Are We Becoming a Nation of Renters? Investing for the New Housing Dynamic

“And your inheritance is…You get to take over payments on the family homestead when we go!”

For those thinking today of their kids’ inheritance, or indeed of their own future, there is a new dynamic that must be taken into account: so many people bought much more house than they would have or could have or maybe even should have because (a) the financing was cheap, (b) the qualifying was easy to non-existent, and (c) because “real estate always goes up, at least in our (choose one: town, state, city, region, whatever.)”

Unlike those Pollyannas who believe that last statement, I see a likely continuation of turmoil for most single-family residential real estate markets for a number of years. There are many reasons for this, most of which I’ve seen discussed elsewhere. But there is one more factor that I believe adds gasoline to what may be a burning funeral pyre of household wealth: the percentage of net worth that is represented by a family’s primary residence. As a result of higher home prices during the Greenspan real estate bubble, people spent this “paper” wealth without actually having it, in order to buy all sorts of consumables and steadily depreciating durables, rather than adding to savings and investment.

I read recently that the average percentage of their total net worth that currently-retired Americans have tied up in this one illiquid asset is somewhere near 80%. More than three-quarters of most people’s net worth consists of equity in their homes! The numbers are roughly the same for Boomers.

This fact has massive implications for both the real estate market and the stock market. In order to pass a portion of their net worth to their children and grandchildren, or to pay for their living expenses as they live longer than ever before, many homeowners will have to pass the house in which they live on to their kids – or sell it in order to pay for their own assisted living or other expenses.

It seems to me that this reality will result in a very large glut of houses for sale, not because of the good tidings of monstrous appreciation but because current homeowners will have to unlock that equity to get money to survive on. In the good old days of the first decade of this millennium, they could simply take out a second mortgage or get an equity line of credit on the house. But not many bankers are going to be amenable to lending money against an asset that hasn’t appreciated in years.

Because of this, I see Americans becoming far more willing, whether by circumstance or choice, to rent rather than own. I think you can avoid that fate yourself by being aware of the trend and profiting from some of the implications of this scenario.

One of those would be high-quality apartment REITs, by which I mean that both their apartments and their balance sheets are high-quality! Some of the “vulture funds” recently established to buy apartment houses or entire developments of foreclosed rental properties may also do well.

Too many people are still relying on hope for a rebound in real estate prices, followed by 10% a year appreciation on the house they live in. Worse, they fully expect to sell at the top when they leave it. That’s not a plan, it’s a trap. Over the past 20 years or so, Americans have accumulated more credit card debt, more student loans, higher car payments, and in general bought more “stuff”, all the while believing that they didn’t need to save for a rainy day because they were already engaging in “forced saving” by accumulating more equity in their homes year after year. After all, “real estate always goes up, at least in our (choose one: town, state, city, region, whatever.)”

I said the stock market would also benefit. Beyond your decision to buy or not buy the apartment REITs and vulture funds I discuss below, just being in the asset class of equities rather than the asset class of residential real estate may benefit you. When the value of one’s biggest asset is rising non-stop, it becomes an excuse to save less and to diversify less. The logic becomes “Why should I diversify into tech or materials or health care when the house two doors down just sold for $780,000?” rather than, “Gee, tech is getting to be too big a part of the portfolio I’m relying on to fund my retirement; maybe I should diversify into some metals and bonds.”

The real estate wealth effect is a seductive force that encourages concentration rather than diversification. Once people realize that it was a mistake to borrow and borrow against their home only to watch as it declines precipitously, they will be “once burned, twice shy” and anxious to diversify into other investment instruments like far more liquid stocks and bonds. Stocks may be the best for younger retirees but for those who took a 30-year mortgage at age 55 and retired 10 years later, their forced home sale proceeds will likely find their way into the less volatile bond market, as they contemplate the now-mixed blessing of funding their lifestyle and mortgage payments for another 10, 20 or 30 years.

Real estate will have its day again but in the short to intermediate term I think the money to be made in real estate will be made (1) at the very high end where assets, not income, buys houses, often for cash; and (2) in rental homes and apartments which may be less grand than the current homestead but which leave money left over for living an enjoyable life.

There are three ways to profit from this state of affairs directly, of course: if you are young enough for it to make sense to purchase rather than rent, by all means do it. A combination of low current prices and government confiscation of money from one taxpayer to assist another make it too attractive not to. The legislation for taxpayer credits for buying a home may have been written by homebuilders, and passed by Congress, but if it benefits you, well, they’ve already taken the money from all taxpayers – if you qualify, you may as well take it. They’ll just find another, bigger piece of pork to dispense somewhere else to less effect, anyway.

The second way you might benefit, especially if you are one of those sellers who must sell to release your equity, is to assist those buying their home, perhaps by taking back some of the paper yourself. After all, it is secured by a property you know well.

The third way, if you have cash to buy, is to buy a home or condo with the intent to rent it to others. There will be plenty of second-home owners this year and next who are willing to sell those second homes in desirable vacation areas for far less than they paid for them. You may not get rich but you will give others the joy of staying in a beautiful place while paying down your mortgage for you.

Since the three approaches above involve direct participation and research specific to each deal, many readers will prefer the first two I mentioned: apartment REITs and/or vulture funds.

As to the former, I think people may be resigned to selling their homes to get money to live on, but I believe they will be unwilling to move down in quality unless their circumstances force them to. If their illusory “paper wealth” was $550,000 in “equity” and it’s now reduced to just $250,000, they will still sell to get that $250,000 in cold hard investable cash, but the pain of doing so will be lessened if they move to an even nicer place than they left behind.

