Market Report: September 2011

The Feds Get It

Those who hoped for the start of a recovery in real estate in 2011, there is good news and bad news. The good news is that those at the helm of the housing system in this country have implemented a policy that I think has a chance of doing more good than harm. The bad news is that I cannot even see far enough in the distance to spot any glimmer of recovery.

We are three to four years into this housing correction. The traditional rule of thumb has always been that the length of the up and down cycles have to match. I see little evidence to suggest this will change this time around. The recovery began in earnest in 1996 and lasted twelve or so years. That means 2020 if you want to use this method. I recognize this may sound extreme, but consider the following. Prices today are rough 30%f off of the highs. If you grant a generous annual rate of return of 6% a year and an inflation rate of 4% a year, 2020 does not seem that crazy.

Looking around at other investment vehicles this does not seem to off. Stocks? They have been flat for a decade. How long will it take to just return to the 14,000 on the Dow where it was in 2008? Bonds and CDs have not fare much better and the Fed has signaled that short term money will cost nothing for at least the next two years. Only the smirking gold-bugs seem to be winning but shortly they will be running for cover. If you doubt this, look at those who bet on $150 oil now sitting around eighty bucks. Given all of this, real estate is not the worst area to invest money in.

Real estate is dependent more on jobs that interest rates. In the past, the latter has done all of the heavy lifting to revive housing. This time around jobs and wages are depressing prices along with the huge inventory of troubled residential assets. We are becoming a city of renters, I wrote two years ago.

I think that banks, the Feds and Treasury have an unspoken arrangement when it comes to the vast numbers of homeowners in financial difficulty or who owe more than there houses are worth. The lessons of the RTC debacle twenty years ago has taken root. As evidence of this measured approach, last week a trail balloon was sent up concerning renting out houses. The RTC debacle could have been avoided if the RTC's minions had operated there huge portfolio of failed commercial properties and sold them off over time. Instead they dumped them on the market, depressing prices and creating even more foreclosures. My holding on to inventories of bad assets and renting them, we need a national work-out policy. We need a foreclosure czar to oversea this and meter out properties as market conditions dictate. In my opinion, this will be national policy by the end of the year.

Our only other choice is to encourage inflation. We can always reduce debt and increase real equities with inflation. The Fed knows that to allow a little inflation could backfire. It is not unlike keeping a pit bull, it may turn on you and you have lost control. I know there are those that argue that the Fed could orchestrate a measured amount of inflation.(call this article some modest proposals)

As I have been writing for the past year, the correction now at hand will continue for some period of time. We do not have the employment base and community income to sustain meaningful price appreciation. There is good news in this as prices have bottomed as long as our betters further restrain the supply of failed residential investments—this is key and I suspect that decision has been made and over the next year we will a measured approach to the trouble housing package. This will mean at least some price stability, and in the event job reappear, moderate upward pressure on prices.

One reason this has taken so long is that the current and past administration had to face a financial crisis that was unique and massive. And this time around we got a taste the dark side of globalism. The recent stock market volatility is always seems to be sparked by a problem some where. If its Tuesday, it must be Greece. Managing inflation and delation is difficult enough, but in a global context any policy is fraught with danger. The best the Fed can do is stay lashed to the tiller during the storm that is far from spent.

This does not mean I do not believe in San Diego exceptional-ism. Population will grow and housing supplies will shrink relative to growth. There will be housing inflation but not so much in prices as in rents. I wrote two years ago that San Diego's homeowners would become a minority. If you doubt this, just ask yourself how many people in San Diego today can afford a $4,000 a month house payment? Without that, there will be soft demand for purchases going forward.

I would still be willing to purchase property today. I find residential and apartment investments have far better prospects than everything else that competes for investment dollars. I recognize renting can make more sense in the short term but over a longer period of time I think renting is less attractive. Especially since the Feds want to give you a real tax cut, cheap money. You will make more in stocks if you can time the market but nearly all of us mortals cannot do that.

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