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SMART MONEY: Why the Housing Crisis Should Make You Bullish (via the Wall Street Journal)

May-13-2011

by Brett Arends

We ran across this MarketWatch column recently on WSJ.com, where it was titled, “Housing Crash is Getting Worse” – and cringed. Oh no, not another bad news housing crash story we thought a first. But then we read on….”But all this bearish news makes me bullish.

Wait, really? This market should make us bullish? Then we noticed this sub-head and were definitely intrigued:

If you thought the housing crisis was bad, think again.


Well, that’s more like it! we thought. We’ve believed for some time that while it’s true that housing has been in crisis mode for too long and bright spots are often hard to find, they do exist. For some, the current market is creating opportunities and benefits — some which haven’t been seen for years and once the market recovers and they go away, may not be seen again in our lifetimes. Perhaps this is why author and senior columnist Brett Arends says when it comes to distressed housing, “I’m finding it hard not to be a contrarian bull.”

Interesting…

While the first half of the article does not paint a pretty picture of the current state of the housing market, Arends does find reason to be bullish and explains his rationale for this school of thought in the second half.  He makes six points in favor of this argument and they are pretty compelling. In the end he says, “For those who are in a position to buy in today’s market and can be disciplined and patient, you’ll probably do pretty well from here…if you hunt down the bargains, you’re disciplined about price, you get the right financing, and you hold on for five years or more.” Here are his six points. Read them and see if you agree.

First, prices in many areas are now cheap. They have corrected a long way since the bubble began to burst five years ago. Of course, it depends on where you are. I’m still skeptical of the real-estate markets that have held up best prime stuff like Manhattan, San Francisco or Beverly Hills. It’s hard to get a deal there.

But in the places that have fallen the furthest, there are deals aplenty. Zillow found only four metro areas in America that have leveled out, or risen, lately. Notably, two of those are in stricken Florida Fort Myers and Sarasota. Have they fallen so far they’ve hit bottom? Maybe.

Look at this chart. It shows Miami real-estate prices, adjusted for inflation, over the past quarter-century, using Case-Shiller data. The picture is pretty remarkable. The gigantic bubble has been completely wiped out. We’re back to prices seen in the 1980s when “Miami Vice” was on the air.

The second reason: There are tons of foreclosures and short sales on the market. And there are plenty more sitting in the wings. Banks are holding back big shadow inventories of homes. And that means you can get a great deal. They have to sell. You don’t have to buy. You hold all the cards. Remember, the name of the game isn’t “let’s make a deal.” It’s “take it or leave it.”

Third, in many places rental yields are terrific. It’s cheaper to own than to rent. There have been some forced sales in my building in Miami. Based on my math, the latest buyers have bought condominium units for six times gross annual rents, and maybe 12 times net rents. We’re talking net yields of 7% or more. And rents are rising, because so many former owners are now renters.

The fourth reason I’m bullish is that you can get a very cheap mortgage. Thirty-year conforming loans are going as low as 4.3%. Throw in the tax break on the interest, and you are talking cheap finance.

The fifth reason is that, as painful as this collapse has been, real estate has historically proven to offer very good long-term protection against inflation. Returns have typically averaged about 1% or 2% above inflation. At a time when everyone has been piling into gold, commodities and TIPS bonds to protect themselves against the possibility of inflation, it seems odd that the most popular and successful hedge, namely real estate, goes a-begging.

Thirty-year TIPS bonds are yielding just 1.6% over inflation, and shorter-term bonds offer even lower returns. Short-term TIPS are actually offering negative real yields. How holding TIPS may actually make you poorer.

The sixth reason I’m bullish is perverse, but I’m sticking by it. Everyone else is bearish. You cannot find a real-estate bull anywhere. No one wants to own this asset. No one wants to talk about it. No one wants to hear about it. Everyone seems to agree it’s just going down, down, down forever.

They said much the same about stocks in 1987, 2002 and 2009; Treasury bonds in 1982; and gold in 2000. I cannot prove this is capitulation, but it sure smells something like it.

As ever, if you aren’t disciplined and patient, this probably isn’t for you.

I have absolutely no idea when real estate is going to hit rock bottom. It may take several years. I suspect it will do so in different markets at different times. But there are good homes out there going really cheap. If you hunt down the bargains, you’re disciplined about price, you get the right financing, and you hold on for five years or more, you’ll probably do pretty well from here.

This column also appear on SmartMoney/WSJ.com and was titled, “Why the Housing Crisis Should Make You Bullish.”

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