It Isn't Just Location: Housing and the Economic Recovery

Mike Norman, anchor, HardAssetsInvestor.com (Norman): Hello everybody, and welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. Well, talk about a hard asset, what about real estate? Here to talk about that, and somebody who has a very, very intimate knowledge of the real estate market is Tom Adkins of Tom Adkins Homes. Tom, thanks a lot; it’s great to see you. Now you and I, we go back … because we spoke about this several years ago. We talked about the real estate market as maybe facing some period of softness. But things obviously played out, at least in some of the bigger markets, far worse than the forecasts or the expectations. How do see you things now? Let’s talk about now, because it seems to me, when you look at some of the data … little glimmers of hope popping up, obviously prices have come down a lot; you see the foreclosure activity. How do you see it now? Tom Adkins, president, Tom Adkins Homes (Adkins): Real estate prices depend on three things: net income growth, interest rates ... Norman: Net income growth has been going down. Norman: ... Of course, when GDP shrinks, net income growth follows. Interest rates and confidence. Let’s not forget, people talk about the three ways we got here in the first place, which is critical to understand. The first thing we had was Fannie Mae getting involved with subprime and committing massive fraud to hide the losses, which became pretty dramatic. The second thing was the Federal Reserve’s incredibly stupid mistake of raising interest rates 525% inside of three years – never happened before. Norman: Yeah, and you’re one of the few people whom I’ve heard mention that. I’ve said it before: This goes back to the old inflation-targeting strategy of central banks – doesn’t work. Higher interest rates don’t bring about suddenly more oil production, and nobody was counting on the 500% increase in rates. Adkins: Straight from the real estate perspective, here’s Alan Greenspan, who’s telling you to get out and get adjustable mortgages, and then he raises the No. 1 index used to adjust mortgages 525% and wonders how come all these foreclosures started happening? Norman: Are you saying people who got into these mortgages when rates were down at 1%, they were affordable? They went in there … let’s not talk about the ones that actually were fraudulent … but for the most part, the majority of people who locked in or got into the adjustable when rates were at 1%, because nobody knew that, suddenly the Fed was going to reverse course and jack the rates up by 500%, as you said.? Adkins: Right, and keep in mind, you look historically, the Fed had never done that. The greatest change we ever saw was 2% or 3% over four or five years, and at that point your income can usually outpace the adjustment. This is the first time in history that it was impossible to do. Keep in mind, this is at a time when net income growth was going up 10% per year and the interest rate changes way outpaced that. The third thing was, let’s face it, the subprime losses were contained somewhere early- to mid-2007; it stabilized. So what happened between mid-2007, when the economy is doing fantastic, and today? What happened was the media seized upon this – whether for political reasons or because they like to create good stories – exaggerated the foreclosure situation, which was really contained to three markets for a long time, which were Florida, Southern California and the Nevada Las Vegas area. Norman: But we see this media effect very often. The media could latch onto it, they create the news, it’s the proverbial tail that wags the dog. They get the story, and whereas maybe investors in general might not be inclined to think that way, when they hear this story pounded over and over again on the news, they start to follow that. Adkins: We call it the “alar effect.” Back in 1989, “60 Minutes” did that big exposé on alar. They had this fake scientist who came on and told everyone this chemical alar is used on apples, and when children eat it, they’ll get cancer and die. It was a complete lie, but within 60 days, every apple grower in America was bankrupt. Same thing happened this time in 2008 and 2009, when the media completely exaggerated the foreclosure situation, which was caused primarily because builders simply overbuilt. It had nothing to do with George Bush’s policies or the Fed, nothing to do with it whatsoever. Norman: But aren’t we looking at the opposite situation? You talk about builders overbuilding. Back in 2006, I believe at the peak we put up about 2.6 million homes nationwide. Now we’re doing 400,000, 500,000. Even back when the population was 200 million in 1972, we put up more homes than that. Isn’t that fundamentally planting the seeds for a boom or a shortage at some point down the road? Adkins: We still need to work off the inventory, which nationally is somewhere between 10 and 11 months’ worth of inventory. When that gets worked off, that’s when your boom starts, because as long as people have confidence, interest rates are reasonable, and they have net income to talk about. Keep in mind, you can have all the confidence in the world, you can talk up an economy very easily, but talking an economy up is almost impossible if people don’t have the money in their pocket. They can have all the confidence in the world, but when they open up their wallet and there’s like $11 there, they’re not going to go out and buy a brand new. That’s one of the reasons why you see a problem with the auto industry as well. Not to go off on too much of a tangent here, but I think the auto industry and the automakers have really gotten an unfair smackdown by the media. The reason why they’re having big problems is because people have no money. If they have no money, every industry is in trouble. Norman: If you get the economy back, then cars are sold, homes are sold – you alleviate, you eliminate the problem. Adkins: Find me an industry that’s not suffering right now. All of a sudden, all the management was bad, the unions were bad, blah, blah. Norman: If Toyota is losing money, you don’t hear the Japanese saying they’re not viable and they’re about to force them into bankruptcy. Adkins: You don’t hear them complaining about the Toyota unions – there are none. The Toyota management … they’ve been making zillions of dollars over these years. All of a sudden today they’re stupid? The same guys who had the best car company for 10 years in a row, now they’re awful? Come on. Norman: Let’s give an outlook now. So you’re saying some things are looking more positive, but we still need to get the confidence coming back, we still need to get the net income growth. Essentially what you’re saying is the economy needs to start growing again. Once we see that happening, you get the other two elements coming back. Adkins: People have been hit really hard. People are not just going to take Barack Obama’s word for it, Timothy Geithner’s word for it. They’re going to want to see money in the pocket, and just writing a check from the government ... what are people getting now, $13, $14 a month from the federal government? That’s not going to spur them to buy a house. They need to see serious money. Norman: What about the $8,000 tax credit for first-time home buyers? Adkins: Well, it’s great, but it only lasts one year. It doesn’t go forward. Look at this thing, you’re looking at a $200,000 or $300,000 house or more. In New York City, if you live in an OK suburb, you’re spending $700,000 or $800,000 to buy a decent three-bedroom house; that’s nothing up here. So before people spend that kind of money, they need to know they’re going to have money in their pocket going forward. They need to say, oh, I’m making more money than I was last year. Right now they’re not seeing that, and frankly there’s no prospect for that. Norman: On this site we talk about assets, we talk about quality assets, about diversification. Real estate has always been the bedrock, the foundation, the biggest asset of household savings. Adkins: By far. Norman: Well, that and stocks, but real estate has been the biggest. Is that going to stay that way or have we seen a major change yet? Adkins: We always talk about that. In the moment that you find yourself living in, it’s like, oh my God, everything is going to change? As soon as the economy recovers, it’s going to go back to the way it was, because look, real estate is leveraged and there’s nothing wrong with that; it’s just the way it is. So if you put 10% down on a house and it rises 10% in value, you just doubled your money. You can’t find that in almost anything else, and if you have net income growth that’s coming in, let’s just say you’re making $10,000 more next year than you made the year before, that $10,000 converts to about, I don’t know, about $200,000 or $300,000 more in buying power. So if rates were at 5% or 6% or 7%, you’re buying at $200,000 more than you could the year before. So if a house were selling for $200,000 or $300,000, it will now sell for $300,000 or $400,000. When the recovery happens, Michael, it will be strong and hard. Norman: Things have pulled quite a bit; you’re looking still now for an improvement. We need to see that confidence come back; hopefully it’s going to start. We’ve seen a nice recovery in the stock market since last March. We need to see net income growth, which, essentially, what you’re saying is we need to see the economy start growing again.

