Open source housing
Non-profit capital pool
Adapt urban scale
Non-profit capital pool
Adapt urban scale
Showing posts with label housing. Show all posts
Showing posts with label housing. Show all posts
Monday, March 09, 2015
Open Source Housing Can Adapt ESOPs and REITs
I paid attention at tonight's Commonwealth Club talk on "open source housing." The concept needs more definition but the movement's drivers are on the right track. The current state of open source housing is a collection of websites offering simple, low-cost designs for stand-alone single family homes. Those plans are great for rural areas or exurban infill that can be rebuilt into a denser community. An urban core like San Francisco needs a different open source template.
Capturing a social capital spirit is great for open source plans that support non-profit organizations. The limitation on this movement is that non-profits do not drive America's GDP. Urban housing solutions need a capitalist impulse. Non-profits are welcome to experiment with starting their own credit unions, sequestering parts of their endowment into residential housing units, or issuing bonds to buy buildings. Our Commonwealth Club speakers mentioned all three tonight and I noticed that all three are limited by most non-profits' lack of a capital base. Universities have successfully launched campus-owned residential housing initiatives because they have sufficient financial strength to underwrite large acquisition and construction projects. Your typical San Francisco neighborhood charity cannot match the strength of our local universities.
The fourth pillar of tonight's talk is some kind of open source creative commons license for local housing solutions as co-working spaces. This concept has legs if it finds an ecosystem that can make it profitable for large numbers of market participants who are not limited by geography. Open source systems like Linux and Arduino work because they enable the construction of products that many people will purchase in a free market. Adapting an open source model from IP to physical residences means creating a legal and financial template that people will find profitable.
Here is the Alfidi Capital contribution to open source housing. The private sector already has a concept that allows employees to convert their labor into equity; it's called the employee stock ownership plan (ESOP). Adapting this for a non-profit enables non-profit workers to make tax-free contributions to an equity pool that the organization can use to buy multi-unit residential buildings. Making this scalable means multiple non-profits can pool their ESOP housing funds into a professionally managed private REIT. Consolidating the purchased buildings into a private REIT fund gives each employee shares they can exchange for an available residence, similar to a condominium's homeowner association. The advantage of a REIT structure is that shares may be sold privately between non-profit organizations' employees. Perhaps they could be tradeable on portals like SecondMarket. The REIT's liquidity allows flexibility for non-profit workers who may not wish to spend their entire lives committed to one housing arrangement if they decide to move on with their careers.
I look forward to seeing what SOCAP people will do with open source housing. FINRA notes that private REITs come with many caveats. Physical designs for housing are less important than an economic framework that is scalable to address a large number of mostly urban non-profits that are too small to move the residential market on their own. Employers and investors know that ESOPs and REITs already work as capital pools. The non-profit sector can use them to buy affordable housing.
Capturing a social capital spirit is great for open source plans that support non-profit organizations. The limitation on this movement is that non-profits do not drive America's GDP. Urban housing solutions need a capitalist impulse. Non-profits are welcome to experiment with starting their own credit unions, sequestering parts of their endowment into residential housing units, or issuing bonds to buy buildings. Our Commonwealth Club speakers mentioned all three tonight and I noticed that all three are limited by most non-profits' lack of a capital base. Universities have successfully launched campus-owned residential housing initiatives because they have sufficient financial strength to underwrite large acquisition and construction projects. Your typical San Francisco neighborhood charity cannot match the strength of our local universities.
The fourth pillar of tonight's talk is some kind of open source creative commons license for local housing solutions as co-working spaces. This concept has legs if it finds an ecosystem that can make it profitable for large numbers of market participants who are not limited by geography. Open source systems like Linux and Arduino work because they enable the construction of products that many people will purchase in a free market. Adapting an open source model from IP to physical residences means creating a legal and financial template that people will find profitable.
Here is the Alfidi Capital contribution to open source housing. The private sector already has a concept that allows employees to convert their labor into equity; it's called the employee stock ownership plan (ESOP). Adapting this for a non-profit enables non-profit workers to make tax-free contributions to an equity pool that the organization can use to buy multi-unit residential buildings. Making this scalable means multiple non-profits can pool their ESOP housing funds into a professionally managed private REIT. Consolidating the purchased buildings into a private REIT fund gives each employee shares they can exchange for an available residence, similar to a condominium's homeowner association. The advantage of a REIT structure is that shares may be sold privately between non-profit organizations' employees. Perhaps they could be tradeable on portals like SecondMarket. The REIT's liquidity allows flexibility for non-profit workers who may not wish to spend their entire lives committed to one housing arrangement if they decide to move on with their careers.
I look forward to seeing what SOCAP people will do with open source housing. FINRA notes that private REITs come with many caveats. Physical designs for housing are less important than an economic framework that is scalable to address a large number of mostly urban non-profits that are too small to move the residential market on their own. Employers and investors know that ESOPs and REITs already work as capital pools. The non-profit sector can use them to buy affordable housing.
Tuesday, January 13, 2015
Wednesday, August 20, 2014
House Flipping is Back in Vogue
I have never flipped a house. Buying and fixing a distressed property requires a combination of repair skills that I do not possess. I admire professionals who do it well but I suspect that there is only so much renovation talent to go around. The present bull market in residential real estate is goading plenty of amateurs to try flipping homes. The people on the left end of the bell curve for rehabbing talent are getting in over their heads.
Cable TV shows like Property Wars and Flip That House make it all look so easy. Anyone can do this, right? Well, not really. Mastering the intricacies of a new vocation takes a lot of time and effort. Watching a TV show doesn't cut it. Even the experts have a hard time doing their jobs. One "Property Wars" dude had extremely severe business and financial problems in Arizona. Attending some overpriced coaching sessions don't cut it, either, because a lot of so-called coaches are hired for their sales ability rather than subject-matter expertise.
Real estate gurus have plenty of strategies to sell to their clients, in the hope that one will stick when the others are out of favor in the market. Rehabbers who flip houses are no different. Their niche strategies include something called "wholesaling," which has a bunch of sub-strategies like selling contracts, assigning contracts, double closes, and of course the reverse wholesale. Maybe that last one is like a reverse cowgirl position, but with more work and less fun. My Google searches on these topics reveal that they involve committing to buy properties just to assign ownership to another rehabber or investor. I wonder what the law has to say about that. Selling a property as a third party with no equity is the job of realtors. Doing a realtor's job without the appropriate licensing is legally questionable IMHO. This is why many real estate professionals engage attorneys during closing. BTW, a lot of the websites that turned up in my searches for those terms looked really shady, with little content and lots of ads.
I cringe when I hear real estate gurus promote their workshops as some kind of "summit" that only specially-qualified insiders can access. The next cringe comes when they ask attendees to join their investment team, usually through some proprietary hard money lending partnership. The pitch is that investors who don't want to do all the hard work of finding fixer-upper homes can just put their money on autopilot while the pros take it and . . . do something with it. Beginning rehabbers who give up on flipping are juicy prey for gurus' workshop pitches.
