9/15/13: Clues in the News: Fools Rush In – Beware the Jobless Recovery

We like real estate.  We think real estate is a GREAT investment…maybe the BEST investment.

BUT (and yes, it’s a big bubble of a but), not all real estate is the same.  And not all real estate markets are the same.  And not all real estate market booms are the same.

So, because we’ve been around the block a couple of times (in The Godfather’s case, a couple of thousand times), we know there’s more to a great real estate market than just rising prices.

Fortunately, there are many clues in the daily headlines that help us figure out if the enthusiasm for appreciation is a new gold rush for real estate investors or simply a fool’s gold head fake.

In the studio to sift through the daily dirt of mainstream headlines in search of nuggets of investing gold:

  • Your powerful prospector of broadcast gold, host Robert Helms
  • His dead-pan co-host, Russell Gray
  • Regular contributor, that silver-haired real estate claim-staker and The Godfather of Real Estate, Bob Helms

A lot of things have been going up lately:  Housing prices, housing sales, home-builder confidence, multi-family rents, interest rates, jobless claims….hey wait! Who snuck those last two things in there???

Yes, it’s true.  There’s some seriously concerning news hidden inside all of the happy housing news.

Now this doesn’t mean you can’t make money in this market.  Au contraire, mon ami!  It means there’s a LOT of money going to be made.  But (there it is again), one should proceed carefully because once a market starts to move, whether it’s gold, stocks or real estate, it’s important not to chase it.

Here’s where real estate shows it’s amazing awesomeness.

As we’ve said a zillion times, real estate isn’t an asset class and there’s no such things as one big real estate market.  An ounce of gold or a share of Apple stock is EXACTLY the same, AND it trades for virtually the SAME price anywhere in the world.  So whether you buy  it in the U.S., France, Argentina or Nigeria (wait, we’ve heard you can special prices on gold in Nigeria…at least that’s what the email said….), it’s the SAME.

Contrast this with real estate, where a property’s value can vary not just from state to state or county to county, but right down to the neighborhood, property type, condition and terms of the deal.

The very inefficiencies that make real estate anathema to paper asset traders, make it a value hunter’s paradise!  And what can YOU personally do to fix up an ounce of gold or a share of Apple stock?  We’re guessing it won’t do much good to throw carpet on your Kruggerand or put sod on your Apple stock, but those things might make your real estate worth more.

Plus, real estate allows you to use debt.  And last time we looked, which was just a moment ago, the Fed continues to print money (pending this week’s big announcement about “tapering”…or is it a tape worm?), so tomorrow’s dollars are likely worth less than today’s.  When this happens, it’s AWESOME to borrow, because you can buy stuff today (like houses) and pay back tomorrow (actually, over THIRTY YEARS) with cheaper dollars.  Loans on income producing real estate can be one of the safest ways to short a falling dollar.

But (that thing will not get out of our face)…before you get all hot and bothered and run out to start buying up any property you can find, be CAREFUL!  You should never get IN to a deal that you don’t have at least a couple of ways to get OUT of.

We’re not sure why, but rapid appreciation causes otherwise sensible investors to rush in and expect that prices will continue to rise, and trust that  liquidity will be there (in the form of “a greater fool”) when you want to realize all that wonderful equity.

Well, when an economy is hitting on all 8 cylinders and jobs are being created, real incomes are rising, and lenders are busily making loans to well-qualified borrowers, you might be able to drive your investment vehicle a little closer to the red-line of leverage.  However, as we learned in 2008, hidden forces can be forming that can pull the rug right out from under you pretty fast.

Today, those forces aren’t even all that hidden, which brings us back around to the headlines (and you thought we forgot).  Most of what we should be concerned about is right out in plain sight.  But for some reason, some investors aren’t seeing it.  That’s why we’re here.  To help you take a deep breath and stay sober when everyone else is drunk on QE fueled asset growth.  And you thought it was only stock investors who got drunk on QE.

So in this episode, we discuss the world’s fixation on the U.S. housing market and the general consensus that housing has put in a bottom.  But what bottom are we talking about?

Prices.  But when the headlines say that U.S. labor participation is down, jobless claims are up, interest rates are rising; and a quick trip to the grocery store and gas pump tells you that houses aren’t getting more affordable, it makes you wonder:  So where’s all that price appreciation coming from?

A little more digging and we find that a lot of investment capital has been pouring into real estate, especially single-family homes.  Except this time, instead of all the equity rich Mom & Pop investors buying 2 or 3 houses at a time, there are huge hedge funds buying 20, 30 or 100 at a time.  And many are paying CASH.

Meanwhile multi-family rents are rising and may have peaked temporarily.  Why?

Could it be that real people can’t afford to buy so they’ve been piling into apartments, which are more affordable than houses?  But the article we read suggests that while occupancies are up, which is usually a sign that it’s time to raise rents, most tenants can’t afford a rent increase.  And if a multi-family landlord tries to raise rents, he may find that his tenants will up and move to some place cheaper.

Oh!  Hold that thought.

This is our point.  Hot markets, speculative markets, higher priced markets – they appear tempting when prices are rising.  But if the fundamentals underneath the price increases aren’t sound, then when the tide of QE money recedes, as Warren Buffet says, we’ll see whose been swimming naked.

For residential real estate investing, we favor affordable markets that provide important quality of life infrastructure like transportation, medical, education and entertainment.  Because when people are squeezed, they will move to save money. But they don’t want to live poor.  And when they find they can have a nice suburban life in places like Atlanta, Memphis, Houston, Dallas or other similar big metros, for the same price they might pay to live in the rougher areas of San Francisco, Boston or New York, they’ll move.

That’s the beauty of real estate.  There’s no one “real estate market”. There are thousands of little ones.  And the advantage a Mom & Pop investor has is they can find those high quality, affordable areas and buy up assets that are still selling below replacement cost.  The key is understanding the fundamentals of the LOCAL market and having a great local team who can help you find the right deals.

We could go on (can you tell?), but you get the idea.  Don’t just rush in and buy any property anywhere just because you think it will go up.  It might.  But understand WHY and HOW it might.  Because it might not, and if you use a bunch of leverage with out a long term plan to service it (i.e., tenants employed in a strong job producing local economy), you might end up watching a painful replay of 2008.  Our friend (and 2014 Summit at Sea™ faculty member), Peter Schiff says the REAL crash is yet to come.

We hope he’s wrong.  But Peter Schiff was right about 2008. And after hanging out with on this year’s Summit, we think he’s a pretty smart guy.  But if you have the right properties, in the right markets, with the right financing structure and management team, you are very likely to whether any storm far better that those who are investing purely in inflated stocks for capital gains which are SOLELY dependent upon a greater fool coming in to buy you out at a higher price.

So learn to watch and love the headlines.  And if it gets too tedious for you, just tune in to The Real Estate Guys™ radio show.  We’ll watch the news and interview smart people to help us all understand it better.

One final word of caution:  Don’t let concern about the next crash keep you from investing.  In the face of falling dollar, sitting on savings could be the WORST thing to do.  Real estate investors are having a great time grabbing properties below replacement cost, locking on long term cheap debt, utilizing tax breaks to recoup upfront costs faster and positioning themselves to control one of the most fundamental and desirable assets in any market: the properties that people and businesses need to occupy in order to survive.

For now, listen to this episode and think about this real estate recovery and how you plan to take advantage of what’s happening right now.  Enjoy!

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