As an investor – now I know you do this professionally – you’re involved in the home building yourself. For an investor, for somebody who thinks as you do right now – that there could be a good opportunity given the price decline. Given the fact that we may be starting to stabilize – what are some ideas, ways to go about it? Adkins: If you’re going to be a real estate investor, you have a couple of options. The first one is actually physically buying real estate, buying a house. Norman: Foreclosure? Adkins: Sure; a thousand ways to do it. The other way, of course, is you can get involved in the stock market. If you’re afraid to be an industrial investor, and the reason why is because if you own a home … look any knucklehead can go out and buy a house; the hard part about making that house work is management. The advantage of going into the markets where they provide ETFs or whatever is you go into the market, somebody manages it for you. You sacrifice something, you have less control; the only control you have is to sell it, and, of course, if you bought it at 50 and it’s down to 30, you’re losing. So that’s the downside of going through the market: You don’t have the control over it. You’re weighing these two things out, and for some people, they don’t want to get involved with calling the plumber or fixing the roof; it’s just a pain in the neck. Norman: You don’t have to do that with a stock. Adkins: Yeah. Norman: What areas of the country … now, the ones that were hardest hit obviously were California, Miami, Las Vegas, Phoenix, these places. Are those the places you want to get back into? Adkins: Not yet, no. I’ll tell you why. They were the first places to suffer, and there’s a huge inventory there. There are in some places they are thinking of, four, five years’ worth of inventory. Norman: But aren't those places the real desirable places, don’t they have the demographics backing it up that’ll say, long term, that’s where the growth is going to stay? Adkins: You need someone to rent that thing from you, unless you want to buy and let it sit there. You need someone to rent that thing to get some income coming in, and right now they’re just not there. There’s a market stabilization where there’s just about enough renters as there are houses available; that’s when you get back into the market in those places. Now let me give you an example of a place to look at. I do a lot of investment in Texas; Texas is a spectacular state. You look for the following things: a state that has low taxes, a great growth environment, great business environment, and other factors that might increase its desirability. For instance, Washington, the Seattle area, is actually not that bad of a place to go; they have not been hit that hard. Why? Because imports are doing great; it’s still a place to buy. Also, when exports happen, all these exporting areas … Norman: Exports have been doing great. Adkins: Imports and exports, both. If you bring something in, it goes through Seattle, it goes through San Diego, and it goes through the ports of Houston. So you look at places where there’s a lot of commerce going in and out of the country, because regardless of what the country’s doing, whether imports are happening or exports are happening, either way, they’ve got to go through that port, and that’s where you want to do a lot of business. So if you look at places like … anywhere there’s a decent port city, there’s typically a decent business environment, especially with Asia right now. So anything on the West Coast that has a decent business environment, I like it – take out California.

