, Newburyport, MA


December 14, 2010

Looking through a complicated real estate market

I am always asked, "How is the real estate market?" And my pat answer has always been "Are you buying or selling?"

You see, I need to know their motivation before getting into an educated discussion. Regardless of their answer, being first-time buyers or seasoned, I have always been able to give them an upbeat and encouraging answer. But, recently, it has been more difficult. Even though hindsight is 20/20, the information and advice that is emerging is definitely contradictory.

On one hand, there are the likes of John Paulson (multibillionaire hedge fund manager) who is very "bullish" and will now always be remembered for his statement this past September, "If you don't own a home, buy one. If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home."

The point he was making is that now is the best time to buy a house in the past 50 years, as "your debt and interest payments get locked in at record lows, while the price of your home will rise." This is the same John Paulson that made a killing going short on subprime mortgages a few years ago. Simply put, he felt that home prices were out of whack and would almost certainly have to fall. Nothing new there, and I could not have agreed with him more.

Paulson's view isn't crazy. It's just simple. From 1970 to 2000, home prices rose and fell somewhat in tandem with the Consumer Price Index. This pattern broke in the latest housing bubble, with home prices rapidly rising, even as the CPI fell. Perhaps, Paulson is just betting that the pre-bubble correlation between home prices and inflation will return.

But we all know that the real villain of the housing market was the Fed and the secondary mortgage market being led by unconscionable lenders and, ultimately, Wall Street packaging subprime mortgages as derivatives. Obviously, this presents the bearish side of the argument.

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