If an apartment REIT avoided the temptation to stray from their normal, boring, business in the region they understood the best in order to rush, late in the game, into Las Vegas, Phoenix, Miami and other “hot” sectors -- buying at the top and getting no bargain in financing their late entry -- you can find these firms selling at eminently fair stock prices, getting strong cash flow from properties that have not plummeted like those in the hot markets did.

Demand for these units will increase even if current homeowners don’t convert to renting in numbers as great as I expect. We are still a nation of immigrants, and legal immigration is expected to continue unabated during these hard times at an average rate of 1.7-2 million annually. Also, we are likely somewhere near the zenith of unemployment. As employment increases in 2010 and 2011, demand will increase from people moving out of relatives’ homes and shelters, as well as move-up renters renting better places. Finally, many currently unemployed and those under-employed or anxious to change jobs as the times get better will prefer renting to owning simply because they need to stay mobile and unencumbered in order to follow their employment goals and dreams.

When it comes to the supply side of the equation, I see little new construction of multi-family rental housing as big projects will be severely limited by lack of financing. Local banks, the source of most such financing, are less willing to loan to real estate firms after losing so much recently in foreclosures and builder bankruptcies.

So which firms do I think are most worthy of your attention? Those with low leverage (low debt levels) and those with less exposure to previously-hot overbuilt markets like Phoenix, Miami, Las Vegas, Orlando and Tampa. Both Mid America Apartment Communities (MAA) and Avalon Bay (AVB) qualify in these categories.

Here is where MAA’s properties are located (click to enlarge):

And here are AVB’s (click to enlarge):

AVB is a bit heavier in California but their risk there is spread among many communities, some of which never became overheated and are thus still attractive.

Neither chased “growth”, neither overpaid for properties at the top, and neither are over-leveraged. Essex Property Trust (ESS), BRE Properties (BRE), and Equity Residential (EQR) all do well in terms of their capital ratios but I don’t like their high exposure to some California and Florida markets I consider still ripe for further problems. (Of these, I consider ESS the best.) Since their California portfolio is small, Post Properties (PPS) might qualify for a top slot -- except their exposure to Atlanta, DC, Tampa and other formerly hot markets puts me off.

Among the vulture funds, I prefer those which buy properties in bulk from banks and brokers for resale or rental. These funds buy properties that have already had the excesses wrung out of them, but sometimes bring their own problems in terms of having been abused or neglected. That’s why I prefer to buy these in a basket via publicly-traded funds like Colony Financial (CLNY) and Crexus Investment (CXS). There are others, but I like the people behind these two, the experience of management, and the timing of their entry into the business the best. Both are seeking apartment buildings where the developer has over-extended and is in need of immediate capital or is facing foreclosure on the entire project. These funds ride to the rescue and take the liability off the developers’ hands, albeit at a price the developer would not normally accept.

Given my premise that more Americans will be renting in the future out of necessity, that employment will (slowly) pick up, that many workers will want to live in apartments for greater job-seeking flexibility, that apartment rental rates and prices will be rising, and that there will be a paucity of new construction financing, I can think of no finer possibilities for your consideration than those I’ve discussed here.

Full Disclosure: Author is long AVB, MAA, CLNY, and CXS.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless –our Investors Edge ® Growth and Value Portfolio has beaten the S&P 500 for 10 years running but there is no guarantee that we will continue to do so.

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

Comments

[Moon Kil Woong:]

Having too big of home is like renting if you can't build up equity. You pay your rent in property taxes and bank interest. Thus renting is often better. There is nothing wrong with it. In fact’s it’s suitable and prudent based on what you economic situation.

People have really stigmatized renters incorrectly. A renter who saves beats a homeowner who doesn't hands down. Furthermore, housing prices unhinged from a reasonable multiple to local rental costs are really susceptible to price correction 15x is rich. The only way rental prices rise is more demand.

Thus rental prices in many ways are the fundamental support to the housing market. Not fake low interest ARMs, 3.5% down FMA loans, or 30 mortgages at 5.5% peddled by Fannie Mae, Ginne Mae, and Freddie Mac at the future cost to taxpayers (when they go underwater and get bailed out by the government again from writing these absurdly low long term mortgages and buying the bonds from banks).

Thus the only ones who may be laughing all the way to the bank in the future is renters to the chagrin of the government and real estate brokers. Sure you don't get the giant housing price apreciation gamble, but if you want to gamble goping to Vegas seems a lot cheaper these days.

Nov 06 04:03 AM

[Davewmart:]

A fine article.
Just one question:
What makes you think the economy will in fact recover within the next 20 years or so, and what will cause this recovery?
The best I can see is stagnation, as in Japan for the last 20 years, and that is on the optimistic side..
Even under that scenario it seems to me that some variant of your suggested strategy might be the best that can be done.

Nov 06 05:40 AM

[AndrewBaker:]

Renting is a good option for many. Pouring cash into a home and looking at it as an investment is both contradictory in that one lives in one's home and therefore it is not available to "spend" as are investment funds, and also dangerous in that one is putting too much into one quite illiquid asset thus reducing diversification and becoming dependent on the vagaries of one non-predictable market should a sale be required to raise funds. And this situation often occurs in a period of economic problems which may well mean that the value available is less than anticipated.