I'll bet that real estate courses from UC Berkeley Extension and other bodies are a lot more authoritative and affordable than any guru seminar on house flipping. Peer-reviewed bodies of knowledge are less likely to come with self-serving snake-oil pitches attached. I have always liked John T. Reed's real estate offerings because he cites market data and laws to support his ideas. I have yet to hear a guru's pitch that mentioned legal requirements for seller financing or bank REO purchases. They all make it sound so easy, when in fact it's hard to get things in writing when working with alternatives to conventional home purchase channels.
Aspiring real estate flippers need data before they start hunting for property to rehab. NAR's Research and Statistics shows which markets are affordable and which properties are selling. The "foreclosure discount" is a commonly accepted way to estimate the success of a buy-and-flip strategy in real estate rehabilitation. Subtracting the median foreclosure sales price from the median sales price in a region determines the foreclosure discount. The discount can be misleading because foreclosed homes may vary widely in quality from most homes. Zillow notes that comparing foreclosure resales to their estimated full fair market value makes for a more accurate foreclosure discount. The more accurate discount offers far less of an attractive gain for flippers; they will have to add even more value with a rehab effort.
I continue to wonder why any competent real-estate professional would insist that tax-advantaged retirement accounts are appropriate vehicles to hold physical property. People who think it's cool to flip houses in their IRAs need their heads examined. The IRS has a ton of restrictions governing how money in an IRA can be used for real property. Working with those restrictions is a lot less efficient than rolling real estate gains into a tax-deferred 1031 exchange. It's also a lot cheaper to buy property through tax liens than buying the property outright. Conserving capital that way eliminates the need to find hard money lenders or questionable business partners.
The unanticipated costs of attorney fees, title searches, high-interest loans, and miscellaneous project expenses will chip away at the huge gains flippers thought they would make. The US housing market crash after 2006 should have taught Americans not to play games with their homes. That sad era should have humbled those who buy more house than they can afford, lie to obtain financing, use their home equity as an ATM machine, or flip homes like they're playing in casinos. The sad part now is that the Federal Reserve's QE and ZIRP have brought back all of these phenomena. Borrowing cheaply to flip quickly is in vogue once again. I'll watch the frenzy from the sidelines while amateurs lose their shirts, and my cash will be ready when San Francisco levies its tax liens.
Cable TV shows like Property Wars and Flip That House make it all look so easy. Anyone can do this, right? Well, not really. Mastering the intricacies of a new vocation takes a lot of time and effort. Watching a TV show doesn't cut it. Even the experts have a hard time doing their jobs. One "Property Wars" dude had extremely severe business and financial problems in Arizona. Attending some overpriced coaching sessions don't cut it, either, because a lot of so-called coaches are hired for their sales ability rather than subject-matter expertise.
Real estate gurus have plenty of strategies to sell to their clients, in the hope that one will stick when the others are out of favor in the market. Rehabbers who flip houses are no different. Their niche strategies include something called "wholesaling," which has a bunch of sub-strategies like selling contracts, assigning contracts, double closes, and of course the reverse wholesale. Maybe that last one is like a reverse cowgirl position, but with more work and less fun. My Google searches on these topics reveal that they involve committing to buy properties just to assign ownership to another rehabber or investor. I wonder what the law has to say about that. Selling a property as a third party with no equity is the job of realtors. Doing a realtor's job without the appropriate licensing is legally questionable IMHO. This is why many real estate professionals engage attorneys during closing. BTW, a lot of the websites that turned up in my searches for those terms looked really shady, with little content and lots of ads.
I cringe when I hear real estate gurus promote their workshops as some kind of "summit" that only specially-qualified insiders can access. The next cringe comes when they ask attendees to join their investment team, usually through some proprietary hard money lending partnership. The pitch is that investors who don't want to do all the hard work of finding fixer-upper homes can just put their money on autopilot while the pros take it and . . . do something with it. Beginning rehabbers who give up on flipping are juicy prey for gurus' workshop pitches.
I'll bet that real estate courses from UC Berkeley Extension and other bodies are a lot more authoritative and affordable than any guru seminar on house flipping. Peer-reviewed bodies of knowledge are less likely to come with self-serving snake-oil pitches attached. I have always liked John T. Reed's real estate offerings because he cites market data and laws to support his ideas. I have yet to hear a guru's pitch that mentioned legal requirements for seller financing or bank REO purchases. They all make it sound so easy, when in fact it's hard to get things in writing when working with alternatives to conventional home purchase channels.
Aspiring real estate flippers need data before they start hunting for property to rehab. NAR's Research and Statistics shows which markets are affordable and which properties are selling. The "foreclosure discount" is a commonly accepted way to estimate the success of a buy-and-flip strategy in real estate rehabilitation. Subtracting the median foreclosure sales price from the median sales price in a region determines the foreclosure discount. The discount can be misleading because foreclosed homes may vary widely in quality from most homes. Zillow notes that comparing foreclosure resales to their estimated full fair market value makes for a more accurate foreclosure discount. The more accurate discount offers far less of an attractive gain for flippers; they will have to add even more value with a rehab effort.
I continue to wonder why any competent real-estate professional would insist that tax-advantaged retirement accounts are appropriate vehicles to hold physical property. People who think it's cool to flip houses in their IRAs need their heads examined. The IRS has a ton of restrictions governing how money in an IRA can be used for real property. Working with those restrictions is a lot less efficient than rolling real estate gains into a tax-deferred 1031 exchange. It's also a lot cheaper to buy property through tax liens than buying the property outright. Conserving capital that way eliminates the need to find hard money lenders or questionable business partners.
The unanticipated costs of attorney fees, title searches, high-interest loans, and miscellaneous project expenses will chip away at the huge gains flippers thought they would make. The US housing market crash after 2006 should have taught Americans not to play games with their homes. That sad era should have humbled those who buy more house than they can afford, lie to obtain financing, use their home equity as an ATM machine, or flip homes like they're playing in casinos. The sad part now is that the Federal Reserve's QE and ZIRP have brought back all of these phenomena. Borrowing cheaply to flip quickly is in vogue once again. I'll watch the frenzy from the sidelines while amateurs lose their shirts, and my cash will be ready when San Francisco levies its tax liens.
Monday, February 24, 2014
Financial Sarcasm Roundup for 02/24/14
I can't imagine a life without sarcasm. Maybe other people can manage that but I can't relate to them. I don't write for the inattentive or unimaginative parts of the human race. This blog of mine isn't their cup of tea.
The SEC is studying whether changing the tick size of trades will improve liquidity for small cap companies. Tick sizes are a non-issue. Changing a trading increment doesn't add liquidity; only attracting more participants to a market adds liquidity. I can't believe the SEC hasn't figured this out. I need to lower my expectations even further. These people must have nothing better to do. Oh wait, I know, they could prosecute all of those financial executives who falsified mortgage documentation prior to the 2008 crisis. They could also go after Libor and currency traders who colluded to fix the market. Nah, that's not as rewarding as changing tick sizes.
