Some decent bargains exist for the enterprising investor and it might prove a good year for real estate agents that are in position to handle increased selling. The competition for business, however, will probably still be tough.
Macro -- Big changes are still coming. The U.S. is used to borrowing to buy goods, but now the U.S. will increasingly have to produce more goods for exchange and do so quickly. A lot of credit was issued in the U.S. economy that depends on the old relationships in prices - not just in Real Estate, but across the board. This means many outstanding opportunities for people earning incomes in the winning industries that are able to buy distressed assets sold by the losing industries.
Prices and Credit -- Although overall credit may slow or contract, prices will still rise because the Fed must avoid deflationary collapse at (almost) all costs. After credit has been extended to unsustainable entities, the Fed (in conjunction with the fiscal authorities) will create purchasing power easing the transition (too bad they didn't stay tight on the upside which would avoid the correction in the first place).
Limits to Fed Action -- The Fed can create excess cash unless the market rejects both government bonds and the currency .. which would occur if the Fed caused mass exodus from the dollar. So, inflation (and the falling value of the dollar) is likely to be punctuated by sudden reversals to keep expectations from driving inflation too high and ruining the market for government bonds. Every dip is a decent buying opportunity for hard goods, but a smart investor will hedge deflation as well. The Fed can easily lose control under this high volatility.
The whipsaw -- Foreign markets are likely going to zoom even higher as the U.S. goes through this adjustment which will take years, setting up a future (mega?) correction in non-U.S. markets. That makes opportunities for gains especially significant, as one gain can be played into another by buying distressed assets. For now, foreign markets (or international commodities) are the place to be... with an eye on the deteriorating credit situation.
Investments -- It is a good idea to hold a portion in short-term treasuries (the knock-on effects of the Real Estate correction could turn very ugly), non-dollar top rated bonds (protecting against dollar losses), commodities (hedging inflation while protecting against the depreciation of all currencies), and physical cash in a secure location (for spending needs should cash become unavailable because of market seizure).
2008 is going to be a tough year. Except for a few regions, the majority of adjustments are likely in front of us, not behind us.
Credit inflation can hit any class of goods -- Financial assets (like the Nasdaq bubble), commodities (1970s & '80s), or Real Estate (2005). Credit inflation is an increase in credit which substitutes for real savings. Real savings provides real resources by deferring consumption, but credit inflation is created and underwritten by the Fed in conjunction with the U.S. government. Bottom line: The Fed created the bubble in Real Estate.
Real Estate -- In 2008, a much larger number of homes will likely hit the market and will be priced to genuinely move (rather than taken back off the market). Banks are motivated to make deals with borrowers to keep from foreclosing and delaying the mark-to-market, but foreclosures will accelerate, forcing many homes onto the market and raising questions about bank solvency. Some decent bargains exist for the enterprising investor and it might prove a good year for real estate agents that are in position to handle increased selling. The competition for business, however, will probably still be tough.
Macro -- Big changes are still coming. The U.S. is used to borrowing to buy goods, but now the U.S. will increasingly have to produce more goods for exchange and do so quickly. A lot of credit was issued in the U.S. economy that depends on the old relationships in prices - not just in Real Estate, but across the board. This means many outstanding opportunities for people earning incomes in the winning industries that are able to buy distressed assets sold by the losing industries.
Prices and Credit -- Although overall credit may slow or contract, prices will still rise because the Fed must avoid deflationary collapse at (almost) all costs. After credit has been extended to unsustainable entities, the Fed (in conjunction with the fiscal authorities) will create purchasing power easing the transition (too bad they didn't stay tight on the upside which would avoid the correction in the first place).
Limits to Fed Action -- The Fed can create excess cash unless the market rejects both government bonds and the currency .. which would occur if the Fed caused mass exodus from the dollar. So, inflation (and the falling value of the dollar) is likely to be punctuated by sudden reversals to keep expectations from driving inflation too high and ruining the market for government bonds. Every dip is a decent buying opportunity for hard goods, but a smart investor will hedge deflation as well. The Fed can easily lose control under this high volatility.
The whipsaw -- Foreign markets are likely going to zoom even higher as the U.S. goes through this adjustment which will take years, setting up a future (mega?) correction in non-U.S. markets. That makes opportunities for gains especially significant, as one gain can be played into another by buying distressed assets. For now, foreign markets (or international commodities) are the place to be... with an eye on the deteriorating credit situation.
Investments -- It is a good idea to hold a portion in short-term treasuries (the knock-on effects of the Real Estate correction could turn very ugly), non-dollar top rated bonds (protecting against dollar losses), commodities (hedging inflation while protecting against the depreciation of all currencies), and physical cash in a secure location (for spending needs should cash become unavailable because of market seizure).