Agreed, having cash on deposit doesn't pay much right now, but not much is still better than a reducing value. Corporate bonds and convertibles can provide a better income return for paying rent, and a foray back into the housing ownership market deferred, if ownership is wanted in the future.

Other countries (eg: UK) have schemes where capital can be drawn down from the equity in a home and interest rolled up until death and with a no negative equity guarantee (meaning the estate cannot be liable for interest greater than the realized sale value). These schemes though are not so popular as people see it as giving their home away to the mortgage company and denying an inheritance to their loved ones. So, why not sell, invest the proceeds and rent?

The bottom line is that home ownership is not necessarily the best thing, especially in retirement when funds to enjoy life are wanted.

Nov 06 05:59 AM

[enigmaman:]

Now that its becoming very clear that the Admin has thrown in the towel as it relates to stimulating the economy, you do not hear Obama preaching job creation at the same level as in the first quarter, same goes for fighting to stop home foreclosures especially now that you have Fannie and Freddie instituting lease in lieu of foreclosure programs, there answer to foreclosures is they will have none of it, they will take the house back in exchange for a one year lease. I havent thought this policy out but what I feel is this says the Government knows it cant fix the problem, it does not speak well of the economy, is not good for property owners, property values, property appreciation because IMO this will turn into a massive government housing program that will cause more problems than it cures but in the end the Government will be in control of more real estate then is healthy for America. As far as investing in any parts of the industry, Im not seeing any near term benefits, long term what I see is the typical government housing problems that have never helped property values.

Nov 06 06:35 AM

[3percenter:]

There is no such thing as a "homeowner". Stop paying your property taxes and find out pretty quickly who really owns your home. I'm 35 and have never owned a home. I am still renting and am able to put away a good chunk of savings every month. My former neighbors who were also tenants, on the other hand, bought their first home at the peak of the boom and soon realized they were part of the sub-prime borrowers crowd. They are now struggling to stay in their home without a dime left over at the end of every month. The American Dream? No thanks.

Nov 06 06:45 AM

[enigmaman:]

Obama will be more then happy to oblige your request, he will put you in affordable housing, with low rent, and rent control so not to cause you any stress worrying about the future, you both believe in the same same thing, security over opportunity, "You want to go to heaven but you dont want to die, Obama will do what he can to make it happen for you" you just have to keep the faith and hang in their long enough for him to oblige


On Nov 06 06:45 AM 3percenter wrote:

> There is no such thing as a "homeowner". Stop paying your property
> taxes and find out pretty quickly who really owns your home. I'm
> 35 and have never owned a home. I am still renting and am able to
> put away a good chunk of savings every month. My former neighbors
> who were also tenants, on the other hand, bought their first home
> at the peak of the boom and soon realized they were part of the sub-prime
> borrowers crowd. They are now struggling to stay in their home without
> a dime left over at the end of every month. The American Dream? No
> thanks.

Nov 06 07:04 AM

[Marty Boardman:]

Excellent article. Your home is not an investment, it is a place to live. However, I disagree with your endorsement of apartment REITs, at least in Phoenix. Vacancy rates for multi-family complexes here are extremely high because they have to compete with the huge inventory of single-family homes available for rent.

Nov 06 07:23 AM

[LilBob:]

I have to side with Marty on being skeptical of apartment REITs. While I do agree that there are obvious economies of scale presented by multi-unit residences, there is such an enormous backlog of oversized homes that could (and will eventually) be converted to multi-occupant dwellings, and so many multi unit properties sitting in urban neighborhoods waiting to be renovated as soon as rising gas prices prompt more Americans to move back towards the cities that I just don't see any rational demand for new construction; especially when many of those older homes in the cities have hardwood floors, large windows and unique architectural details that make new construction look like a housing project by comparison.

Nov 06 07:32 AM

[datadave:]

Home prices are still way too high in relation to incomes. That's the problem.

Nov 06 07:34 AM

[Shaftsinker:]

If you do buy it's a matter of buying something you can afford. The whole ridiculous McMansion culture is why buying a home suddenly has such a bad name.

Nov 06 07:44 AM

[User 353732:]

1. In certain zip codes, primarily "resort" zip codes people have noticed a trend where fairly large homes are now owned by 2 people who live together. These people may be related by blood(e.g. widowed or spinster sisters or widowed mother and divorced daughter with young children) or by friendship(e.g. 2 middle aged or senior citizen women friends ). This arrangement while no doubt satisfactory while both owners are able to live quasi-independently may well create substantial issues when one owner must monetize the ownership interest to pay for assisted living or move to a long term nursing care facility. Unless, the owners have willed each other their interests(which seems logical) death can create estate problems. Nonetheless, this arrangement is a form of risk and cost sharing that may prove appealing to an aging population with increasingly fragmented or broken or dysfunctional families

2. These zip codes are also seeing the rise of specially built group residential compounds that combine single story or low rise apartments with shared facilities such as large kitchens, dining, living and entertainment areas and front and back yards. The motive seems to cost sharing, companionship, safety and mutual assistance for impaired or aging but unrelated individuals.

3. There is also the re-emergence of the once familiar phenomenon of adult, working , children staying with their parents and paying "rent" and otherwise contributing financially to the household.
In addition, many first generation immigrants seem to have revived the traditional practice of multi-generational living. The old spacious Victorian homes that were once common in America( now country inns or small offices or even restaurants ) were ,of course, designed to house extended families. Multi generational living had and may again have several attractions for a socially fearful, economically compressed and aging and ailing Middle Class.
Multi generational living in large homes that also house a home based small business may become an increasingly attractive model for millions of people: a model that was common just 3 or 4 generations ago.

