Buffett and Paulson right to see US housing as a buy with 30-year mortgages
Posted on 04 March 2011 with 5 comments from readers
The Sage of Omaha thinks US residential property looks cheap and will probably bottom within a year, while the hedge fund manager who earned more than any other in history last year, John Paulson also strongly tips housing as a buy if you are going to use a 30-year fixed-rate mortgage.
Warren Buffett and John Paulson frequently make calls that are greeted with howls of disbelief. That is how they became multi-billionaires. ArabianMoney is sitting up and paying attention, and not laughing at all.
Shorting US bonds
John Paulson simply notes that US house prices are at a six-year low. But it is the ability to fix interest rates now for the next 30 years that really has his contrarian instincts twitching. He says this makes US housing a shorting option for long-term US bonds, and that is a very good bet right now.
Indeed, ArabianMoney listened to Jim Rogers and Professor Nassim Taleb in Abu Dhabi yesterday say just the same thing. US long-term bonds are about the worst invesment you could possibly make.
‘Two to three per cent on something that will devalue massively over 30 years, what kind of an investment is that?’ to paraphase Jim Rogers. He is planning to short US bonds when the dollar has completed what he thinks maybe a rally just ahead of us now (the dollar usually rises when stock markets fall).
The 30-year fixed rate US mortgage is therefore a gift to investors. You get your housing finance at close to the best possible rates for the next 30 years. It is indeed a put option on the US dollar and bonds, as Paulson says.
Buffettology
Of course, you can wait for house prices to bottom out. Warren Buffett says this will happen within the next year. He has a habit of getting these things right. And is it not to be expected that after a six year fall to seriously low prices that the bottom cannot be very far away?
In truth the biggest danger is missing the entry point for low interest rates, not picking the bottom for house prices. For the bond market which sets US long-term mortgage rates has been moving against borrowers since QE2 last autumn.
You have to juggle one against the other: house prices versus interest rates. Naturally not everyone is in a position to buy US residential property but if you are then this looks well worth considering at this juncture for fixed mortgage rates and house prices.
But if you are a cash buyer there is little need to worry about jumping in. House prices could bounce a long the bottom for some years. It is the fixed rate mortgages that will become far more expensive as another global financial crisis unfolds.
5 Comments posted by readers:
If you can get a nice house, (especially waterfront property) with a low fixed rate 30 year loan, and inflation takes off like it did during the 1970’s, you can end up living in the home for the last 1/3 of the 30 year period, virtually for free. Inflation favors the debtor BIG TIME. Double digit inflation will wipe out the real value of a debt in no time. Just hope your income goes up at the same rate.
And always remember the three rules of residential real estate investment, location, location, location. Now you may need to think about future fuel rationing. Things in distant suburbs could get rough if you need to get to work in a distant CBD. See the Hirsch Report.
And high income neighborhoods usually stay that way.
I see further drops in California before we rebound or start to climb back. I still don’t think we hit bottom. A quick search on Zillow.com will show that there are many homes for sale still and the foreclosure list on there is still on the high side.
fairly well spoken..allow one point – none of these stars factors residential property taxes as real estate killer..local taxes exceed my entire mortgage payment from the period ‘79 – ‘83..employment which allowed discretionary saving for down payment was obtainable..$9.50 is the new US wage..housing in oldspeak will never exist again..less than 1 in 10 current children of the damned will ever meet the borrowing requirement to mortgage..that model is gone, never to be replaced unless housing becomes so debased vacancies are GIVEN AWAY..be careful should you plant a young person in the soil that nurtured the Omaha king & his court – this is a new world..it was our old one that gave us borrowing (not housing)
which in quiet turn was put in charge of financing local govt AND public education..
sorry to be the bearer..any economic model that only has the bank’s welfare at heart is dead on arrival
I’m not personally worth several billion like the Omaha Sage, but as a retired ex-real estate builder/developer whose been through volatile RE markets over three North American business cycles, I can’t see this picture playing out.
Capital Economics, (Toronto-based firm) estimates 4.5 million properties in the US foreclosure pipeline, plus 850,000 currently for sale. There is shadow inventory of more than 5.3 million homes that will continue to push prices downward. For every one home selling, two are foreclosing. Last year’s report by this same firm called the price bottom 47 months from May 2010. I go with that report because the real problem is job growth. Looking behind the media optimism and the rigged numbers the factual reality is municipalities all over America are shedding jobs at rates never-before-seen, and it will continue.
California ( one example only) is bankrupt and job cuts are going to be of avalanche proportion this year. Added to that, the municipal tax base is shrinking everywhere and there is still the bottom to fall out of raw land prices, that’s coming soon, this year is my guess.
The average price of homes in the US will ultimately correct to match the 3X the average income (ignoring the likelihood of overshoot to 2.5X , the absolute bottom) . It’s an economic rule in the US that growth in housing is the economic driver for the US economy as a whole. There is no such thing as a jobless recovery (no matter who utters the words) and the new average income figure for job growth will be mainly based on $9.50/hr Wal-Mart type jobs, average income in the US is on a downward slope.
The US real estate market might bottom out by the spring of 2014, after the next hard leg down, regardless of the effect of QE3, QE4, and QE5, which should be about 2014 also. My 2 cents.
James M
PS i love your website, keep up the really good work!
Ed Note: Agreed on house prices. It is the 30-year mortgages that are the bargain, and over 30 years you repay several times the price of a house in interest – so keeping this low maybe more important than the actual house price. Probably several hundred dollars worth!
I’m selling you something today, for twice the price of the same item re-priced and sold tomorrow at half. Is that a bargain?
It’s the regimes next move, the attempt to build a floor under the falling market. But the dropping category in highest acceleration is that category just under the top priced homes, and above mid-priced. There is also odd buying activity to be accounted for, buying activity by amateur speculators who stepped into the quicksand, other buyers are downsizing, where one spouse goes bankrupt taking the fall, while other buys back in. There’s a lot of re-organization of family debt going on. At the bottom of the market, prices based on the first time buyer are settling in, but the over-all value index has a long way to correct, before it normalizes.
So where will the absorption inducement be? In speculative inventory seemingly a good buy, or at the bottom price layer, while the upper-mid-range inventory continues to crash. Where is the bulk of foreclosure?
But, consider that 6 months after the crash of raw land values by say 50%, the average price of the bottom tier home, will reduce down by another 20%. Why is that? Because building a house and selling it, for builders, is the process we go through to monetize our stored value in land. Builders today are simply trying to move cargo to stay alive. That activity will continue to force prices down.