Publisher's Letter - Bringing Our Own Rope

Karl Marx believed the Capitalists would supply the rope for the gallows from which the Communists would hang the failed idea of capitalism.

As a members of the real estate industry press, we are own worst enemies. If the financial implication wasn’t so tragic for some, it would be just be comedic. However through all this media noise, reality is very different.

“It’s a Great Time to Buy?”
Fact: it is always a good time to buy the right property, just that some times are better than others.

I recently attended the annual meeting of the National Association of Real Estate Editors. These are senior writers who cover the real estate beat at big city and local newspapers. NAREE is generally a switched on and lively bunch, but imbued with a healthy level of skepticism.

The president elect of the National Association of Realtors, Charles McMillan, addressed this group and gently chided them for less than positive media coverage contributing to the current real estate malaise. One writer from Newton MA quietly asked the question: “Mr. McMillan, How can I take you at your word? A year ago the NAR told me it was a great time to buy and had I decided to buy my house then, I’d now be underwater some 15%. Yet the NAR is still telling me it’s a great time to buy. What am I to believe?”

Charles McMillan, the new president responded by telling us how capable and respected the NAR economic analysts are. The leading economist Larry Yun has “in fact moved from sixth most trusted American economist to number five, because of the death of one of the preceding six!”

GOB SMACKED
And then it hit me! The buy message was right but was not being presented in the context of a long term asset. It is always a good time to buy the right real estate. It is not a commodity and does not trade efficiently like a stock.

The way NAR reports data is effectively playing a championship “away game” with their “pre season try-outs.” No plan just milling about in the face of a deadly serious competitor. The realty industry has been conned into reporting on housing markets like this is stock market data. Even worse, making housing data sound like it’s the subject of day trading speculation. Wall St. is competing for investment capital and money invested in homes are assets lost to Wall St. management.

DANCING TO WALL ST's REPORTING TEMPO?
Your house is NOT a traded asset in the sense of an investment in a stock, bond or other traded financial instrument. It has a daily utility far and away more important than an investment return. It’s a castle not a commodity.

The answer to the Newtonian’s question was to place the experience in context: A 12 month homeownership and investment window is not a practical measurement, so year over year data is misleading. This writer had owned his home for a not untypical 10 years and had seen values more than triple, so for him the question was truly theoretical. If the leadership of the NAR can be caught this flat footed with such an important question and a marginal response, no wonder the press writes what they do and real estate agents are chagrined at the results.

Very few of the people that bought house in mid 2007 will be affected by that possible 15% retrenchment in home values. That number is probably wrong because of the way data is gathered, averaged and reported in a manner that is convenient to the analyst, hardly meaningful to the individual homebuyer and a grave disservice to the nation’s consumer confidence.

Many banking institutions are conveniently using the subprime, housing and the credit malaise to cover complex multi-billion investment bets that have gone bad.

INVESTOR AMERICA
An investment in a good home in a nice neighborhood is a great way to accumulate wealth. Our recent report, “The Invaluable Investor” found that 89% of all homebuyers, whether first time, move up, second home or an intentional investment purchase, though investment when making that decision.

The average homeownership cycle is five to seven years. The percentage of the total housing units on the market during a typical 12 month period averages about 5%. Most people are therefore not affected by the market data that is reported by the major data sources. With just 5% of the residential real estate in play in a year, versus 100% a day on Wall Street, this is hardly a comparable market, yet the leading thinkers in the real estate industry cannot make the distinction.

It’s irrefutable. History has shown that the home you buy today will most likely be more expensive next year. Just look at the perennial complaints about affordability.
1. 78% of all home purchase are for living first, not investment. An increase rises in value is a bonus.
2. Since 1929 the average home in Averageville USA has appreciated around five percent per year, with 2007 being an exception.
3. Most homes are bought 5 to 30 year loans. The deposit is leveraged around 5 to 1 time with today’s loans.
4. Appreciation accrues on the total capital value of the home, not just the deposit. So the cash-on-cash returns are leveraged.
5. The average homeowner lives in a home from five to seven years so is not affected by short term market fluctuations, short of being compelled to sell in a “stalled market.”
6. Perennially good neighborhoods do not become bad quickly, if ever, and seldom lose value.
7. The tax benefits and inflation resistant aspects of real estate make a home or investment purchase perennially attractive.
8. Real estate financials favor the buy and hold versus flip investor.

HIP, WISER EARLY & BUYING
The average home buyer is getting a whole lot younger with many 20 somethings buying far earlier than previous generations. Our parents and the boomer generation have shown the way in not planning for retirement. The recognition that “jobs for life” was a quaint 20th Century idea means wising up, building independence and even wealth has become a priority for younger adults.

The data unthinkingly generated and condoned by the NAR, Standard & Poors’ Case/Shiller Index or data from US agencies like Office of Federal Housing Enterprise Oversight. By understanding the background an individual looking to invest in a home need not be confused. Their academic averaging to try and make macro sense of a very personal and micro decision is unhelpful academic noise the simply media passes along.

Further: NAR, OFHEO and Realogy each produce housing data differently, but arrive at about the same result for the whole country with a average retrenchment of about 1%. Case/Shiller however only indexes a limited number of paired sales of selected homes in the 20 most active cities in 17 states. This is presented as a reflection of the US housing market that ignores 43 states. They claim a 15% national decline in values.

Say that again? A case(Shiller) of Manhattan academic myopia at it’s very best. Dare we suggest that this just maybe an argument in defense of stocks and bonds investment?

WE HAVE MET THE ENEMY
It’s ourselves. We are unwittingly dancing to an unknown Wall St traded assets piper’s tune. Traded assets are assumed to be liquid, offering measurable returns (or loses) in very efficient markets than can value an asset based on the current demand with a price that is “marked to the market.” Your home is your castle, not their commodity, so does not compare. Wax apples and over ripe oranges again,

At Personal Real Estate Investor Magazine we believe that there is always another side to the story that requires a little more work and a little more background to tell it correctly. Our major dailies are on a mission to produce exciting headlines about the latest disaster, housing or otherwise. This data stuff is boring but vital to any investor.

Newspaper real estate editors are no different than any of us short of the fact they depend on too few sources and go with the most convenient and most spectacular bad news that ignores human nature and the way most people live. I hate moving and do not plan on selling and leaving my eleven year residence anytime soon.

This (market) soon will pass, and homes will inevitably get more expensive. If you are in the market for a home or if you are sitting tight, choose carefully and take the long view. In real estate, time has a habit of healing everything. Money goes where it’s most welcome. Welcome Home.

God bless and wise investing,
Regards
Andrew Waite