4. People report that in places where there is a substantial transient or seasonal population, housing is expensive but incomes are relatively low, there is a nascent trend: rooming houses for 8 to 20 plus people, patterned on hostels found in many parts of the Old World or on rooming houses common in many American industrial cities even 65 years ago.

5. Renting may well make financial sense for young families or individuals if these people are averse to high leverage and expect no net benefits from home ownership for the next ten or so years.
For landlords, however, renting may be financially disappointing, even with a small or no mortgage. Property taxes, insurance and maintenance costs continue to mount; renters are not very hesitant to slow pay or not pay ,especially in counties or states where landlord/tenant codes are hostile to landlords and evictions take months. Even with no mortgage, rental properties ,in many cases, may have very meager cash flow ,providing negligible cash on cash returns..... but then so do money market funds and these have no upside.

6. In the near term nominal prices for rental properties may stagnate. However, in the mid term, dollar debasement is likely to propel a flight to real assets, including residential real estate so nominal prices may well start rising in 3 to 5 years to offset dollar degradation.
In the longer term the environment for a real increase in rental residential properties( from end 2009 levels) are favorable assuming new construction remains depressed for another 5 years. The combination of adding 3 million people each year to the population, decaying housing stock , sharp rise in the absolute number of seasonal and multi year renters and,of course, the fall of the dollar suggests that residential rental properties in zip codes with good demographics ought to be a part of investor portfolios , at least for those people who have a long term investment horizon.

Nov 06 07:57 AM

[JR Ewing:]

I have never seen some many people I know on the brink of losing everything or already there. I have one friend and one relative in law living with me because they can make enough to pay rent and would be on the street. A guy that works for me has two jobs and after child support, and health insurance and taxes can't pay his rent, student loans and car payment and will be moving in with girl friend of a month or be on the street.

Bottom line is it has become to expensive to live in the US. Wages are not keeping up with the cost of living. Medical costs of insurance and prescriptions are out of line with incomes. We need either wage inflation that won't come with the large pool of unemployed and lack of manufacturing that is not coming back. The alternative in cost of living deflation that the government is dead set on stopping.

The middle class is dead.

Nov 06 08:32 AM

[Tony Petroski:]

Mr. Shaefer:

Your investment advice is valuable.

Your article neglected one large factor, and one of the reasons the "boomers" bought their real estate:

Real Estate is an inflation hedge. That's one of the reasons it always goes up.

Don't worry too much about the boomers. They'll figure their way through this thing.

Nov 06 08:45 AM

[a fat panda:]

Renting isn't better for the country as a whole because renters do not take care of the property. You are exactly right about renting the home from the bank. When someone's mortgage goes under water, they realize that any improvements that they do to the property accrue to the bank.


On Nov 06 04:03 AM Moon Kil Woong wrote:

> Having too big of home is like renting if you can't build up equity.
> You pay your rent in property taxes and bank interest. Thus renting
> is often better. There is nothing wrong with it. In fact’s it’s suitable
> and prudent based on what you economic situation.
>
> People have really stigmatized renters incorrectly. A renter who
> saves beats a homeowner who doesn't hands down. Furthermore, housing
> prices unhinged from a reasonable multiple to local rental costs
> are really susceptible to price correction 15x is rich. The only
> way rental prices rise is more demand.
>
> Thus rental prices in many ways are the fundamental support to the
> housing market. Not fake low interest ARMs, 3.5% down FMA loans,
> or 30 mortgages at 5.5% peddled by Fannie Mae, Ginne Mae, and Freddie
> Mac at the future cost to taxpayers (when they go underwater and
> get bailed out by the government again from writing these absurdly
> low long term mortgages and buying the bonds from banks).
>
> Thus the only ones who may be laughing all the way to the bank in
> the future is renters to the chagrin of the government and real estate
> brokers. Sure you don't get the giant housing price apreciation gamble,
> but if you want to gamble goping to Vegas seems a lot cheaper these
> days.

Nov 06 09:45 AM

[Windsun33:]

Perhaps it is time to stop preaching that you "must" own a home, and that renting is inherently bad. Perhaps it is also time to stop over-subsidizing homes that in many ways renters end up paying for in higher taxes and higher rents and NO subsidies.

Nov 06 09:48 AM

[enigmaman:]

Using what metric? This is the proverbial" chicken or the egg" dilemma.

Are prices to hi or are incomes to low,
at this stage of the housing game home prices are back to pre bubble times and if we were back then with full employment there would be no housing afford-ability problem.

If prices are to high then incomes are falling below what they were pre housing bubble, so we are then going backwards not forwards in the economy.

Would you prefer that wages catch up with current home prices or prefer home prices move to meet wages.

The first scenario means recovery the other catastrophe, we will not attain the first without jobs being created we can attain the other just by maintaining the status quo. From the actions taken by this Admin it looks like they have chosen the #2 scenario. While this would be bad for the American people it will be good for those in power because from our weakness they will draw strength, its the Golden Rule "Those who own the gold , rule"


On Nov 06 07:34 AM datadave wrote:

> Home prices are still way too high in relation to incomes. That's
> the problem.

Nov 06 09:48 AM

[a fat panda:]

"Just one question:
What makes you think the economy will in fact recover within the next 20 years or so, and what will cause this recovery?"