Deutsche Bank thinks the Australian dollar is headed for a price collapse. Well, that's just great, since I'm using that currency to hedge the US dollar. Actually I don't care much for what Deutsche Bank thinks. Their derivative exposures to European markets are so bad that they could easily collapse themselves before the Australian dollar hits bottom. A cheaper Aussie dollar just means I'll buy more FXA. I can't say the same about any European banks.
The NAR notes that existing home sales are at 18-month lows. The real estate sales pros never let facts get in the way of their sales pitch. It's always a great time to buy a house, even in their mushy heads. I don't expect them to connect the decline in home sales with the Fed's reduced commitment to purchase mortgage-backed securities. The math on higher real interest rates is inevitably a negative for people who borrow to buy a house. Note further that I've said "house" and not "home." People who missed out on the flipping craze ten years ago jumped back in, and I'm pretty sure it will end the same way. Private equity shops borrowing to buy existing homes in all-cash offers are going to get flushed.
I've got a pretty busy week ahead with a few meetings and social events. This gives me several audiences to entertain, live and in person, with my sarcasm. I expect attractive women to swoon with every sarcastic financial utterance I generate in San Francisco.
The SEC is studying whether changing the tick size of trades will improve liquidity for small cap companies. Tick sizes are a non-issue. Changing a trading increment doesn't add liquidity; only attracting more participants to a market adds liquidity. I can't believe the SEC hasn't figured this out. I need to lower my expectations even further. These people must have nothing better to do. Oh wait, I know, they could prosecute all of those financial executives who falsified mortgage documentation prior to the 2008 crisis. They could also go after Libor and currency traders who colluded to fix the market. Nah, that's not as rewarding as changing tick sizes.
Deutsche Bank thinks the Australian dollar is headed for a price collapse. Well, that's just great, since I'm using that currency to hedge the US dollar. Actually I don't care much for what Deutsche Bank thinks. Their derivative exposures to European markets are so bad that they could easily collapse themselves before the Australian dollar hits bottom. A cheaper Aussie dollar just means I'll buy more FXA. I can't say the same about any European banks.
The NAR notes that existing home sales are at 18-month lows. The real estate sales pros never let facts get in the way of their sales pitch. It's always a great time to buy a house, even in their mushy heads. I don't expect them to connect the decline in home sales with the Fed's reduced commitment to purchase mortgage-backed securities. The math on higher real interest rates is inevitably a negative for people who borrow to buy a house. Note further that I've said "house" and not "home." People who missed out on the flipping craze ten years ago jumped back in, and I'm pretty sure it will end the same way. Private equity shops borrowing to buy existing homes in all-cash offers are going to get flushed.
I've got a pretty busy week ahead with a few meetings and social events. This gives me several audiences to entertain, live and in person, with my sarcasm. I expect attractive women to swoon with every sarcastic financial utterance I generate in San Francisco.
Thursday, January 30, 2014
Tuesday, August 06, 2013
Fannie Mae And Freddie Mac On The Chopping Block
The Administration is backing the ultimate solution for the ginormous albatrosses known as Fannie Mae and Freddie Mac. Winding them down is a worthwhile goal. I believe they never should have existed in the first place. These monstrosities have artificially sustained demand for housing and promulgated the mentality that a home is some kind of investment. Wrong! A single-family house should really be considered a durable good that eventually falls apart and needs to be replaced.
I absorbed the government sponsored enterprise (GSE) doctrine like any other MBA student. These twins existed to provide liquidity to an otherwise illiquid market in real estate, right? Those millions of mortgage payments aggregated into pools would provide regular income for anyone who bought a Freddie or Fannie security, right? Hey, it all looked so brilliant. What could go wrong? Everything could go wrong, and it did.
People with no assets or income got loans they could never pay back to buy homes they did not need. Bankers packaged these loans into securities that they knew Fannie and Freddie could resell to sucker investors. Policymakers kept the carousel ride going because making McMansions available to slobs was good PR and got votes. Everybody messed up big time and America is poorer for it all.
The Fed is now the buyer of last resort for MBS. Reinvigorating the private investment market for all of the garbage on its balance sheet is the only thing standing between the US and hyperinflation. The thing you need to remember is that investors who buy whatever the Fed has to sell will counteract its monetary stimulus and force up real interest rates. Maybe that's the big plan after all. You buy the MBS, Fannie and Freddie shut down, rising mortgage rates make your next home unaffordable, and the Fed's loose monetary policy is neutralized so the economy can resume its controlled slide down through stagflation to a lower but sustainable level of activity. Eventually the MBS either disintegrates when its underlying mortgages go into foreclosure or its principal value is eroded from persistent inflation. It's all so brilliant I wish I'd thought of it myself. Wait a minute . . . I just did.
I absorbed the government sponsored enterprise (GSE) doctrine like any other MBA student. These twins existed to provide liquidity to an otherwise illiquid market in real estate, right? Those millions of mortgage payments aggregated into pools would provide regular income for anyone who bought a Freddie or Fannie security, right? Hey, it all looked so brilliant. What could go wrong? Everything could go wrong, and it did.
People with no assets or income got loans they could never pay back to buy homes they did not need. Bankers packaged these loans into securities that they knew Fannie and Freddie could resell to sucker investors. Policymakers kept the carousel ride going because making McMansions available to slobs was good PR and got votes. Everybody messed up big time and America is poorer for it all.
The Fed is now the buyer of last resort for MBS. Reinvigorating the private investment market for all of the garbage on its balance sheet is the only thing standing between the US and hyperinflation. The thing you need to remember is that investors who buy whatever the Fed has to sell will counteract its monetary stimulus and force up real interest rates. Maybe that's the big plan after all. You buy the MBS, Fannie and Freddie shut down, rising mortgage rates make your next home unaffordable, and the Fed's loose monetary policy is neutralized so the economy can resume its controlled slide down through stagflation to a lower but sustainable level of activity. Eventually the MBS either disintegrates when its underlying mortgages go into foreclosure or its principal value is eroded from persistent inflation. It's all so brilliant I wish I'd thought of it myself. Wait a minute . . . I just did.
Saturday, August 03, 2013
Monday, July 22, 2013
Financial Sarcasm Roundup for 07/22/13
I find it un-freaking believable that markets continue to hit new highs while central banks pump them with liquidity and dingbat money managers keep gambling with other people's money. The only way out of this mess is through sarcasm.
The G-20 is doing a u-turn away from austerity even though it knows by know that monetary easing doesn't spur real growth. All of those ugly protests in Greece and Spain spooked the elites into thinking they won't get their weekly caviar fill if austerity brings revolution.
China's interest-rate liberalization now makes excessive borrowing easier than ever. This extends the life of the shadow banking system's overburdened balance sheets by months, or perhaps years. Chinese real-estate developers now have to meet fewer hurdles to commit control fraud.
