|Real estate booms and busts
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Markets show no clear direction. Dow up 95 points yesterday. Gold up $16.
The press, too, seems confused about what stories to follow. One newspaper focuses on jobs. Another thinks Janet Yellen should get more ink. Spain has climbed out of recession, the Financial Times tells us. Another shutdown danger looms ahead, warns the Wall Street Journal.
We have been connecting the dots between civilization, barbarism and Fed policy. Not everyone's cup of tea, to be sure, but it has held our interest for a few days.
Today, however, we back off...we don't have the energy for deep thinking. Thinking is like mining. It is easier to do on the surface. So, we will think superficially, today. It is more fun too.
Down in Florida, everything seemed to be booming again. The restaurants were full. Smiling faces were everywhere. And new apartment buildings, which seemed abandoned 4 years ago, now have their parking lots full of shiny new cars.
We caught up with an old friend, a savvy real estate investor.
"We had a field day for a while," he began. "It was unbelievably good. So unbelievable that even my partner couldn't believe it. We should have been buying up everything. But he got cold feet.
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"There were lots of rental units on sale...for 5 or 6 times income. At that price, you couldn't miss. You could plug in a 'safety' measure - figuring your rental income might go down 25% -- but the numbers still looked good.
"And I was doing it without financing. No leverage. You can imagine how good you could have done with a little leverage. You could borrow at, what, 4% or 5%. If you bought at 5 times income, you could spend half your revenue on upkeep and overhead and still come out ahead.
"You didn't have to be a genius. You just had to be in the business and you had to keep your head.
"I have a friend down here. He was buying apartment buildings at 3 times rental income. No kidding. He bought something like 100 units. He made a fortune. In just a few months. He just borrowed the money to buy the things. Now, he can refinance...pay off the loans...and he's got millions of dollars worth of property.
"But now it's over. Prices are up...there aren't many distressed situations. I can't find anything selling for less than 6 times income. And they don't look very attractive, for one reason or another.
"Isn't that funny though? I mean, how you get hit with a massive financial crisis...and it turns out to be the opportunity of a lifetime? You just have to keep your wits about you. Which is pretty hard to do."
Very hard to do. Whatever the zeitgeist of the time...it's hard to resist. When all the people you know are running around like chickens with their heads cut off, you probably are too!
But while the bust is over in America, bubbles are developing elsewhere...especially where they speak English. According to the Economist, house prices are 20% too high in Britain, 46% over fair value in Australia and 74% out-of-whack in Canada.
In non-English speaking countries, too, real estate booms may be turning into bubbles, thanks largely to government policies. Yes, the authorities are fooling with interest rates...and giving buyers an opportunity.
The UK, for example, has a "Help to Buy" program in which the government takes much of the risk of marginal mortgages. Argentina has a buy-the-vote program in which some prospective homeowners are given construction mortgages at a low, fixed rate as low as only 2%...which is pretty darned good in a country where inflation is running about 25% to 30% per year!
And in France, buyers have mortgage finance that is sexier than it first appears. An old friend, originally from New Orleans, explained when we were in Paris last month:
"They don't have non-recourse loans. And they don't have fixed rate loans. So you think there's not much you can do. But, in fact, they have something else. The rates are low...and the payments are fixed. So, what you do is...you get a loan at just, say, 2.7%...which is very low. You buy an apartment for $1,000,000. Your mortgage payment is only $27,000 a year. You can rent that apartment out for...maybe...$40,000. So, already you're not in bad shape. You pay $27,000...and let's say you only get $35,000 in rent. Rentals here are typically net, net, net... You're breaking even.
"Now, let's say mortgage rates go up. It doesn't matter, because your monthly payment is fixed. They just add it on to the end of the mortgage itself. And you don't really care. You're breaking even. And eventually, prices rise...and you refinance or pay it off.
"Recently, I financed some property in Paris at 2.7% and I took the money and bought property in New York. I know it seems a little crazy, but 2.7% is lower than 4%...and at that rate my New York apartment is running above breakeven too."
Yes, dear reader, low-interest financing - not low prices -- is now the key to the US housing market. Buy well...finance fully...and can you still come out ahead?
More to come...
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.
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