Real Estate? Now?

The butterfly counts not months but moments,
and has time enough

–Tagore

In my mind, the conversation goes like this: “So, how ’bout real estate now?” I say. “Too soon for a third buyer ,” he says. He, being Fat Tony, Taleb’s mythical street smart guy from Brooklyn that makes the kind of living that provides the home in Larchmont for the wife, the former Concetta de Magglio, and private school for the two children. This he mostly does by taking the other side of trades put on by Wall Street’s best and brightest.

We would call Fat Tony a very successful skeptical empiricist. “Well, I watch things,” is all he’ll allow. But let us take up his idea about the third buyer, which, in certain transactions, he aims to be.

The real estate market was minding it’s own business when the Fed began gushing cheap money into the financial system early in the new millennium. Whatever they may have had in mind, the result was anything but pretty. The dough wound up in the banks who then used it to go on a tear to generate mortgages wherever they could so they’d have something to package and sell to yield hungry institutions and retirees.

In the end, millions of people with very questionable finances were dragged into home ownership with teaser rate mortgages they did not understand. As the teaser rates morphed much higher the crash began, putting most of the Joe six-packs out on the street. Thus the demise of the first buyers in the mania.

Now come the bottom fishers. Some of them sophisticated. These are the private capital guys, working cozily with the banks whose balance sheets are loaded with foreclosed properties. Hundreds of thousands of these houses have been acquired by outfits like Blackstone Capital and Romney’s old outfit, Bane Capital. Their move, once again, is to cynically package these properties and market them again to the bottom fishing wannabees-pension plans and retirees. Will these folks ever learn?

At last count, sixty percent of home purchases today are cash buys. If that sounds solid, it is anything but. A normal home market functions efficiently when the buyers intend to live in the homes they purchase. Bidding is sensible, homes are maintained with pride of ownership, and purchased homes go off the market for decades or more. But the cohort buying for cash is bidding up prices in the rush to acquire houses for packaging into investment trusts. The intention is to rent these properties until the market goes up so they can be sold for a profit.

What a mess this is going to be! Imagine a manager of one of these trusts that has several thousand homes around the country trying to maintain the properties and keep them rented. The private capital guys will be long out of ownership, having made their millions in fees and inflated prices levied on the trusts. The ultimate owners once again own investments that will be deteriorating from the get go, wreaking havoc on values and the very livability of  neighborhoods scattered around the nation in which these properties are located. Thus the demise of the second buyers.

At some point, maybe in 2017, after the deflationary depression bottoms, the third buyer has a chance. I suspect Fat Tony will be looking to acquire some of these properties–long since abandoned–for the highest best use of the land. Farm land, maybe? Who knows.

Cheers,

Rod

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