Mme. Lagarde wants the US Supreme Court to reaffirm the doctrine of sovereign immunity so she can get on with the IMF's business of ignoring the imminent sovereign debt defaults of the PIIGS bloc. The IMF and other transnational institutions didn't get the memo that sovereignty still matters to investors who consider tax policies, political risk, and other factors specific to nation-states. The globalization of the ruling class into a transnational blob came about thirty years too late. Now the pendulum swings back to nations and their tribal constituents, just as it did in the fifth century as the Roman Empire came apart.
Existing US home sales are heading down the tubes again. Just a teensy rise in mortgage rates was all it took to make the numbers crater. Many homeowners still haven't returned to their breakeven price and now they get to watch their home equity get flushed all over again.
I'd like to thank all of the idiots I've met and heard about recently for making this sarcasm possible. I wouldn't be who I am without them.
Saturday, July 06, 2013
The Haiku of Finance for 07/06/13
Home improvement store
Profit tied to home building
Boom-bust together
Profit tied to home building
Boom-bust together
Lowe's Chops Down Orchard
Orchard Supply Hardware (OSHWQ) is bankrupt. Lowe's (LOW) is buying most of OSH's assets in a bankruptcy auction for $205M. The risk of this transaction breaking up is small unless Home Depot (HD) jumps in with a bid. Lowe's intent is to increase its California presence and Home Depot is already strong in that state. I'd like to know how Lowe's and Home Depot stack up right now.
LOW
Market cap: $45.88B
P/E: 24.49
Profit Margin: 3.91%
ROE: 13.86%
HD
Market cap: $114.37B
P/E: 24.85
Profit Margin: 6.21%
ROE: 27.5%
Investors are paying almost the same P/E for these two big home improvement competitors even though Home Depot is clearly more profitable and making better use of its invested capital. Home Depot has about 50% more market share than Lowe's (judging from their gross revenues), so Lowe's will need all the Orchard retail space it can get. Lowe's same-store sales have been all over the map recently, and Lowe's seems to trail Home Depot in both cost-cutting flexibility and penetration of the professional builders' sector. Lowe's margins will suffer further in the short term after it converts Orchard's stores to its own layout and absorbs the accounts payable that it agreed to take in the buyout deal.
Full disclosure: No positions in any company mentioned at this time.
LOW
Market cap: $45.88B
P/E: 24.49
Profit Margin: 3.91%
ROE: 13.86%
HD
Market cap: $114.37B
P/E: 24.85
Profit Margin: 6.21%
ROE: 27.5%
Investors are paying almost the same P/E for these two big home improvement competitors even though Home Depot is clearly more profitable and making better use of its invested capital. Home Depot has about 50% more market share than Lowe's (judging from their gross revenues), so Lowe's will need all the Orchard retail space it can get. Lowe's same-store sales have been all over the map recently, and Lowe's seems to trail Home Depot in both cost-cutting flexibility and penetration of the professional builders' sector. Lowe's margins will suffer further in the short term after it converts Orchard's stores to its own layout and absorbs the accounts payable that it agreed to take in the buyout deal.
Full disclosure: No positions in any company mentioned at this time.
Thursday, June 20, 2013
No Way Will The Fed End QE During Bernanke's Tenure
I did not have to listen to Fed Chairman Ben Bernanke's remarks yesterday to know what he was going to say. I've chronicled the Fed's mentality for years on this blog. The Fed isn't interested in reducing unemployment. It is actually interested in encouraging spending by promoting a wealth effect in asset classes.
The Fed has liberally provided support to bond valuations and suppressed interest rates by purchasing government bonds and mortgage-backed securities. Remove that demand, or even threaten to do so, and asset prices reset to a sustainable equilibrium. That equilibrium for bond valuations is much lower than where it is today.
Suppressing nominal interest rates means investors are forced to search for yield in assets besides cash savings. Investors have chased stocks. Corporate profits have historically been an average of 6% of GDP, and lately they've been almost twice that figure. Mean reversion in the earnings of a P/E ratio eventually affect the price as well. The equilibrium for stock valuations is much lower than where it is today.
Low rates encouraged home buyers to once again buy more house than they could afford. No one learned anything from the housing crash. Private equity firms bought up vacant homes to use as rental properties. Rising interest rates will cause them pain as home values sink to levels below what they levered up to buy. The equilibrium for home prices is much lower than where it is today.
The market is reacting predictably to the Chairman's remarks, with stocks and bonds slumping. Addicts react badly when they can't get their regular fix. That's why I don't think the Fed is serious about ending its monetary stimulus. Talking the markets down means nothing. Some black swan event will force the Fed to lose control of the yield curve no matter what it purchases.
The Fed has liberally provided support to bond valuations and suppressed interest rates by purchasing government bonds and mortgage-backed securities. Remove that demand, or even threaten to do so, and asset prices reset to a sustainable equilibrium. That equilibrium for bond valuations is much lower than where it is today.
Suppressing nominal interest rates means investors are forced to search for yield in assets besides cash savings. Investors have chased stocks. Corporate profits have historically been an average of 6% of GDP, and lately they've been almost twice that figure. Mean reversion in the earnings of a P/E ratio eventually affect the price as well. The equilibrium for stock valuations is much lower than where it is today.
Low rates encouraged home buyers to once again buy more house than they could afford. No one learned anything from the housing crash. Private equity firms bought up vacant homes to use as rental properties. Rising interest rates will cause them pain as home values sink to levels below what they levered up to buy. The equilibrium for home prices is much lower than where it is today.
The market is reacting predictably to the Chairman's remarks, with stocks and bonds slumping. Addicts react badly when they can't get their regular fix. That's why I don't think the Fed is serious about ending its monetary stimulus. Talking the markets down means nothing. Some black swan event will force the Fed to lose control of the yield curve no matter what it purchases.
Sunday, June 09, 2013
Why I Do Not Want To Be a Landlord
I've been doing a lot of thinking about real estate lately. Some years ago I attended free seminars that were totally worthless. Lately I've been listening to experienced real estate professionals. I now have more sources and references for my knowledge base than I could ever use. One of the more common avenues to success in real estate is owning income-producing residential property. This means investors have to manage their property and tenants as a landlord. Once I started learning about all of the responsibilities a landlord must fulfill, I realized it's a poor fit for my negative attitude toward human beings. The feudal appeal of having serfs as tenants on my land has lost its shine. Let me describe the ways in which landlording would complicate my life and inconvenience me to no end.
I wish I could charge people an arm and a leg for living under my benevolent protection, but alas many communities have rent control laws that prevent landlords from raising rents on long-term occupants. San Francisco is one such town. The City has a rent board that determines what private property owners may do with the property they own. The City is also home to a very vocal tenants union that agitates for rent control. The union's symbol is the classic workers' fist smashing a cartoonish landlord. The clear message is that radicals who believe property is theft and profit is evil will use every means available to destroy the capitalists who provide them with climate-controlled shelter from the elements. No thanks. I will not be a landlord in San Francisco if it means I become the target of idiots with no life.