Norman: I think what tripped up a lot of people is this speculative fever. I’ve spoken about it here concerning other markets as well, like oil last year when it ran up to $150. How do you as a professional investor maintain a discipline when you stay away – when things are floppy, but you don’t plunge in … really become aggressive like now when things look very opportune?

Adkins: There are two things to consider when you’re an investor. One is when you see that overexcited, overexuberance in any kind of market whatsoever, you can understand when the peak’s going to come and when to get out, or, if you’re in it for the long term, you don’t worry about that. The other side is you have to worry about what government policies might do that completely obliterates any of these peaks-and-valleys investment strategies you’ve got, because the government could come in at any point and just screw everything all up.

Norman: But isn’t government on your side as a real estate investor? We’ve had 70, 80 years of history where real estate has been a favored asset class, and there’s been, either in the tax code or otherwise, support from the public sector, from the government, for home ownership.

Adkins: Yeah, when you buy real estate, there’s a couple of things to keep in mind. One is always take a look at your tax breaks and understand how they work. Make sure that a tax break that existed three years ago still exists today. For instance, during the savings and loan crisis, that was primarily created when the government changed the depreciation schedule from like 30-something percent down to 3 percent, and all these shopping malls that were worth $10 million are suddenly worth $2 million because depreciation wasn’t there anymore as something you compute into your valuation. So always make sure you understand all that stuff.

But when you look at buying real estate, there are a couple strategies: You can either go short term or long term. Some people buy houses, fix them up and sell them, make a profit that way; some people buy a house, wait for the market to peak out and try to play the market.