Innovation. Innovation. Innovation.

Once we get leaders looking inward to produce better products for wider markets instead of looking outward to the hand of the government, our economy will recover. Our markets will reflect the improvement. And we will look back and say, I will never get into debt again - just like they did in the 30s.


On Nov 06 05:40 AM Davewmart wrote:

> A fine article.
> Just one question:
> What makes you think the economy will in fact recover within the
> next 20 years or so, and what will cause this recovery?
> The best I can see is stagnation, as in Japan for the last 20 years,
> and that is on the optimistic side..
> Even under that scenario it seems to me that some variant of your
> suggested strategy might be the best that can be done.

Nov 06 09:49 AM

[woollyB:]

Frankly, the collapse is so widespread I don't know how you identify any REIT to have any confidence in. Even "high quality" REITs are comprised of assets that the originators didn't want, and even if the loans are performing, you have to factor in the impact of fear.

People used to give me a hard time about throwing my money away on rent. Not anymore. If buying a house were a good idea, the government wouldn't have to push us so hard to do it.

Nov 06 09:54 AM

[a. palmer jr.:]

I always thought that if you're going to pay monthly on the place where you live you might as well eventually own it. The only flaw I can see in that idea is that people now (that have jobs) move around with their jobs from city to city and it would be unhandy to have to sell your house and buy another one. If you're staying put I still don't see anything wrong with owning something you can afford.

Nov 06 09:56 AM

[Dave Shafer:]

Where did you get that 80% figure? That is 2 to 3 times the national average. You also forget that real estate is local and therefore those areas you mentioned have large amounts of single family inventory.
Your suggestion of renting is actually a pretty good one for the 75+ crowd, as they are not able to keep up with the maintenance requirements and don't need the sizes of the average single family home.
There is another trend you missed which is for retirees to move into CCRCs which are campuses which have the full range of senior housing from apartments/condos to assisted living to nursing homes. You pay an entrance fee and then a fixed monthly amount. Health Care REITs are the best bet for investing in these facilities [see HCN].

I wouldn't invest in apartment REITs until it is clear what direction real estate is going long term. Homeownership rates are still above long term averages, even though they have dropped 3 percentage points over the last couple years.

Nov 06 10:15 AM

[Arnold Layne:]

Interesting how sentiment is now so negative on homeownership. Oops, I mean homerentership since the bank owns the home, right?
Renters were demonized in the past say some, I don't think so. Maybe looked down upon as not 'having made it', but of course, homeownership was and for most still, I think still the goal. If the metric is whether one will get rich quick, then that is wrong. If the metric is whether one will lose his ass over 10, 15 or 30 yrs, I hope that is also wrong! My metric is will I have a place to live that I enjoy, can call my own [even if I only have 20% equity], modify as I wish, etc for 15 yrs or so, and at least break even. Real interest rates are very attractive.
Renting may make more sense from a financial POV for many, but having done both, I'll take buying when I can afford it, which I can and have.

Nov 06 10:35 AM

[Cyrus the G...:]

This is a great article and you point out some very relevant themes. I too believe that we are definitely seeing a modern-day serfdom, where more and more property is owned by fewer groups of people. You have Fannie Mae, for example, who is going to rent homes back to Americans. That is simply amazing to me.

That is only one example. But the point is that fewer people will own tangible assets; most people will own debt which demands payments.

I am personally in the financial services field and our firm purchases toxic assets. We are seeing fewer banks let go of these toxic assets because they are trying to retain them, restructure the debt, and possibly rent out to previous or new owners. Having this type of power (owning real tangible property) will be scarce in the coming years as fewer people have income, employment, savings, etc.

Again, awesome article.

Nov 06 11:18 AM

[Old Trader:]

The Managing Director(?) of Colony has been on Bloomberg TV a couple of times, over the last 6-8 weeks, or so, and evidently the firm has been very active, of late, buying chunks of property from both banks, as well as distressed developers. It seems they're finding some value at current prices. Thanks for sharing your thoughts!

Nov 06 11:38 AM

[sticktoitiv...:]

3percenter

"There is no such thing as a "homeowner". Stop paying your property taxes and find out pretty quickly who really owns your home."

Stop paying your income tax. The government will actually do your job for you.


I'm not especially bullish real estate, but some of you folks hate real estate like your trying to sell competing asset class or something.

Nov 06 12:43 PM

[robert99:]

On Nov 06 09:49 AM a fat panda wrote:
>Once we get leaders looking inward to produce better products for
> wider markets instead of looking outward to the hand of the government,
> our economy will recover. Our markets will reflect the improvement.
> And we will look back and say, I will never get into debt again -
> just like they did in the 30s.

Indeed.

Nov 06 01:03 PM

[Socialism c...:]

You make the case for the complete abolition of confiscatory taxation!!

fairtax.org


On Nov 06 06:45 AM 3percenter wrote:

> There is no such thing as a "homeowner". Stop paying your property
> taxes and find out pretty quickly who really owns your home. I'm
> 35 and have never owned a home. I am still renting and am able to
> put away a good chunk of savings every month. My former neighbors
> who were also tenants, on the other hand, bought their first home
> at the peak of the boom and soon realized they were part of the sub-prime
> borrowers crowd. They are now struggling to stay in their home without
> a dime left over at the end of every month. The American Dream? No
> thanks.