Owning rental property in less restrictive areas means figuring out how much to charge for rent. Figure extra charges for after-hours service calls, inspections, and non-routine maintenance. Having a live response to an overnight maintenance call may be worth the expense if it prevents water damage from destroying property. Watch out for those leaks above the ground floor. Fees for late rents are of course limited by local laws. I'd like to charge people double rent for wasting my time and insulting my intelligence but that's probably prohibited by some do-gooder San Francisco ordinance.
Locked-out tenants are a pain in the behind. I don't want to get calls at oh-dark-thirty from someone who lost their key or left it on the kitchen counter. Having a locksmith on call is not something I relish. I can just imagine a nosy neighbor snooping as the locksmith opens the tenant's door, then calling the cops to report a break-in, and then snickering as the locksmith calls me to complain about wasted time. Yeah, Neighborhood Watch would be all about busybodies watching me lose money. That is a headache I do not need.
Keeping tenants informed is another landlord task I don't want to do. Many tenants are dumb enough to need reminders of when their rent is due, so landlords need to time their newsletter publishing so the reminder ends up at the top of the shoebox, or hatbox, or breadbox, or glovebox, or wherever ghetto tenants like to stuff their overdue bills. Landlords can sometimes use this retardation to their advantage. If the newsletter contains requests for confirmation of safety measures like smoke detectors or carbon monoxide detectors, keeping proof of confirmations can limit landlords' liability in the aftermath of emergencies. Furnaces and air conditioning units are among landlords' most expensive repairs, but I worry that reminding tenants to change filters will fall on deaf ears. Having laundry facilities on site means more maintenance expenses, plus complaints from some tenant who claims a machine ate too many quarters.
Competent businesses consider the cost of acquiring new customers. Landlording as a business means figuring the cost of acquiring new tenants through advertising. Window signs might be more effective than lawn signs that get kicked over, and some high school kid on the corner holding a sign and waving might be a source of amusement. I would give an illiterate tenant a cheeseburger just to see them wave a big sign on the street corner with my name on it. Selecting new tenants means abiding by HUD's Fair Housing regulations. Some tenants fall into legally protected classes. Others that aren't protected don't have to live with me if I don't want them around. Frankly, I don't want anyone around. I don't want animals around either and they're not a protected class, so landlords can have special fees and insurance requirements for our furry friends.
I always wondered why the rental applications I've filled out were so detailed. It turns out that landlords need to collect as much info during the intake process as possible to allow them to garnish wages and collect judgments. County tax records provide a public record of tenants' true addresses, which makes sending judgment notices easier. I sure don't want any known drug offenders on my property, because law enforcement could execute a civil asset forfeiture action against me if I rent to them in full knowledge of their activity. Checking the sheriff's records helps keep the riff-raff away. I'd rather save myself the trouble and keep everyone away.
I have difficulty believing any of the so-called asset protection strategies real estate professionals claim they use. I had an LLC structure until very recently for Alfidi Capital until I determined that paying the $800 per year to the State of California wasn't getting me any benefit. I did not have the time to treat the LLC as a separate entity that would give it corporate veil status. It also obviously carried my name, and I was the registered agent because I don't need to retain a lawyer for routine business functions. My LLC was useless and I'm in the final stages of converting Alfidi Capital from an LLC to a sole proprietorship. I will never again waste time and money using an LLC for anything that I can handle myself, including real estate. Insurance policies are probably cheaper than an LLC and land trusts are probably more anonymous. I'm no expert on land trusts but I'm wary of their potential for misuse. Would a property management company be willing to accept designation as a trustee of a land trust if the named beneficiary is the landlord's LLC, but the landlord has no property insurance? Who would sue who if something goes wrong? I don't want to spend time in court just to find out.
I'd rather take a less costly stance with my asset protection posture. The California superior court system has searchable databases of civil cases online. I've searched San Francisco Superior Court's records many times for the names of local troublemakers whom I do not wish to have in my life. It's educational to see who pops up as the initiator of frivolous lawsuits. I don't want litigation addicts as business associates. Landlords should beware of having them as tenants.
Landlords also have to manage the cash they receive and spend. It comes in by check, money order, electronic payment, etc. It goes out any way you like. You're the boss and you're running this business. I'm not. The process of evicting a bad tenant and preparing a unit for the next occupancy takes time, requiring cash reserves on hand to cover an estimated tenant failure rate. I suspect that corporate experience with uncollectible accounts receivable would be helpful here. Credit card companies sell their charge-off accounts to judgment collectors and other miscellaneous investors. Maybe landlords who don't want to pursue deadbeat tenants are a good source of deal flow for judgment recovery aficionados.
Disaster-prone areas call for their own category of Darwin Awards. I've always been fascinated by the stupidity of developers who build there, investors who buy there, insurers who underwrite there, and tenants who live there. I will never buy developed property on a floodplain. I will never buy property in the San Francisco Bay Area that does not meet seismic code requirements. I sometimes wonder whether architects who design structures that resist hurricanes and tornadoes have disruptive ideas for real estate developers in the Gulf states and Midwest. Somebody could make a buck.
Limits on landlording turn me off. Some paychecks are resistant to garnishment (like Social Security). Lawsuits and judgment collections can be a landlord's best friend. Landlords may have to pay interest on the deposits they collect. Limiting the deposit to cover first and last month's rent may or may not be helpful in avoiding interest charges. I have no desire to maintain records for thirty years that will allow me to calculate the return of some granny's deposit to her estate's executor once she croaks.
Tenants turn me off too. Low income properties are full of risky tenants who cause nightmares. I remember living in a Richmond, California apartment complex near the Hilltop Auto Mall. The City of Richmond bought it in 2003 to convert it into Section 8 housing while they spent tax dollars renovating the real low-income projects downtown. Life in my apartment complex soon deteriorated from an already low status. Tenants would enter the rental office bragging about being late on payments. Druggies left their detritus in the entryways and tenants left their human waste in the hallways. These people really were human waste with all of their behavioral problems. Section 8 of the Housing Act of 1937 now has a devoted constituency in the underclass. Housing voucher recipients strike me as the equivalent of parolees, people who leave and reenter the Section 8 program through revolving doors that affirm their victimhood. HUD even goes so far as to provide links to tenants' rights organizations, advocating against property owners whose taxes help fund HUD's operations. Bottom feeders are disgusting. I moved out of the ghetto in 2004 and I'll never live that way again. No way will any low-income tenant ever occupy my radar as a business professional.
Want to hire a property manager to do all of this work for you? Well, that requires work too. You'll have to consider how long they've been in business and whether they have the staff to handle all of the properties they manage. If they manage property out of your area, that means you're on the hook for long-distance absentee landlord status. If they have judgments against them, well, guess who they pass their bills to for payment. I'm not paying even a fraction of my income from an investment to someone else.
I had fun as a kid playing fake landlording with the Monopoly board game. The secret to success in that game is to own everything on a given street to capture renters who are highly mobile. Owning more properties means reinvesting your rent in improvements (houses, hotels) until you own the board and win by bankrupting everyone. In real life, the have-not takers will hamstring the landlord makers with regulations and lawsuits. They will also empower their political allies with subsidy vouchers, non-profit advocacy groups that subsist on foundation grants, and loudmouth activists. Everyone wants to be on the side of the angels as long as it means a free lunch. Real landlording isn't like Monopoly. The real world makes it difficult to win.
