Old dudes like us have fond memories of beer-belly laughing out loud at the hysterical antics of Peter Sellers’ Inspector Clouseau in the original Pink Panther movies.
If you’ve never seen them, check them out. Two of the best are Return of the Pink Panther (1975) and Revenge of the Pink Panther (1978).
Clouseau is a bumbling idiot. But through sheer dumb luck he always ends up succeeding … in unexpected ways as a result of unintended consequences.
The Senate’s recent hearings on housing reform remind us of Clouseau.
The purported goal of the Senate shindig is to gather a group of big-brained housing industry leaders and experts to find a solution to the affordable housing “crisis”.
But … as this Forbes article opines, some perspectives aren’t part of the conversation … perhaps for a reason.
Of course, you may have a differing opinion and that’s fine. We have our own opinion too. But that’s not the purpose of today’s muse.
We simply watch what’s happening today and consider how best to capture opportunity or avoid loss based on where things are likely headed tomorrow.
In this case, it seems Uncle Sam is looking for ways to make housing affordable. That’s a noble objective. Go team.
There are really just three basic approaches.
One is to increase supply relative to demand. When supply exceeds demand, prices to drop. That’s how abundance and productivity create prosperity.
After all, lower prices make things more affordable to more people, right?
That sounds reasonable. But it also sounds a lot like deflation.
And when bankers are in the room … the kind who make home loans secured by the dollar value of the property … they FREAK at the idea of falling prices.
So you’re probably not getting sincere ideas from bankers about how to lower prices.
Then there are the builders …
While builders LOVE the idea of building more houses, they also want to earn a profit. Profitable building is easier when prices are higher, NOT lower. So you can guess which direction the builders are leaning.
What about the wizards of Wall Street?
These guys make money shuffling paper. So they just want LOTS of paper (i.e., mortgage-backed securities) created, so they have more chips to play with in their casinos.
And Wall Street knows falling prices frighten the lenders who make the paper possible. So it’s a safe bet Wall Street votes with the bankers for higher prices.
Even at the Main Street level, there’s not much motivation to push prices down in pursuit of truly affordable housing.
Real estate agents (the largest trade association in North America) aren’t raving fans of low prices as the preferred path to affordability … despite their rhetoric.
After all, real estate agents promote buying a home as a great “investment”. No one wants to make an “investment” that goes down. So higher is better.
Last but not least, there’s Dick and Jane Homeowner (often registered voters) … whom are keenly aware of their castle’s current market value, even though they have no intent on selling.
Of course, it’s fine for the prices of cell phones and big screen TVs to fall, but not home sweet home. God forbid.
Plus, its fun for Dick and Jane to use their home equity to reset credit lines with debt consolidation loans, or to augment the falling purchasing power of their incomes.
And everyone knows home equity ATMs only work when housing prices steadily RISE.
So yes, home BUYERS want the house affordable when THEY buy it. But after that … home OWNERS want up, up, up. Sorry, next generation. Figure it out.
When we asked then-candidate Donald Trump for his plan for housing , he simply said … “Jobs”. Presumably, good jobs with higher pay.
Higher pay leads to the ability to make higher payments which leads to bigger mortgages (happy bankers, happy Wall Street) which leads to HIGHER prices.
So it’s just a wild guess … but we don’t think there’s a chance in a very hot place that there’s any serious motivation to make housing affordable.
Not if “affordable” means “less expensive”.
ALL the incentives are to make housing MORE EXPENSIVE … but ACCESSIBLE. That means more, cheaper, and easier FINANCING.
So even IF the PTB (Powers That Be … it only sounds like Politboro) sincerely believe more and cheaper financing makes things more “affordable” …
(Hey, it worked for college tuition … oh, wait …)
… like Inspector Clouseau, they’ll end up pushing housing prices up by “accident”.
That’s what happens when you use debt to pull purchasing power from the future into the present.
But whatever the motives, they certainly have the tools to make it happen …
… lower interest rates, easier lending guidelines, government (taxpayer) guarantees, tax breaks … and the Fed’s all-powerful printing press.
Yes, we know all that is what first inflated and then deflated the housing bubble last time.
But smart, disciplined investors made not only survived the implosion … they made millions from the re-inflation.
So while this may not be the time to speculate on a housing price boom in the short term …
… it’s arguably a great time to liquidate equity, streamline expenses, solidify leases, and prepare for the long game.
Because when Uncle Sam is working on making something “affordable”, it usually means that something is showing serious signs of slowing and needs a boost.
Of course, when you find reasonable deals in relatively affordable markets and you have a GREAT boots-on-the-ground team, it’s also a great time to use cash flow real estate to stock up on cheap long-term debt.
Remember, real estate … even housing … isn’t an asset class.
Every individual neighborhood and property is unique. So while deals might be harder to find, they’re still out there.
And if the cash flow makes sense, you’ll weather the storm … warmed by the notion that everyone with power to influence policy will be voting for HIGHER prices year in and year out … forever.
Of course, they might break the financial system or crash the dollar trying to do it … so it’s smart to be prepared for that too.
That’s why we like gold, oil, agriculture, and paid for properties in non-leveraged markets … including, and perhaps especially, in non-domestic markets.
Real assets like food, commodities and land tend to hold relative value when currencies struggle.
Gold and silver can almost always be easily converted into any currency … and are a useful way to store liquefied equity privately outside a fragile financial system or hostile jurisdiction.
And if the dollar continues its long-term slide relative to gold, a little gold might go a long way toward retiring dollar denominated debt (like a mortgage).
That’s where we think gold bugs and real estate bugs don’t understand each other. We know. We spend a lot of time with both.
Gold is great for reducing counter-party risk and hedging against a falling currency. But gold doesn’t cash flow.
Real estate is great for using cheap long-term debt to create tax-free cash flow and long-term equity growth. But it isn’t liquid and it takes a long time to retire the debt.
But putting gold and leverage cash-flowing real estate in a falling currency environment together makes each much more powerful.
It takes time to get your mind around it … but we encourage you to dedicate a little of your financial education time and budget to learning more.
Because once you understand how gold and real estate make each other better, you’ll probably be more excited about both. We are.
Until next time … good investing!
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