Norman: Isn’t it better to accumulate and just build a portfolio, hold on to it?

Adkins: The downside to buying real estate and holding it … and I’ll tell you, I do it and I believe in it. If you buy a house, don’t sell it, keep it. If you have a house and you want to go buy another house and sell your old house, don’t sell that house, keep that thing. Twenty, 30, 40 years later, it’s worth an incredible amount of money.

Norman: It’s like a great company with great quality stock, like any great asset.

Adkins: If today it’s worth $200,000, 30 years from now it’s going to be worth $400,000 or $500,000. Yeah, you’d be a fool to sell your real estate, plus the closing costs going in and out will kill you anyway, so you might as well hang on to the thing.

So what I tell people is, first of all, if you’re just a single person going out to buy a house yourself for the first time, always buy your second house first. Don’t buy that little house and sell it and buy a bigger house and sell it; you lose tons on commission, and the house that used to cost $300,000 now costs $700,000 seven years later. Why did you do that? You could have bought that. By the way, that’s why I jump on mortgages; they’re actually great things to use.

Norman: It’s this flipping mentality and I think it does people in.

Adkins: Michael, I’m not afraid of the flipping mentality. The flipping mentality is not what got us in this mess. What got in this mess was having all these people who are doing short-term adjustables who were not qualified to do short-term adjustables. There’s nothing wrong with adjustables; it’s like any other tool in your shed.

Norman: I think you hit on it on the first one. I think what got us into this mess is the notion – and I think it’s a false notion – that the Fed could somehow target inflation, and that we’re going to discover oil, what, if they put interest rates up to 5¼%.

Adkins: Michael, don’t forget, the people who got hurt the worst in this thing were not the rich people who were flipping, it was the poor people in the ‘hood who were trying to get their first house and the government said sure, just sign right here and we’ll give you any stinking thing you want; they’re the people who got crossed.

Norman: There you have it folks: real estate. There’s no hard asset any bigger than that and that’s what we’re all about here on HardAssetsInvestor.com. This is Mike Norman signing off for now. Take care, have a good one.

Comments

[nym:]

What were SA editors thinking on this article: so many self-serving words from a real estate guy? For example, he blames the media for aggravating the foreclosures starting in 2007. While I wish they'd gotten on the story years earlier, what should they done once they were on it, keep silent?

Jul 03 10:17 AM

[Jimbo989:]

To blame the media for the banks using 40 times leveraging of assets and massive use of credit derivitive swaps is to give the media and the banks a free pass. The banking sector collapsed because it no longer had cash reserves, its accountants allowed them to treat deriviatives as reserves, when in fact they were no such thing. The media shone no light on this, the media is in fact a puppet of the corporations that own it, the media is a handy to dog to beat, but they are in fact inept at investigation and spend far more time on missing white woman, dead children, and celebrities without underwear.

The economy has systemic problems, offshoring has reduced American manufacturing to a hollow shell, without good paying jobs Americans can no longer be the #1 consumer society, gorging on the worlds production, and they are forced to rely on debt to continue their consumption. Since housing prices have collapsed, homes are no longer a golden goose filled with equity to mortgage out and enjoy yet another spending spree. Problem 1 - the consumer is broke.

The banking system is rife with fraud, as AIG, and its practice of reinsuring its own policies through wholly owned branch companies has proven. As well as Goldman Sachs selling mortgage bond tranches as investments at the same time they were running an Index that supported short positions against the very same bonds they were selling as good investments. Problem #2 broken banking & investment system

The population demographic is shifting - the baby boomers have begun to retire and are no longer a fountain of money to be skimmed by every investing con available. Many boomer investors lost money in both recent bubbles and will not be investors or savers, but will instead require government assistance for the rest of their lives. Problem #3 aging population.

The Federal Reserve and their problematic money policies have managed to destroy the wealth of the nation, the double bubble economy of Alan Greenspan, followed by the attempt by Ben Bernanke to fix an excrement filled cake by frosting it with tons of money and charging the tax payers for the privilege of this outrage through a 4 trillion dollar tax payer funded bailout shows the true cluelessness of those in charge. Problem #4 the Federal Reserve.

