Advice for Renters: Wait Until 2010 to Buy

The LA Times has a nice story about Leo Nordine, a 45-year-old Hermosa Beach real estate broker who specializes in foreclosure sales and must be about the only realtor in the world who doesn't own a cell phone. Really!

He drives an eight-year-old car too! Amazing.

It's as if frugal is cool now. Our two six-year-old cars and a shared cell phone (it's a Pay As You Go and rarely gets turned on) look downright wimpy by comparison.

Can we really make the transformation back to a society of modest savers?

It looks like we're about to find out...

Sorry, this was supposed to be about Mr. Nordine, but I can't help but stop and gawk at this wave of thriftiness that is sweeping the country.

Anyway, back to the Foreclosure King...

As might be expected, business is booming these days and he has some important advice for renters who are now chomping at the bit, anxious to become homeowners.

Nordine, a 45-year-old native son and surfer didn't just catch the current foreclosure tidal wave, he has sold 3,500 bank-owned homes during the last two decades. He credits his uncanny ability to time the real estate market's cycles and position himself to reap its rewards as the key to his extraordinary success. And he does it all from the comfort of his home overlooking the Strand in Hermosa Beach.
...
Nordine has made his own fortune not only by selling homes but also by investing shrewdly. In the 1980s, he bought about 20 properties, most of them single-family homes in Torrance. He sold them off in 1990 and '91 when he anticipated a bust was coming. He dived back into the market in the mid-1990s -- this time apartments in Santa Monica -- and sold off most of them in 2005.

Today, he and his second wife own a 22-unit complex and a 12-unit complex in Santa Monica; a single-family home and a four-plex in El Segundo; nine bungalows and a four-plex in Torrance; a five-plex in Redondo Beach; and the house-office in Hermosa Beach.

But being a dad and husband is what it's all about for Nordine. His is the first face his son Nate sees every morning when he wakes and the last one he sees at bedtime.

So what advice does Nordine offer those concerned about the real estate market?

Don't sell unless you absolutely have to. Don't buy until 2010, when prices should be at 2000 levels. And apply every spare nickel to paying off your debt, including mortgages.

Take heart aspiring homeowners (like us), 2010 isn't much more than a year away...

Comments

[investor88:]

Good advice, buy in 2010 when real estate prices will be at 2000 levels! Leo still holds properties for investment, a interesting note.

2008 Oct 27 08:44 AM

[Michael Comeau:]

That's pretty good advice but I'm getting the impression that mid-2009 might be better. Waiting too long might mean the bargains start to disappear.

2008 Oct 27 09:26 AM

[Duude:]

Nordine has been spectacular with his timing in the past, but there are other factors he surely isn't considering.
We know about the big, new inventory of unsold homes that foreclosure has brought to the market. We know about the offsetting big drop in new permits. We know we are entering a recession but haven't much clarity regarding either the length of the recession nor the depth. Some predict a reemerging economic expansion by the latter half of 2009 without any idea of peak unemployment. We're at 6.1% unemployment now which if fine, but everyone knows this number will grow. Some say 7.5%, others 8.5%. How high it gets will significantly affect the value and pricing of homes. Add to that all those that had planned to sell before the market dropped out. This is more inventory that will reenter available inventory at some point in time. Unfortunately, due to the length of this real estate bear market, many will either sell at or near the bottom or just walk away.
However, the most serious factor that will undoubtedly depress home values for some time to come is financing. Its true if you have 20% down, great credit and enough income, you can still get financing. But our securitized mortgage obligations will never get the demand they once had. The world is going to change. One quote I heard from a European analyst speaking about Norwegian bankers demand for our CMOs was that the only thing Norwegian bankers like better than French pastry was American derivatives. I think they are going to develop a financial allergy for these products in the future. It isn't just about Norwegian bankers. World demand for our securitizations has been hot and now its not. With a drop in world demand, these mortgage loans will be much more expensive to keep. We're going to be housing our own debt in the future. No more spreading of the risk. This is going to be expensive. Who pays for it? Future mortgage applicants with higher interest rates. That reduces affordability. The current crop of homes were built for a population that didn't fully qualify. The available pool of buyers is going down, the financing expense is going up, and we have a big buildup in inventory with a hard to predict with any accuracy recession that is only in the first innings.
2010??.... Forget about it.

2008 Oct 27 11:41 AM

[ChickenLips:]

Duude, you are correct.

Demand is there, but the ability to finance a purchase is no longer there. I want to upgrade like everybody else, but I probably don't qualify for a new mortgage like everybody else! I don't think we need to be asking a real estate broker about investing in real estate again, we need to be asking the finance reps. Real estate will not turn around until the financing becomes readily available again to eat up this inventory.

But if all the finance people are losing their jobs, that to me is a very STRONG sign that real estate isn't coming back anytime soon.

Rental properties will always be in demand, we all need a roof over our heads, right?

2008 Oct 27 12:22 PM

[Smarty_Pants:]

On the plus side, banks will have so many foreclosure properties on their books that they will eventually be willing to lend at very good terms just to get rid of them. Odds are that the FED will start some program to enable this easier credit to clear the foreclosed logjam.

Get to know your local bankers now. They will be good to count as friends soon enough.

2008 Oct 27 02:46 PM

[moonbat1775:]

I read somewhere, that during the hyperinflation in Germany, a single gold coin would buy a block of business property. Since bankers and the Fed are the cause of our problems, I reckon I'll wait. Plus, my apartment over a garage in Heaven will beat any mansion ever built on earth.

