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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.

Buy mortgage notes — Cliff Diving for Ice Cream

When my kids were younger, they, like most kids, would have gladly eaten as much ice cream and desserts as they could have gotten their little hands on.  They knew that ice cream tasted good even if they didn’t have an understanding of the consequences, like later having a stomachache and having no energy when the sugar high wore off.  All they knew was that eating ice cream made their taste buds happy.

As a society, especially among baby boomers, we have gotten to enjoy a high standard of living and received all sorts of free goodies over the years.  If I’m too lazy to work, I just tell the government that I’m looking for a job and I get an unemployment check.  If I am retired, 200 pounds overweight, and smoke like a chimney, the government will still cover most of my medical care.  If I want a loan to buy a house, government programs will guarantee that loan and Fed policies keep the interest rate artificially low.  What gets forgotten by many Americans is that someone has to pay for all of this.  Others like the Chinese and Japanese loan us the money by buying government treasuries, but the taxpayers eventually have to reach into their pockets to pay up.

Discussion on the upcoming “fiscal cliff” reflects Americans’ poor understanding of or not caring about basic math, in that you can’t spend more than you bring in and you cannot spend your way to prosperity.  The fiscal cliff term was coined to describe the challenge that the U.S. government will face at the end of this year, when Bush-era tax cuts expire (they were extended once already, in 2010) and automatic spending cuts kick in.  Both presidential candidates and most members of Congress agree that this fiscal cliff must be avoided at all costs.  Republicans eventually want to cut spending by large amounts, while Democrats eventually want smaller spending cuts and big tax increases.  If the fiscal cliff is not avoided, the Congressional Budget Office (CBO) predicts a dramatic cut to GDP, higher unemployment, and negative growth leading to a recession.  Specifically, the CBO states that GDP will decline by four percentage points and unemployment will climb by nearly a full percentage point.
Buy mortgage notes
Rather Keynesian
It seems to me that the CBO forecast and political jawboning are too Keynesian.  In other words, the assumption is that government spending and programs are the main drivers of economic activity.  While I won’t minimize the impact that the fiscal cliff could have in the short term, I doubt that it would be near as catastrophic as Wall Street and politicians are telling us.  At the edge of the cliff, maybe we rappel down a short distance, jump to a ledge on the other side, and start our climb out of this hole of debt.  The CBO expects that keeping the fiscal cliff in place would reduce the deficit by $560 billion, which seems to me like a really good start to getting our financial house in order.

Instead of covering up the country’s problems with ice cream and happy faces, isn’t it time that we act like adults and take our medicine now?  Tax increases on the wealthy will need to be part of the solution to keep the peace and to prevent the income disparity between rich and poor from becoming too vast.  However, most of the problem is on the spending side, especially with our out-of-control entitlement programs and with our military acting as the world’s sheriff.  We simply cannot afford these and should have addressed the issues long ago.

Unfortunately, I would be willing to bet that nothing will happen before the election and that by Christmas the Congress will have extended the tax cuts and eliminated the spending cuts, thus making our debt problem even larger.  A crystal ball isn’t really necessary to predict that politicians will act just like they have in the past.

Alan Noblitt is a nationwide mortgage note buyer who will buy mortgage notes in all 50 states.  He will also buy mortgage notes on properties as varied as residential, commercial, and land.