Some investors thrive as landlords. They love tracking all of the daily details and solving human problems. Good for them. They have the skills and patience to perform a very necessary market function and deserve handsome rewards for their results. They are welcome to own all of the income-producing residential property which will never see a bid from me. There are many strategies available to real estate investors who do not want to be landlords. I'd rather develop land, manage human-scale agribusiness projects, own oil and gas leases, rehabilitate vacant buildings, own rights-of-way and easements, purchase tax liens, buy REITs and ETFs, or do just about anything else. Any of those choices are more preferable to me than dealing with live human beings. Even dealing with dead human beings as a cemetery owner requires adherence to special regulations. I do not want people on my property, living or deceased. I can't wait to tell those kids to get off my lawn. All I need is the lawn so I can start yelling.
Full disclosure: I do not own real estate at this time.
I wish I could charge people an arm and a leg for living under my benevolent protection, but alas many communities have rent control laws that prevent landlords from raising rents on long-term occupants. San Francisco is one such town. The City has a rent board that determines what private property owners may do with the property they own. The City is also home to a very vocal tenants union that agitates for rent control. The union's symbol is the classic workers' fist smashing a cartoonish landlord. The clear message is that radicals who believe property is theft and profit is evil will use every means available to destroy the capitalists who provide them with climate-controlled shelter from the elements. No thanks. I will not be a landlord in San Francisco if it means I become the target of idiots with no life.
Owning rental property in less restrictive areas means figuring out how much to charge for rent. Figure extra charges for after-hours service calls, inspections, and non-routine maintenance. Having a live response to an overnight maintenance call may be worth the expense if it prevents water damage from destroying property. Watch out for those leaks above the ground floor. Fees for late rents are of course limited by local laws. I'd like to charge people double rent for wasting my time and insulting my intelligence but that's probably prohibited by some do-gooder San Francisco ordinance.
Locked-out tenants are a pain in the behind. I don't want to get calls at oh-dark-thirty from someone who lost their key or left it on the kitchen counter. Having a locksmith on call is not something I relish. I can just imagine a nosy neighbor snooping as the locksmith opens the tenant's door, then calling the cops to report a break-in, and then snickering as the locksmith calls me to complain about wasted time. Yeah, Neighborhood Watch would be all about busybodies watching me lose money. That is a headache I do not need.
Keeping tenants informed is another landlord task I don't want to do. Many tenants are dumb enough to need reminders of when their rent is due, so landlords need to time their newsletter publishing so the reminder ends up at the top of the shoebox, or hatbox, or breadbox, or glovebox, or wherever ghetto tenants like to stuff their overdue bills. Landlords can sometimes use this retardation to their advantage. If the newsletter contains requests for confirmation of safety measures like smoke detectors or carbon monoxide detectors, keeping proof of confirmations can limit landlords' liability in the aftermath of emergencies. Furnaces and air conditioning units are among landlords' most expensive repairs, but I worry that reminding tenants to change filters will fall on deaf ears. Having laundry facilities on site means more maintenance expenses, plus complaints from some tenant who claims a machine ate too many quarters.
Competent businesses consider the cost of acquiring new customers. Landlording as a business means figuring the cost of acquiring new tenants through advertising. Window signs might be more effective than lawn signs that get kicked over, and some high school kid on the corner holding a sign and waving might be a source of amusement. I would give an illiterate tenant a cheeseburger just to see them wave a big sign on the street corner with my name on it. Selecting new tenants means abiding by HUD's Fair Housing regulations. Some tenants fall into legally protected classes. Others that aren't protected don't have to live with me if I don't want them around. Frankly, I don't want anyone around. I don't want animals around either and they're not a protected class, so landlords can have special fees and insurance requirements for our furry friends.
I always wondered why the rental applications I've filled out were so detailed. It turns out that landlords need to collect as much info during the intake process as possible to allow them to garnish wages and collect judgments. County tax records provide a public record of tenants' true addresses, which makes sending judgment notices easier. I sure don't want any known drug offenders on my property, because law enforcement could execute a civil asset forfeiture action against me if I rent to them in full knowledge of their activity. Checking the sheriff's records helps keep the riff-raff away. I'd rather save myself the trouble and keep everyone away.
I have difficulty believing any of the so-called asset protection strategies real estate professionals claim they use. I had an LLC structure until very recently for Alfidi Capital until I determined that paying the $800 per year to the State of California wasn't getting me any benefit. I did not have the time to treat the LLC as a separate entity that would give it corporate veil status. It also obviously carried my name, and I was the registered agent because I don't need to retain a lawyer for routine business functions. My LLC was useless and I'm in the final stages of converting Alfidi Capital from an LLC to a sole proprietorship. I will never again waste time and money using an LLC for anything that I can handle myself, including real estate. Insurance policies are probably cheaper than an LLC and land trusts are probably more anonymous. I'm no expert on land trusts but I'm wary of their potential for misuse. Would a property management company be willing to accept designation as a trustee of a land trust if the named beneficiary is the landlord's LLC, but the landlord has no property insurance? Who would sue who if something goes wrong? I don't want to spend time in court just to find out.
I'd rather take a less costly stance with my asset protection posture. The California superior court system has searchable databases of civil cases online. I've searched San Francisco Superior Court's records many times for the names of local troublemakers whom I do not wish to have in my life. It's educational to see who pops up as the initiator of frivolous lawsuits. I don't want litigation addicts as business associates. Landlords should beware of having them as tenants.
Landlords also have to manage the cash they receive and spend. It comes in by check, money order, electronic payment, etc. It goes out any way you like. You're the boss and you're running this business. I'm not. The process of evicting a bad tenant and preparing a unit for the next occupancy takes time, requiring cash reserves on hand to cover an estimated tenant failure rate. I suspect that corporate experience with uncollectible accounts receivable would be helpful here. Credit card companies sell their charge-off accounts to judgment collectors and other miscellaneous investors. Maybe landlords who don't want to pursue deadbeat tenants are a good source of deal flow for judgment recovery aficionados.
Disaster-prone areas call for their own category of Darwin Awards. I've always been fascinated by the stupidity of developers who build there, investors who buy there, insurers who underwrite there, and tenants who live there. I will never buy developed property on a floodplain. I will never buy property in the San Francisco Bay Area that does not meet seismic code requirements. I sometimes wonder whether architects who design structures that resist hurricanes and tornadoes have disruptive ideas for real estate developers in the Gulf states and Midwest. Somebody could make a buck.
Limits on landlording turn me off. Some paychecks are resistant to garnishment (like Social Security). Lawsuits and judgment collections can be a landlord's best friend. Landlords may have to pay interest on the deposits they collect. Limiting the deposit to cover first and last month's rent may or may not be helpful in avoiding interest charges. I have no desire to maintain records for thirty years that will allow me to calculate the return of some granny's deposit to her estate's executor once she croaks.