Nov 06 03:32 PM

[steveusa:]

many Americans, like most people around the world, still dream of owning their very own home-
and if they have an income they can count on, a real low price will induce purchase even now

yes, housing is a disaster now
and Mr. Schaefer's article contains many brilliant points

but it not only overlooks the "dream" of home ownership...
but the new subtext of anxiety holding back home purchasing
by those with steady income

and it is this Consumer Angst that is almost overwhelming ...
but not quite...steady income earners are still buying their "dream" when the price is real low


On Nov 06 04:03 AM Moon Kil Woong wrote:

> Having too big of home is like renting if you can't build up equity.
> You pay your rent in property taxes and bank interest. Thus renting
> is often better. There is nothing wrong with it. In fact’s it’s suitable
> and prudent based on what you economic situation.
>
> People have really stigmatized renters incorrectly. A renter who
> saves beats a homeowner who doesn't hands down. Furthermore, housing
> prices unhinged from a reasonable multiple to local rental costs
> are really susceptible to price correction 15x is rich. The only
> way rental prices rise is more demand.
>
> Thus rental prices in many ways are the fundamental support to the
> housing market. Not fake low interest ARMs, 3.5% down FMA loans,
> or 30 mortgages at 5.5% peddled by Fannie Mae, Ginne Mae, and Freddie
> Mac at the future cost to taxpayers (when they go underwater and
> get bailed out by the government again from writing these absurdly
> low long term mortgages and buying the bonds from banks).
>
> Thus the only ones who may be laughing all the way to the bank in
> the future is renters to the chagrin of the government and real estate
> brokers. Sure you don't get the giant housing price apreciation gamble,
> but if you want to gamble goping to Vegas seems a lot cheaper these
> days.

Nov 06 03:34 PM

[Bob Mayo:]

Charles Schwab (the person) mentioned in one of his books that he rented for much of his life, since his financial analysis of home ownership, in the San Francisco area, didn't show it to be a good deal. Later on he decided that owning a home was an investment in life, and he bought one. By this I assume he considered the home to be a lifestyle consumable. This makes perfect sense to me. For instance, I bought a nice car and am enjoying it knowing full well it is not a good investment, and if I had enough cash I could do the same with a house.

Nov 06 03:38 PM

[MichaelJ007:]

The downside to some of the upscale apartment REITs, is that when housing prices finally bottom out to their actual value they will be bought by investors and rented at or near the same price as the nicer apartments or the renters will come out of their shells (apts) and back into housing. Right now in Atlanta I could by a condo comparable to a POST apartment in the same location/area and pay the mortgage, association fees, and taxes for slightly more ($200-300/mth) than it would cost to rent. FHA loans are only requiring 3.5% down and we all know rates are low and Bernanke will keep them that way for as long as he can. When the Condo/SFH prices drop again by 2Q10 it will cost just as much to rent as to own. the only problem is I'd have to live in ATL.

Nov 06 04:04 PM

[User 438377:]

Mobility is becoming increasingly important in finding work and therefore fits well with your "new dynamic". Several comments have addressed the trend for seniors/baby boomers to eventually live in groups as a way to adapt to the challenging economics of retirement and I fully agree with this trend, whether it's a family group, community group or whatever, it seems like a reasonable path forward. Great article!

Nov 06 05:23 PM

[Boxed Merlot:]

Do you think the owner of your residence paid the property taxes on it out of their pocket? Please.


On Nov 06 03:32 PM Socialism cannot compete! wrote:

> You make the case for the complete abolition of confiscatory taxation!!
>
>
> fairtax.org

Nov 06 06:12 PM

[Boxed Merlot:]

On Nov 06 07:32 AM LilBob wrote:

> I have to side with Marty on being skeptical of apartment REITs.
> …I just don't see any rational demand for new construction;
> especially when many of those older homes in the cities have
> hardwood floors, large windows and unique architectural details
> that make new construction look like a housing project by comparison.

On Nov 06 09:45 AM a fat panda wrote:

> Renting isn't better for the country as a whole because renters do
> not take care of the property. You are exactly right about renting
> the home from the bank. When someone's mortgage goes under water,
> they realize that any improvements that they do to the property accrue
> to the bank.

On Nov 06 09:49 AM a fat panda wrote:

> "Just one question:
> What makes you think the economy will in fact recover within the
> next 20 years or so, and what will cause this recovery?"

> Innovation. Innovation. Innovation.

These older structures with large windows, etc. are the housing equivalent of a 1965 GTO with 3 deuces. I’d be afraid to make the comparison of how many Priuses it would take to allow one of these structures to remain inhabited for a year. But, first things first, cash for clunkers, re-election, extended unemployment benefits, re-election, free health care, re-election, etc…

Nov 06 06:41 PM

[The Dark Years:]

Without cheap oil there never would have been an explosive growth in housing, but we did have cheap oil for a very long time. Suburbia grew and with it home ownership. It was desirable to move into the inexpensive hinder lands of major cities because with cheap gas and a good road system it was cost effective to get to a far away job. We would all do well to remember that American society, and it's great wealth has been, and remains based on cheap oil.

