Guessing Housing’s Next Steps – Buy Mortgage Notes

Using the word “guessing” is not something that you see among writers and commentators these days.  Most of them, using data confirming their theory and ignoring all other facts, state with conviction what will happen next with the general economy, the housing market, or most anything else.  After all, the general public doesn’t want wishy-washy “what-if” discussions – they want concrete statements that they can either agree with or else wave off as a disagreeable political statement.  Investors, in particular, want to hear the opinions of gurus so that they can grab that stock, buy mortgage notes, or purchase a house with a high degree of confidence that such actions will be profitable.

What has become apparent over the past few years is that forecasting short-term and long-term trends has become doubly difficult when the government is involved.  Using past trends to predict future occurrences is unhelpful when sailing in to uncharted territory.  From my viewpoint, Wall Street firms have done well over the past few years due largely to their close ties with D.C. politicians and their allies.  The so-called recovery has been due almost in whole by the Fed dropping loads of money into the country and U.S. politicians pretending that the country is fiscally sound.

In few cases has this been as apparent as with housing, which is particularly relevant to me as a buyer of mortgage notes.  Nationwide, housing prices are about 1/3 lower than they were at the peak.  However, real estate news over the past 2-3 years has been quite positive.  At its worst, nearly half of all home sales were foreclosure-related.  Now, that figure is down to 21% — less than one in five houses (though add another 15% for short sales).  Home prices across the country have been going up, with skyrocketing being the more descriptive word for cities like Phoenix and Las Vegas, along with much of California.  Prices in many those cities are up over 20% in the past year.  According to CEPR (5/29/13), most of those price increases are in the bottom-third of the market.  During the last three months, prices for that lower third have risen at an annual rate of 70% in Las Vegas and 50% in Phoenix.  In Los Angeles, overall housing prices are up 10% in the past year even while unemployment remains above 10% and real income has gone down.  Clearly, these types of increase are not sustainable.Arizona house

There are other concerns about housing to consider:

  • 11 million homeowners are still underwater
  • The credit-rating agency, Fitch, warns that higher interest rates and credit concerns means that gains in some markets are outpacing fundamentals
  • Housing supply is artificially low due to recent foreclosure regulations and the large number of underwater borrowers
  • A few hedge funds and investment companies, which bought a huge number of properties in recent years, are giving indications that they will start pulling back some of their cash.  If this happens on a large scale, housing prices would take a hit.

So, what to do if you’re considering buying a house either to live in or to use as an investment?  If you’re looking at price-volatile areas like those mentioned above, my advice is to stay on the sidelines due to the likelihood of a near-term stall or drop.  However, in most of the rest of the country, which has less drastic swings in in price, buying a house is still a good investment.  Yes, there are still risks but I believe them to be less than investing in the stock market, buying gold, or having them lose value in a bank savings account as inflation outpaces rates.  If you are going to buy, you may want to do it soon, as mortgage rates look like they will continue to creep up.

One thought on “Guessing Housing’s Next Steps – Buy Mortgage Notes

  • By Pat Rombach -

    Buying a house is a long term short on the US dollar. Because if inflation hits you will be paying back the loan with cheaper dollars. Good Article. Entry point in any investment is very difficult. But if you pick an average entry point and live in your house 15+ years you should do well. Interesting point about a short term drop. I think you may be correct on that one.

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