Tenants turn me off too. Low income properties are full of risky tenants who cause nightmares. I remember living in a Richmond, California apartment complex near the Hilltop Auto Mall. The City of Richmond bought it in 2003 to convert it into Section 8 housing while they spent tax dollars renovating the real low-income projects downtown. Life in my apartment complex soon deteriorated from an already low status. Tenants would enter the rental office bragging about being late on payments. Druggies left their detritus in the entryways and tenants left their human waste in the hallways. These people really were human waste with all of their behavioral problems. Section 8 of the Housing Act of 1937 now has a devoted constituency in the underclass. Housing voucher recipients strike me as the equivalent of parolees, people who leave and reenter the Section 8 program through revolving doors that affirm their victimhood. HUD even goes so far as to provide links to tenants' rights organizations, advocating against property owners whose taxes help fund HUD's operations. Bottom feeders are disgusting. I moved out of the ghetto in 2004 and I'll never live that way again. No way will any low-income tenant ever occupy my radar as a business professional.
Want to hire a property manager to do all of this work for you? Well, that requires work too. You'll have to consider how long they've been in business and whether they have the staff to handle all of the properties they manage. If they manage property out of your area, that means you're on the hook for long-distance absentee landlord status. If they have judgments against them, well, guess who they pass their bills to for payment. I'm not paying even a fraction of my income from an investment to someone else.
I had fun as a kid playing fake landlording with the Monopoly board game. The secret to success in that game is to own everything on a given street to capture renters who are highly mobile. Owning more properties means reinvesting your rent in improvements (houses, hotels) until you own the board and win by bankrupting everyone. In real life, the have-not takers will hamstring the landlord makers with regulations and lawsuits. They will also empower their political allies with subsidy vouchers, non-profit advocacy groups that subsist on foundation grants, and loudmouth activists. Everyone wants to be on the side of the angels as long as it means a free lunch. Real landlording isn't like Monopoly. The real world makes it difficult to win.
Some investors thrive as landlords. They love tracking all of the daily details and solving human problems. Good for them. They have the skills and patience to perform a very necessary market function and deserve handsome rewards for their results. They are welcome to own all of the income-producing residential property which will never see a bid from me. There are many strategies available to real estate investors who do not want to be landlords. I'd rather develop land, manage human-scale agribusiness projects, own oil and gas leases, rehabilitate vacant buildings, own rights-of-way and easements, purchase tax liens, buy REITs and ETFs, or do just about anything else. Any of those choices are more preferable to me than dealing with live human beings. Even dealing with dead human beings as a cemetery owner requires adherence to special regulations. I do not want people on my property, living or deceased. I can't wait to tell those kids to get off my lawn. All I need is the lawn so I can start yelling.
Full disclosure: I do not own real estate at this time.
Saturday, June 08, 2013
The Haiku of Finance for 06/08/13
Build on vacant lot
Home and business in one place
Sky is the limit
Home and business in one place
Sky is the limit
Monday, June 03, 2013
The Haiku of Finance for 06/03/13
Case-Shiller Index
Home prices keep rebounding
All because of ZIRP
Home prices keep rebounding
All because of ZIRP
Wednesday, April 10, 2013
Indefinite Bond Buying and Another Housing Bailout
It's too early in the week for more sarcasm, so I'm going to try very hard to keep it real today. The Fed's newly-released minutes from March hint at winding down the $85B monthly QE. I can't believe there is any way they can do that without the housing market going straight down the tubes. The Federal Housing Administration will need a $943M bailout because it guaranteed home mortgages that are now underwater.
Just remember that the Fed bought mortgage-backed securities to support insolvent banks' balance sheets, which encouraged banks to use credit from the Fed to buy Treasuries. The FHA is forcing the Treasury to eat home loan losses, so the Treasury must issue new debt to be bought by banks whose mortgage-backed securities are being bought up by the Fed. You don't need an MBA to figure this out. The Fed's quantitative easing supports a very fragile house of cards. If and when foreign central banks start to sell their U.S. Treasuries, the U.S. banking sector and housing sector come tumbling down.
Full disclosure: No position in U.S. dollar fixed-income securities at this time.
Just remember that the Fed bought mortgage-backed securities to support insolvent banks' balance sheets, which encouraged banks to use credit from the Fed to buy Treasuries. The FHA is forcing the Treasury to eat home loan losses, so the Treasury must issue new debt to be bought by banks whose mortgage-backed securities are being bought up by the Fed. You don't need an MBA to figure this out. The Fed's quantitative easing supports a very fragile house of cards. If and when foreign central banks start to sell their U.S. Treasuries, the U.S. banking sector and housing sector come tumbling down.
Full disclosure: No position in U.S. dollar fixed-income securities at this time.
Sunday, February 24, 2013
Fed Inflates Auto and Housing Double Bubble
You've got to be kidding me, Bloomberg, if you think the Fed's ZIRP is a job stimulus. The Federal Reserve's record low interest rates encourage reckless borrowing but you wouldn't know it from reading conventional media. I look past cursory forecasts of job creation in the automobile and housing sectors.
Read the Federal Reserve's G.19 series data on consumer credit. Pay particular attention to note #6 on new car loan data:
Even if you ignore the Fed's own admission that its data on automobile loans is worthless for analysis, you can see from previous years' data that new car loans peaked in 2009 and have declined since then. Any surge in loans since then is statistically questionable. Auto sector executives who base their hiring forecasts on hope for loan growth are asking for trouble.
Purported growth in home mortgage lending is also questionable. Read the Federal Reserve's Mortgage Debt Outstanding data; I selected December 2012, the most recent month available as of this writing. Outstanding mortgages have been declining for "all holders" and "one- to four-family residences," the main categories that matter for homebuilders who want to forecast demand for new developments.
I ignore happy talk touting job growth from new bubbles. I strongly suspect that whatever growth in demand automakers report is the result of subprime lending that pulls forward their future quarters' sales at unsustainably low financing costs. I do web searches of phrases like "all cash buyers" for housing demand and get a similar feeling. Home loan demand is collapsing across sectors for many reasons. Banks have tightened credit standards and cash buyers are looking to flip properties rather than build equity. These are not real sources of future job growth in two of the economy's biggest sectors.
The Fed's desperate ZIRP has not spurred overall lending but what little activity it does encourage is unhealthy. Things look like 2007 all over again.
Read the Federal Reserve's G.19 series data on consumer credit. Pay particular attention to note #6 on new car loan data:
6.The statistical foundation for these series has deteriorated. Therefore, publication of these series is temporarily being suspended. The statistical foundation is in the process of being improved, and publication will resume as soon as possible.
Even if you ignore the Fed's own admission that its data on automobile loans is worthless for analysis, you can see from previous years' data that new car loans peaked in 2009 and have declined since then. Any surge in loans since then is statistically questionable. Auto sector executives who base their hiring forecasts on hope for loan growth are asking for trouble.
