Thursday, February 18, 2010

Why Does Our Country Hate Fair House Prices?

I follow the Lafayette real estate market very closely. Today was unusual in that there was a house that sold for close to fair value, which is 2001 pricing - $188 a square foot. One of the first in the past 8 years, so it is kind of exciting to me. It was an REO sale in a pretty nice neighborhood. Mountain View Drive to be exact.

Since I am a value investor. It always gives me a good feeling when I see an asset priced at fair value. You can call it historical trend value, intrinsic value or fair value, it all means the same thing to me. It implies that the asset is affordable and the price is fair. That's a very good thing.

Now here is a question to determine if you are a value investor:

Do you feel that Lafayette will go back to 2001 prices?

Most of the recent sales in Lafayette are at 2006 prices. Therefore homes are still priced at bubble prices. Every once in a while I will even see one sell at 2007 prices. This kind of makes me cringe.

What is strange is that most of the market experts be it Realtors, economists, bankers or brokers would say that this recent Mountain View sale is an aberration. The Lafayette housing market definitely knows it's an anomaly because families are paying on average 2006 prices. So what's the deal.

I reflect back to 1990, 1996, 2007 and today:
  • 1990 - Houses were unaffordable and everyone was climbing over themselves to buy a bigger and pricier house. Everyone was telling me I had to buy a bigger house for my growing family. I looked at prices and they didn't make sense to me so I refused to buy and we lived for the next 6 years in a house that was too small, much to the consternation of my wife and my Mother-in-Law. Houses at the time were priced above historical trend.
  • 1996 - No one wanted to buy a home. Everyone said houses were overpriced. I bought a house that was a stretch for me. I remember people coming over to my home and not being able to understand how I could afford a house that was so impressive. Well the fact was that I had saved money while others were debt slaves to an overpriced home. Houses at this time were very affordable and way below historical value trend. But no one wanted to buy. Very strange but of course very consistent
  • 2007 - This was the peak of the last housing bubble and our whole society had decided that they were going to retire at 50 from the equity in their homes. Since homes were far, far above historical value trend when I sold my home I made a vow to myself not to buy another home until at least 2010.
  • 2010 - I am renting and saving a significant amount of money while my down payment is in a brokerage account earning interest. Lafayette housing will have to fall 30% to be in line with historical value trends. The economy will slow and this could shave even more value off that amount as rents and household income decline. For myself, I refuse to buy a home at over fair value.

This post is not meant to give all of the variables that will contribute to the high end real estate market correcting at least 30% in the next 5 years. I have written extensively on that. I would like to make an observation about human nature.

Why is it that most of the time our economic experts miss the big turns in the economy? Why is it that they can't determine the historical value trend of assets? Why on earth would we let the knuckleheads that consistently and continually denied our economic problems in the first place use extreme fiscal and monetary policies that have never been successful before?

So, I would like to say very clearly that this Mountain View property that just sold is the first of a trend back to fair value.

So you say this is impossible. Well, Antioch real estate is presently selling at 1998 prices and Sacramento is selling at 1996 prices.

Las Vegas is the same. Phoenix the same. Florida the same. So is this bad?

Lower end real estate markets always come back to fair value more quickly than higher end areas after a bubble. Presently real estate in lower end markets like Antioch have become affordable for the first time in 9 years.

Now each sale in Antioch wipes out a speculator. Each sale eliminates a subprime loan that was sold by a corrupt mortgage broker. Each sale helps a family get out of stifling debt which could make their rent payment less than half of their old mortgage payment. Each sale will strengthen the balance sheet of the bank that is financing the new home. Each sale could weaken the balance sheet of the bad bank that made the toxic loan in the first place and hopefully make them fire the person responsible. This could create a job for a more capable young person in the future.

But the most important event is that each sale allows a young family to feel the joy of buying a new home that is affordable. Is this bad?

So back to the sticky high end real estate market. There is no reason why Lafayette can't bottom at 2001 prices. It is actually the most likely scenario. Young families that buy now are making a very large leveraged bet buying an overpriced asset in an extremely unsound economy. Is it good that our government is slowing the trend back to affordable values by robbing trillions of dollars from our children?

These young upper middle class families that are buying now in Lafayette could very well be underwater in 5 years as the government is artificially manipulating almost every facet of the real estate market with borrowed money. Will this be a victory for our government?

So I come back to the human nature part of the equation. Why is it so important for asset prices in Lafayette to be wildly overpriced? Why has our government spent tens of trillions of dollars over the last 25 years in subsidies, incentives, gifts, graft and bailouts in an attempt to make prices of homes unaffordable?

Why do we want our government to choose the winners and losers? Why do we love home owners and hate renters? Why do we love speculators and hate savers? Why do we hate our children and expect them to take on the debt that we are creating to distort our asset markets to reward favored members of our society?

Why does our country hate fair house prices?

Going one step further. The net value of our nation's residential housing stock is honestly about $6 trillion on a good day. Our government has spent tens of trillions of dollars over the last 25 years in an attempt to artificially manipulate house prices higher. The choice by our government to pay $10 trillion to distort prices in a $6 trillion market does not make sense. Even paying $1 to distort any market prices does not make sense.

It makes no sense economically. Fair and affordable asset prices cultivate a sound and vibrant economy. Or to state it differently: improperly priced assets will reek havoc with even the strongest economy. So why do we hate fair house prices?

House prices in the upper end of Lafayette are mispriced. I can rent for half the price of buying. Case closed, now let's move along.

People say to me all of the time, "how could you possibly know what house prices will be in the future". "Do you have a crystal ball?".

All I can say is yes, I have a crystal ball. It's a chart of the historical value trends. Assets have always come back in line with affordability. It is an irrefutable fact that all of our economic experts consistently ignore. In the same way that we ignore the fact that our experts have been consistently wrong on every major turn in the housing market and the economy.

Blind faith is a blessing in one's religious life but it is definitely our country's curse when it comes to investing.

No comments:

Post a Comment