What’s going on in Ventura, CA?
People are losing their homes due to the lavishly attractive equity loans from the mid 2000’s that are now seeking repayment and have, in some cases, doubled homeowners’ monthly payments. These situations have created a national furor that has maliciously attached itself to real estate. But why is real estate not to blame?
Real estate is not to blame for homeowners losing their homes. A sheer lack of understanding and lack education on the part of anyone involved in the real estate business is the reason why homeowners are losing their homes. In 2005/2006, home buyers were convinced that prices of real estate could not fall and therefore everyone should buy real estate and take out equity loans on the appreciation of their homes (which in some cases appreciated 30% or more in one year!).
As the real estate cycle progresses, prices will fluctuate upwards and downwards. Take a look at the image to the right. The stock market cliche, “buy low, sell high,” is relevant here. Ask yourself, “Where in the cycle are we now (January 2011)? Now ask yourself, “At what point would I buy if I wanted to make money?” The answer shouldn’t surprise you.
The answers to both of these questions point to the bottom of the real estate cycle, between the red and the green arrows. While the bottom may be turbulent (reports of home values sporadically increasing and decreasing), the road ahead (which has held true ever since real estate markets existed) clearly outlines growth and price increases. Unfortunately, the length of these cycles are not predictable. The cycle may progress from the current low point to its peak in 2 years, 5 years, or even 10 years. Irregardless, by understanding this cycle an investor is capable of timing purchases to make money.
So what is really happening in Ventura? While the multiple listing service is littered with short sales and homes that sellers are having trouble getting rid of without drastically slashing their prices, smart investors and first time home buyers are making the transition to buying real estate. Heart breaking foreclosure stories are not what will educate someone on the right time to buy. In fact, by following the crowd, someone risks becoming a victim of the same circumstances that create over-publicized foreclosure stories. Of course, studying the real estate cycle alone won’t educate someone. To be fully aware of all of the benefits and risks of home ownership you should contact someone who will selflessly advise you, be it a Realtor® or not.
As a confirmation of what I’ve just written, here are some highlights of a great article: Real Estate: Finally a Good Investment?
Incredibly Low Rates
This cohort is led by John Paulson, the hedge-fund manager who made $20 billion betting against the housing bubble. Last fall he said in a speech: “If you don’t own a home buy one. If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home.”
Why is Mr. Paulson so adamant? Because he believes long-term interest rates are not going to get much lower. They have, in fact, risen since he gave that speech, but they remain remarkably low by historic standards. Low rates and the expectation that home prices will rise is his argument.
Investment Against Inflation: Real Estate
If that’s the case, then convention would argue for holding assets that do well in an inflationary environment. That includes Treasury Inflation Protected Securities, commodities and real estate. Remember that during the stagflation nightmare of the 1970s, real estate had a strong run.
People Uneducated in Real Estate are Frustrated
Hatred of an asset is often the precursor to contrarian interest, and being contrarian is at the heart of many investment strategies. To paraphrase Warren Buffett, be fearful when others are greedy and greedy when others are fearful. Mr. Buffett backed that idea when he invested in the stock market in the teeth of the financial crisis in late 2008 and early 2009.
What do you think?