Underlying the economic turmoil of recent years is the dawning reality of peak cheap oil and the impact of raising costs for the product. As availability of oil declines and demand increases prices will climb and BRIC countries will outbid us for the resource we need to maintain growth. If the economy does not grow we will likely not be building huge tracts of new homes, and neither the working class, nor the middle class will be able to afford to buy much of anything. Credit worthiness for many has been destroyed and clearly the situation is not improving so where will the credit come from? More than likely it will be a long road back to climbing wages (and employment at more than minimum wages) with consumers being able to rebuild their shattered FICO scores. It could also be a long time before banks again lend. So I just do not see a very rosy future, especially since no one seems to factor in the Black Swan of oil price shocks resulting from a decline in world production. Such an event would have a very profound impact on builder's development plans, prices for homes built, and rental values such that there "may" not be any wise strategy to follow.

Nov 06 07:19 PM

[davidbdc:]

A lot of good comments. I'm not sold that the apartment reits are a great value. I do agree that MAA seems to be solidly run and it does pay out a 5% dividend.....if it goes below $40, maybe closer to $35 then I would agree its a good buy.

But I don't believe that people really have any interest in renting in apartment communities....they are just there for a period of time before moving off to something better, or as the article points out on to the next job.

And one thing that I see happening more and more is that people are renting out parts of their houses......I myself spent 3 years renting a converted basement when I was younger. So even though I agree with the premise that younger people are going to be less likely to buy as soon as they can......I don't think it equates with more demand for apartment communities.

And the other thing that isn't mentioned is that apartment renters are more likely to be in the type of jobs that have been hard hit in this recession. Less of them are college educated. When people lose their homes they now are usually in the position of being unemployed and they won't be able to move into an apartment - its off to friends or relatives. For those with families that still have income they will try to move into some type of house to keep continuity for their children...apartments would be a last choice.

Of all the choices, I think buying a big old house with multiple bathrooms and renting out rooms to early 20 somethings is the best bet. Find something for 100K and get 4-5 renters at $400 per month and your in business.

Nov 06 08:44 PM

[a fat panda:]

Box,

AHHHHHHHHH! Listen to yourself. It is a 65' GTO now. INNOVATE! INNOVATE! INNOVATE!

We are trying to sell our current house. It is configured for a family with 1 kid max. We recogfigured the office, and designed it for a 4-6 year old boy. For $2,000, we now opened an entirely new market for the same house.It now will appeal to people with 2 kids provided that one of them is under 7. Innovation isn't just Silicon Valley. It is making your products better and opening new markets.

Our country is led by people who look at the house as what it is instead of what it could be. They look at a house and see a "1965 GTO with 3 deuces.". They are willing to compete solely on price because they lack the imagination to do more.

On Nov 06 06:41 PM Boxed Merlot wrote:

> On Nov 06 07:32 AM LilBob wrote:

Nov 06 08:47 PM

[Chancer:]

If Obama, Pelosi, and the rest of the liberal Democrats have their way, we will become a nation of renters and public transportation commuters with few Americans owning homes and cars. They want us to be just like Europe.

The way there will be a value-added-tax in Obama's second term (if re-elected) which will cause a huge increase in the cost of living, decrease living standards, and stop Americans from saving or accumulating wealth; causing more and morer people to live paycheck to paycheck and to become more dependent on handout from a socialist liberal Democrat government.

Nov 06 08:50 PM

[dondon:]

I sold in 2005 and have rented ever since. I'm paying less than my last mortgage and live in a larger home. My hot water heater went out last week. I called the landlord and he replaced it. It cost me nothing. Renting is a good option until house prices start to rise again.

Nov 06 09:27 PM

[Wyatt Junker:]

Home ownership will be a rare commodity in the future, and yes, I did say 'commodity' since it will track and rise with inflation like all other inflation protected assets like oil and gold. You damn well BETTER get into home ownership now because you will never afford it in 3 to 5 years once inflation hits and interest rates soar!

With historical 5.15%, 30 yr. fixed opportunities, if you don't own a home you are a fool.

I fear for renters. Those costs will sky-rocket along with everything else!

Meanwhile, me in my little old house with my little old locked-in low fixed rate and inked(past tense) bank note that will look piddly as inflation zooms, will rejoice and practice a wild form of prayerful gratitude that God was kind to me to have a roof over my head.

And I'm not even a broker or an agent. I'm just someone who owns a home.

Rent at your peril.

Your window is about to close for good.

Nov 06 11:43 PM

[Wyatt Junker:]

Remember, landlords will and can raise rents. And they will when inflation forces their hand.

Also remember, interest rates will crush everyone who didn't get in while they had the chance and they can't get any lower than right now. They will only go up from here.

Nov 06 11:46 PM

[Davewmart:]

In reply to my question:
"Just one question:
What makes you think the economy will in fact recover within the next 20 years or so, and what will cause this recovery?"

A fat panda replied:

'Innovation. Innovation. Innovation.

Once we get leaders looking inward to produce better products for wider markets instead of looking outward to the hand of the government, our economy will recover. Our markets will reflect the improvement. And we will look back and say, I will never get into debt again - just like they did in the 30s.'

I agree. However it seems to me that it will take around 20 years for this to kick in powerfully enough to get any real growth.

Not only do debts need to be paid down, which on the personal level takes time, but the completely unsustainable liabilities governments have taken on need to be resolved somehow.

To use figures which I am more familiar with, those of the UK, the present national debt is likely to be increased by around £1.5 trillion to pay for the banks cock-ups:
www.telegraph.co.uk/fi...
(Note also in this informative article that the Bank of England sees the banking crisis recurring if real reform is not carried out - a notable divergence from the Fed's stance)

To this must be added around £1 trillion of unfunded public pension liabilities.
The GDP of the UK is around £1.5 trillion, with a lot of that provided by financial services.

