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.
The ugly head of Wall Street's toxic assets (mortgage-backed securities) has surfaced again, this time in Ireland under the guise of the Anglo Irish Bank, which needs $40 billion to stay afloat (that is six times more than Goldman Sachs needed). They invested heavily in Wall Street, as well as having their own housing collapse, and now its residents will have to pick up the tab.
Ireland isn't the only victim. There are others. So, the repercussions of the toxic assets are international and will be with us awhile. Combine this with unemployment, tighter credit standards, backlogged foreclosures, the lack of a private secondary mortgage market, and there is a strong reason to be skeptical that real estate will work as a hedge.
My answer to buyers/sellers is now more basic, but with a point that I have always emphasized, regardless of market conditions. Do not look back at the 90s and expect double-digit increases every year. The days of speculative investments with a guarantee of a quick profit are over.
But, yes, I am an optimist, and it is a great time to buy, as prices are down and interest rates low. So, let's follow Paulson's lead, but slowly. Buy a property that you can afford, call it home and put equity into it the old-fashioned way — pay the mortgage down. If you need to move and sell, price it correctly and do not be greedy, and call the next property home.
• • •
SNbSBill Barrows has been a local Realtor for 18 years. His e-mail is billbarrows1@gmail.com.
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