2008 Oct 27 02:55 PM

[derryl:]

There are upper limits on total bank lending based on the bank's capitalization. If the value of the bank's capital--it's total stock valuation--is $1 billion and the legislated assets to capital ratio is 20, that bank can make a maximum of $20 billion in loans. During the Greenspan low interest bubble there was demand for new loans well beyond what total US bank capitalization would support. This restricted bank profits, but prudence born of hard-earned experience prevented any largescale relaxation of capital requirements.

("fractional reserve" requirements are something else entirely. These are cash reserves that banks must keep in order to supply cash-on-demand to their depositors. The reserve "requirement" is real, based on banks' experience rather than legislation, and is about 4%. If a bank's depositors have a total of $1 million in checking and savings deposits, the bank will need about $40000 cash on hand to meet its customers' cash needs. Depository institutions like banks MUST meet these needs, but there is no set rate telling them what those needs are.)

Already in the 1970s Fannie and Freddie had invented mortgage loan securitization. They packaged mortgages and sold ABSs into the open market, which served to freeze up excess liquidity that had been put into the system by mortgage borrowers: that money was now owned by the sellers of real estate to those borrowers. As long as ABS buyers were Americans this was a good way to internally finance a level of real estate activity that banks alone could not legally finance. Banks who had made the original mortgages could collect fees for continuing to administer the collection of mortgage payments, refinancing as mortgage terms came due, and making new mortgages which were promptly packaged into ABSs and sold, which gave banks a new expandable source of revenue and profits beyond their allowable loans portfolio.

Regardless what you think about the way the banking/finance system is designed (there's lots of criticism about fiat money, fractional reserve and central banking), the system attempts to coordinate new money circulated to finance new production with savings from past productions and with existing stocks of goods-for-sale. The idea is that whoever wants to take something for themselves has to at some time put back in an equal amount. Too much new money too fast causes inflationary bubbles and related problems that we now see in their gigantic unmistakable form.

By securitizing American mortgages and selling ABSs to Americans the finance system was working as it was designed to. American liquid money made a good rate of return by investing in ABSs. But securitized American mortgages were eventually sold en masse to foreigners. This left excess privately held liquidity (i.e. money) in American hands and that money was looking for a rate of return on investments. But the money had already produced the investments--all the real estate that was mortgaged.

The financial system only works properly if the total stocks of money and goods-for-sale remains within a more or less closed loop. Imports of money must be balanced by exports of goods, or else you end up with an economy that has too much money in it for the amount of goods that were produced. Securitization of mortgages and later securitization of American consumer and corporate debt that was sold all over the planet caused the import of vast amounts of foreign money into America which released vast amount of American money to inflate US prices of all the existing stock of goods and investments that were available to absorb that money.

I think the correct way out of this situation is to repay alll the foreign money with US exports and to refinance all the American real estate and corporate debt with all the liquid American money that has been playing a non-productive numbers game on the financial markets instead of investing productively in the real economy real estate and stock markets.

There's nothing wrong with globalized investments as long as your nationals are exporting as much US money into other economies as foreigners are injecting into your economy. Otherwise international financial flow imbalances cause problems: starved-out investment in donor countries and inflated investment in recipient countries. Eventually the music stops and the fallout starts.

Rebalancing is easier said than done, but I think this is what should be the target. Hopefully the recent G7/IMF emergency meetings are looking at something along these lines.

2008 Oct 28 12:41 PM

[derryl:]

P.S. Once the imported money is either purged or balanced by exported money, prices of real estate, stocks and other real wealth will be able to start rebalancing themselves. This does not address the misallocation of resources that saw too many luxury houses and goods being produced while Americans were feeling rich due to price inflation of their real estate and stock portfolio values.

It turns out these luxury goods are not affordable by enough Americans to clear the stocks of them at for-profit prices. So lots of people will get to buy houses they could not afford in the real economic sense, because the builders/owners will have to sell them at whatever much lower prices people can actually afford to pay. The bottom might still be a long way down.

2008 Oct 28 12:56 PM

[Tran Harry:]

The prices are going anywhere these days but up, it is definitely a good idea to play the waiting game, and I'm sure that even if you don't buy at the absolute bottom, just waiting for a few years from now you will still be able to buy a house cheaper than the prices we have seen these days.

The real issue is now that the banks have the bailout money in play, when will home buyers finally be able to borrow money from banks again?

2008 Oct 29 02:36 AM

[Tran Harry:]

The problem with making money with US Exports is that we don't exactly have much goods to export, most of the manufacturing of the products that are produced by American companies are already outsourced, so we actually import what we create.

The only few large home brand super companies that are left are all uncompetitive, our Automobiles are undesirable to foreigners with small streets who also demand efficiency over size, our airplanes are being produced into a dying industry that isn't forecasted to grow, our main competitive edge is in software and that gets bootlegged in countries with lax regulation, and financial services which just bursted.

Unless you are suggesting we export what we do do best which is make weapons and create countries with weapons, the US has given up its industrial revolution days.

2008 Oct 29 12:06 PM

[john1:]

Just more unpatriotic negativity from liberals who hate America, and the troops.

2008 Oct 29 04:07 PM

[FP:]

Keep waiting, that when 2010 is here you will be told by the same guys to wait till 2013, on & on. For some people there has never been the right time & never will.
Keep waiting until socialism is here, no more 401k to worry, you will be given a house for free & you will work for free.

2008 Oct 29 11:16 PM

[FP:]

John1, I agree with you 100%, this is the same niche as patrick.net

2008 Oct 29 11:21 PM

[Kunst:]

"Waiting too long might mean the bargains start to disappear."

Somehow, I just don't see a housing boom any time soon. After the last housing bust, in the early 1990's, prices stayed flat near the bottom for a good five years.

The only counter to that would be if the government decides to inflate our way out of this mess. That would be a different game with different rules. If that happens, buy early and often.

2008 Nov 02 10:11 PM