As always catastrophe is never the result of a single event, but rather a series of factors, each compounding the other and amplifying the destruction, so our economy is shredding itself on a bed of broken razor blades built by our leaders in government and finance, who appear to be surprised the the victim is bleeding and attempt to deny it in every public forum available.

Until the basic problems are corrected, they cannot be a recovery, and at our debt levels and with our aging demographic and our levels of manufacturing, perhaps this economy has become the new normal. The bubbles of the past merely hid the true nature of our economy which is that it can no longer support full employment and that we are a nation that has overextended its credit limit.

I'd love to blame it all on the media, but I think they had many helpers pushing the economy over the cliff.

Jul 03 11:33 AM

[RTF 360:]

so much for "quick read"

Did you finish War & Peace " on the toilet?

Jul 03 12:57 PM

[realold:]

What a bunch of garbage. anyone with 1/2 a brain saw this real estate crash coming. Likewise, it takes income growth (requires a job for most people) and stability in the economy for people to invest in or move up in housing, not just "confidence". With the Obamanator marching forward to destroy private enterprise in this country, maybe things are looking up in Canada, but not here. A government dependent voter is a Democratic voter. Things will get much worse until President for Life Obama is done.

Jul 03 10:45 PM

[ed233:]

This article is nonsense. Remember a home is purchased first and foremost as shelter not for the purpose of leverage. That's why there is so much of a problem with the housing in America. Secondly, the media had nothing to do with the housing crisis. It reports the facts after the problem occurs. Get your history and facts together instead of ranting about something that makes no sense. LOL Looking after your money.

Jul 03 11:48 PM

[alienation:]

How can the media be preventing a recovery when we're in no position to have a recovery? We're just not there yet - 11 months of inventory? That says it right there. Confidence can be high, and you still have to clear that inventory.

One other thing: the Toyota workers in Japan are unionized.

Jul 04 02:31 AM

[ain't no fo...:]

Great one Jimbo, nothing more needs to be added to that, you nailed it.


On Jul 03 11:33 AM Jimbo989 wrote:

> To blame the media for the banks using 40 times leveraging of assets
> and massive use of credit derivitive swaps is to give the media and
> the banks a free pass. The banking sector collapsed because it no
> longer had cash reserves, its accountants allowed them to treat deriviatives
> as reserves, when in fact they were no such thing. The media shone
> no light on this, the media is in fact a puppet of the corporations
> that own it, the media is a handy to dog to beat, but they are in
> fact inept at investigation and spend far more time on missing white
> woman, dead children, and celebrities without underwear.
>
> The economy has systemic problems, offshoring has reduced American
> manufacturing to a hollow shell, without good paying jobs Americans
> can no longer be the #1 consumer society, gorging on the worlds production,
> and they are forced to rely on debt to continue their consumption.
> Since housing prices have collapsed, homes are no longer a golden
> goose filled with equity to mortgage out and enjoy yet another spending
> spree. Problem 1 - the consumer is broke.
>
> The banking system is rife with fraud, as AIG, and its practice of
> reinsuring its own policies through wholly owned branch companies
> has proven. As well as Goldman Sachs selling mortgage bond tranches
> as investments at the same time they were running an Index that supported
> short positions against the very same bonds they were selling as
> good investments. Problem #2 broken banking & investment system
>
>
> The population demographic is shifting - the baby boomers have begun
> to retire and are no longer a fountain of money to be skimmed by
> every investing con available. Many boomer investors lost money in
> both recent bubbles and will not be investors or savers, but will
> instead require government assistance for the rest of their lives.
> Problem #3 aging population.
>
> The Federal Reserve and their problematic money policies have managed
> to destroy the wealth of the nation, the double bubble economy of
> Alan Greenspan, followed by the attempt by Ben Bernanke to fix an
> excrement filled cake by frosting it with tons of money and charging
> the tax payers for the privilege of this outrage through a 4 trillion
> dollar tax payer funded bailout shows the true cluelessness of those
> in charge. Problem #4 the Federal Reserve.
>
> As always catastrophe is never the result of a single event, but
> rather a series of factors, each compounding the other and amplifying
> the destruction, so our economy is shredding itself on a bed of broken
> razor blades built by our leaders in government and finance, who
> appear to be surprised the the victim is bleeding and attempt to
> deny it in every public forum available.
>
> Until the basic problems are corrected, they cannot be a recovery,
> and at our debt levels and with our aging demographic and our levels
> of manufacturing, perhaps this economy has become the new normal.
> The bubbles of the past merely hid the true nature of our economy
> which is that it can no longer support full employment and that we
> are a nation that has overextended its credit limit.
>
> I'd love to blame it all on the media, but I think they had many
> helpers pushing the economy over the cliff.