Purported growth in home mortgage lending is also questionable. Read the Federal Reserve's Mortgage Debt Outstanding data; I selected December 2012, the most recent month available as of this writing. Outstanding mortgages have been declining for "all holders" and "one- to four-family residences," the main categories that matter for homebuilders who want to forecast demand for new developments.
I ignore happy talk touting job growth from new bubbles. I strongly suspect that whatever growth in demand automakers report is the result of subprime lending that pulls forward their future quarters' sales at unsustainably low financing costs. I do web searches of phrases like "all cash buyers" for housing demand and get a similar feeling. Home loan demand is collapsing across sectors for many reasons. Banks have tightened credit standards and cash buyers are looking to flip properties rather than build equity. These are not real sources of future job growth in two of the economy's biggest sectors.
The Fed's desperate ZIRP has not spurred overall lending but what little activity it does encourage is unhealthy. Things look like 2007 all over again.
Thursday, August 09, 2012
Saturday, August 04, 2012
You Can't See An Asset Bubble From The Inside
I can attribute some of my portfolio's success to the avoidance of asset bubbles. If I had been invested in any of the crazes that hit the markets since the mid-'90s I'd be in a world of hurt. Fortunately I don't follow crowds.
I stayed in cash and fixed income while plenty of very smart people chased dot-com dreams in the late 1990s. I remained in cash after that stuff peaked in March 2000 and wiped out plenty of people who thought they knew better than me. I had a bad feeling about the Federal Reserve's stimulative monetary policy of the early 2000s and didn't want to pick the next bad thing by accident.
In 2005 and 2006 I was a trainee broker at UBS Wealth Management in The City, an outsider among the anointed children of our hereditary ruling class. Some of top-producing brokers swore by real estate mutual funds tracking the Cohen & Steers Realty Majors Portfolio Index, thinking they were geniuses. I went the other direction and bought a structured note (in my own portfolio) that bet on a decline in the homebuilding sector. I was later fired from that brokerage job for having produced zero revenue, but I liquidated that structured note at a hefty gain when I was forced to transfer my account to another firm.
My most loyal readers, all three of them, may be aware that I believe defense spending to be an unsustainable bubble. I have tried in vain to convince my military friends not to pin their hopes on a second career with defense contractors. The Pentagon itself is probably in denial about the bubble it helped inflate, with very little visible contingency planning underway for a radically austere future.
Some things never change. A lot of defense sector bulls are going to be let down. That suits me just fine. I'll be ready to buy the defense stocks they'll be forced to abandon.
Full disclosure: No positions in any companies mentioned.
Saturday, April 07, 2012
Don't Take Home-Buying Advice From Warren Buffett
Warren Buffett is awesome in so many ways. That's why I hate having to call him out for giving bad advice to home buyers and real estate investors (those aren't necessarily the same things). Uncle Warren says he'd buy fist-fulls of single-family homes if he could given the broad decline in home values across the U.S. Well, he really could with all of the cash Berkshire Hathaway controls, so why doesn't he? Let me explain.
Mr. Buffett likes the principle of buying anything at a discount and he can't help but sound off on a general trend. The trouble with applying discounting to home buying is that value in real estate always comes from three things: location, location, and location. Part of the problem with the U.S. housing market is that too many single-family homes were built too far from viable communities. The San Francisco Bay Area gives me more evidence of this than I care to see. The most depressing drive I made in 2011 was a long loop northward through the Dublin / Pleasanton area along the Hopyard / Dougherty corridor past clusters of brand new suburbs. Those suburbs are not tied to any major economic drivers that I could see. There were no factories, mines, or power plants around. These McMansion non-neighborhoods are car-focused in an age when cheap oil is increasingly more difficult to extract. I am not one to buy real estate that has little chance of ever being economically viable.
Uncle Warren's remarks remind me of the comments he made at the height of the 2008 financial crisis when he stated his willingness to buy a bond insurer that was in trouble, if only it could truthfully estimate its value. It couldn't, of course, so Mr. Buffett's comments only provided clarity. He did not act on his own advice but anyone who did got fist-fulls of very questionable equity.
It's unfortunate that some money managers still have more money than sense. Private equity funds are actually taking this approach seriously and are raising money to buy large numbers of distressed residential properties. It's ironic that the story leads off with an auction in my very own greater San Francisco suburban area, as if the buyer couldn't see what I see. Good luck with that. The REIT numbers work for large apartment complexes because those properties are located in viable large cities. Running the numbers for single-family homes means these private equity funds will be bidding for homes that never should have been built because they are too far from civic life for an affordable commute. I suspect these ambitious funds will be very disappointed with their yields when they discover that renters no longer want to live an hour away from their jobs. Maybe throwing a random comment out to the crowd is Mr. Buffett's way of seeing how many investors will go for it, thus clearing the field of people who can't see nuances.
Warren Buffett has nothing to worry about. He's been living in the same home for fifty years and has been working from it for much of that time. Smart money managers should do as he does, not as he says. I work from home too.
Mr. Buffett likes the principle of buying anything at a discount and he can't help but sound off on a general trend. The trouble with applying discounting to home buying is that value in real estate always comes from three things: location, location, and location. Part of the problem with the U.S. housing market is that too many single-family homes were built too far from viable communities. The San Francisco Bay Area gives me more evidence of this than I care to see. The most depressing drive I made in 2011 was a long loop northward through the Dublin / Pleasanton area along the Hopyard / Dougherty corridor past clusters of brand new suburbs. Those suburbs are not tied to any major economic drivers that I could see. There were no factories, mines, or power plants around. These McMansion non-neighborhoods are car-focused in an age when cheap oil is increasingly more difficult to extract. I am not one to buy real estate that has little chance of ever being economically viable.
Uncle Warren's remarks remind me of the comments he made at the height of the 2008 financial crisis when he stated his willingness to buy a bond insurer that was in trouble, if only it could truthfully estimate its value. It couldn't, of course, so Mr. Buffett's comments only provided clarity. He did not act on his own advice but anyone who did got fist-fulls of very questionable equity.
It's unfortunate that some money managers still have more money than sense. Private equity funds are actually taking this approach seriously and are raising money to buy large numbers of distressed residential properties. It's ironic that the story leads off with an auction in my very own greater San Francisco suburban area, as if the buyer couldn't see what I see. Good luck with that. The REIT numbers work for large apartment complexes because those properties are located in viable large cities. Running the numbers for single-family homes means these private equity funds will be bidding for homes that never should have been built because they are too far from civic life for an affordable commute. I suspect these ambitious funds will be very disappointed with their yields when they discover that renters no longer want to live an hour away from their jobs. Maybe throwing a random comment out to the crowd is Mr. Buffett's way of seeing how many investors will go for it, thus clearing the field of people who can't see nuances.
Warren Buffett has nothing to worry about. He's been living in the same home for fifty years and has been working from it for much of that time. Smart money managers should do as he does, not as he says. I work from home too.
Subscribe to:
Posts (Atom)