Happy New Year everyone!!! Wow, what a year 2010 turned out to be! Yeah with a lagging and slow recovering economy the passing of 2010 for some people was a cheerful sight. But for others, it proved to be a year full of promise and unlimited potential.
By the way did I mention that right now is a great time to buy a home? Okay folks really how many times have you heard that phrase? Is it starting to feel a little cliche-ish? As Realtors and Mortgage professionals we have all made this statement
to friends, family, and prospects. In fact, truth be told we have probably had a discussion or two even with investment folks as to how the purchase of a home stacks up to other investments. On the flip side, I've also read and heard that homes are not even considered an investment anymore.
Okay.....with all things considered, how much truth is actually in that statement?
Recently, I was reading an article published by Chris Mayer. You may or may not know him. He is the finance guru that has been featured many times on Market watch and appeared on Fox. Anyway, his article started off talking about how over the last few years it was rare that an investment person would recommend buying a home due to the fact that the housing bubble was deflating. However, prudent investors are again weighing the pros & cons of home sales being a smart investment. One of the biggest advocates buying real estate is multi-billionaire John Paulson, founder and President of Paulson & Company.
If you are not familiar with Paulson he manages a number of loosely regulated investment funds. In 2008 he started a hedge fund that lent money to investment banks and other hedge funds that were feeling the pinch from the approximately $345 billion of write downs resulting from under-performing assets linked to the housing market. Ironically that year the firm also hired former Fed chairman, Allen Greenspan. Paulson has about $35 Billion under his management.
Paulson reportedly raked in $1 billion in 2007; $2 billion in 2008; and $2.3 billion in 2009 as a result of fees received from his hedge funds as a direct result of betting against the sub-prime market long before that term was even coined. In April of 
2010, the Wall Street Journal ran an article reporting that Paolo Pellegrini a front man for Paulson was now investing in sub-prime mortgages. Go figure!
So what is the meaning of this antithesis? Hmmmm, not sure! However, it appears that Paulson lust for gold and real estate may be due in part to the incessant money printing by the Feds which he feels will lead the country into double digit inflation by 2012. So let's try and rationalize that thinking.
We all understand that homes represent a real tangible asset. If there is a situation that leads to hyper-inflation, your home will indeed hedge against that hyper-inflation. But won't home prices lag that rate of inflation and wouldn't mortgages become a lot more expensive? Probably! But let's examine thing further.
Folks right now for the first time the rate on 30-year mortgages slipped below that on the 30-year Treasury bond. You can get a 30-year mortgage at just over 4%! Factor in mortgage rates and housing affordability is back to where it was in September 1996. Then mortgage rates were 8% and the average price of a home was $171,600. Yes that means that a person can buy a home right now for a monthly payment that is not to different from the monthly payment one would have paid in September 1996, when rates were significantly higher.
But I hear ya!! Most rational thinking would conclude that if inflation rises to double digits, as indicated by Paulson.....the basement will drop out of bond prices and investors will panic. Meanwhile, interest rates would go through the roof to help compensate bond investors for the value they would lose due to inflation. It can be further assumed that as mortgage rates rise to double digits the impact would drastically reduce the cost of a home the perspective buyer would be able to afford because of an increased mortgage payment. Mr. Bernanke has been trying to avoid that scenario by having the Feds buy up over $1 trillion dollars worth of mortgage bonds.
The net affect of double-digit inflation over several years would result in the adjustment of housing prices and your homes would indeed serve as a hedge.....however, the housing market would still be reeling from the tsunami resulting from skyrocketing mortgage interest rates!
So, how does this scenario play out against say your money invested in a money market account? Well, I'm definitely not an investment strategist or guru but it would appear to me that this same scenario would indeed result in interest rate on those accounts also going up drastically. Can it then be assumed that with the surge in interest rates the nominal rate of return on those investments would be comparable to those of real housing prices? Of course, you are entitled to make your own assumptions.
Well, it all presents an interesting circumstances sure to be debated heavily going forward. Mr. Paulson placed some big poker chips on the table as he has speculated to investors to look for housing prices to go up 8% to 10% nationally this year. Paulson has already added to his stock Beazler Home Builders and increased his stake in Bank of America. But make
no mistake about it, Paulson is a player and all eyes are on his investments. Oh by the way, Paulson does have a hedge against the housing market....a huge gold position. That's not to say that gold will drop in price if the housing markettanks or vice-versa.
In the final analysis there is still validity to the statement. If you factor in the adjustment for inflation, the mortgage payment for a home today is about 30% lower than it was 14 years ago. Essentially, real estate is a method to buy now and pay later. Also, the case for housing will extend to other property types. Owners of quality real estate are getting deals on mortgages that we are surely unlikely to see for a generation.
Now is a GREAT time to buy real estate folks!!! Call me, I'm more than happy to assist you! Yeah....Real Estate is back, baby!!!!
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