Jul 04 10:33 AM

[Alan Young:]

This was intended as satire, wasn't it? Please, HAI, someone, tell us it was satire, because all the previous comments have missed this.
Not particularly funny satire, but still... they can't be serious, can they?

Jul 04 01:34 PM

[D. McHattie:]

Both Mike Norman and Tom Adkins were loudly, agressively clueless back in 2007 and they are just as clueless now.

Their credibility is 0.

www.youtube.com/watch?...

Jul 04 02:01 PM

[Archman Inv...:]

D.McHattie:

God bless you for posting that link.

Everyone and I mean everyone needs to watch that video you linked to. I remember viewing that video months ago.

Tom Adkins is a bold faced. lying, salesman, criminal.

He and Mike Norman are buddies who were 100% dead wrong on housing and the stock market collapse.

Seeking Alpha should be taking into account the credibility of these people.

Tom Adkins and Mike Norman still get air time simply because the general public has not figured out that they are criminals and have yet to face any real accountability for their bold faced lies.

Sorry for ranting everyone. People that like just make me sick the way they prey on the unsuspecting public.

Jul 08 12:47 PM

[Redpenny:]

Wow, where does this guy live and where does he get his evening news? Down here on planet Earth where I live the media is the least of our problems. How about, no lending standards, CDS's, etc.

The thing that I think is dangerous in all of this is that people will read this stuff and want to believe that it is true. Much of what little we actually know about what has gone on behind the scenes is from the media and also from sites like SA, Zero Hedge and the like.

The housing market was as blend of hope and greed. Hope in that that people who never thought they would be able to buy a home were actually able to do so even though they were not qualified, and greed in that the builders kept on building and the speculators kept on buying with cheap, easy money. Both hope and greed took it in the shorts and we are left with the a massive devaluation in what is most peoples prime asset that will last for the next decade, if not an outright loss of that asset.

A sizable amount of people are looking at a lower standard of living for the foreseeable future. If there is someone other than ourselves to blame I would put some squarely on people like Adkins and Norman who fuel the belief that the big bad media is the cause of all problems. The media is flawed, but all in all if there is sunlight to be shone on something the source is very, very often the people who see something wrong and are willing to write about it.

Stay cynical, but keep reading. There will never be a substitute for being informed.

Jul 08 03:01 PM

[FloridaBoy2:]

Yes, it was the media that created home equity loans so people could live a marketers dream. It was the media that told homebuyers that a property would be worth x $ in a year and you could easily refinance. It was the media that stuffed Fannie and Freddie with subprime loans.

I just threw out the newspaper and TV and feel a lot better.

Jul 08 08:21 PM

[Jeff Borack:]

Adkins: If today it’s worth $200,000, 30 years from now it’s going to be worth $400,000 or $500,000. Yeah, you’d be a fool to sell your real estate, plus the closing costs going in and out will kill you anyway, so you might as well hang on to the thing.

If it goes from 200k to 500k in 30 years, thats a return of 3.1% per year. And of course that doesn't take into account the insurance, taxes, interest, maintenance, and upgrades. You would be a "fool" to hold onto that.

Jul 08 11:58 PM