This mess will not be sorted in less than 20 years.

Although perhaps not quite as dire as the UK's position, the US is not far enough behind to see any easy way out.

To these considerations must be added the fact that the era of cheap oil is over.
We aren't suddenly going to be totally without oil, but what we get will be both expensive and scarce, at least if the world as a whole climbs out of recession at all.
Oil prices will rocket and knock any recovery on the head.

The green lobby are being entirely unrealistic in expecting renewables to contribute in a decisive way at any affordable cost.

The desertec proposal, for instance, to get solar energy from the Sahara for Europe, may, it's proponents argue, be able to contribute maybe 15% of Europe's energy needs, for perhaps $500 billion - and not until around 2050.

The only ways of providing the energy we need are to either continue to burn coal, with some contribution from on-shore wind, or to have a massive nuclear build.
Since the nuclear industry has been so thoroughly disembowelled in the West, ramping up wil take time.
It should be noted that China is already massively increasing it's nuclear build, as well as wind turbine build.
Shifting the car fleet to use electricity rather than oil will also take time.

We haven't even started on most of the measures needed, and unrealistic prospectus's abound, from renewables to lack of reform of the banking and health care sectors.

A haitus of 20 years in the West before growth can resume seems to me to be optimistic.

Nov 07 01:05 PM

[ryanclarke:]

The X-Gen and Y-Gen generation were "trained" by their baby boomer parents that, "to buy a house on CREDIT is a good thing. It is a good thing because all you need to do is look at us and how well we are doing ... even though mom and dad haven't lived in the same house for years."

The article's author wrote, "Because of this, I see Americans becoming far more willing, whether by circumstance or choice, to rent rather than own."

My response is, "when the middle class of America is informed that even a 'chance' at owning the property in which they sleep at night is extremely remote ... the middle class won't rent ... THEY WILL REVOLT!"

Nov 07 01:06 PM

[a fat panda:]

"I agree. However it seems to me that it will take around 20 years for this to kick in powerfully enough to get any real growth.... a haitus of 20 years in the West before growth can resume seems to me to be optimistic"

With the way we allocate capital it may take forever. I don't know what it is like where you live, but where I live TARP-funded banks are only too willing to sit on depreciating assets. So capital just sits idle while business can't get a loan.

We are talking about two different levels of innovation. I am looking at it from the entire platform. Everyone needs to do a better and faster job. Here is an example of innovation at work. Every year my car battery dies, and each time AAA sent a tank sized tow-truck to my house. Someone realized that was a waste of a tow-truck. They repriced the service, and sent a guy over in a 15 year-old Honda. The service arrived hours faster, and I was back on the road. Thank you innovation.

I don't disagree with you. I do suspect that my children will have children before the S&P is at its inflation adjusted peaks. Basically it will be a long time before we are as rich as we thought we were.


On Nov 07 01:05 PM Davewmart wrote:

> In reply to my question:
> "Just one question:
> What makes you think the economy will in fact recover within the
> next 20 years or so, and what will cause this recovery?"
>
> A fat panda replied:
>
> 'Innovation. Innovation. Innovation.
>
> Once we get leaders looking inward to produce better products for
> wider markets instead of looking outward to the hand of the government,
> our economy will recover. Our markets will reflect the improvement.
> And we will look back and say, I will never get into debt again -
> just like they did in the 30s.'
>
> I agree. However it seems to me that it will take around 20 years
> for this to kick in powerfully enough to get any real growth.
>
> Not only do debts need to be paid down, which on the personal level
> takes time, but the completely unsustainable liabilities governments
> have taken on need to be resolved somehow.
>
> To use figures which I am more familiar with, those of the UK, the
> present national debt is likely to be increased by around £1.5 trillion
> to pay for the banks cock-ups:
> www.telegraph.co.uk/fi...
>
> (Note also in this informative article that the Bank of England sees
> the banking crisis recurring if real reform is not carried out -
> a notable divergence from the Fed's stance)
>
> To this must be added around £1 trillion of unfunded public pension
> liabilities.
> The GDP of the UK is around £1.5 trillion, with a lot of that provided
> by financial services.
>
> This mess will not be sorted in less than 20 years.
>
> Although perhaps not quite as dire as the UK's position, the US is
> not far enough behind to see any easy way out.
>
> To these considerations must be added the fact that the era of cheap
> oil is over.
> We aren't suddenly going to be totally without oil, but what we get
> will be both expensive and scarce, at least if the world as a whole
> climbs out of recession at all.
> Oil prices will rocket and knock any recovery on the head.
>
> The green lobby are being entirely unrealistic in expecting renewables
> to contribute in a decisive way at any affordable cost.
>
> The desertec proposal, for instance, to get solar energy from the
> Sahara for Europe, may, it's proponents argue, be able to contribute
> maybe 15% of Europe's energy needs, for perhaps $500 billion - and
> not until around 2050.
>
> The only ways of providing the energy we need are to either continue
> to burn coal, with some contribution from on-shore wind, or to have
> a massive nuclear build.
> Since the nuclear industry has been so thoroughly disembowelled in
> the West, ramping up wil take time.
> It should be noted that China is already massively increasing it's
> nuclear build, as well as wind turbine build.
> Shifting the car fleet to use electricity rather than oil will also
> take time.
>
> We haven't even started on most of the measures needed, and unrealistic
> prospectus's abound, from renewables to lack of reform of the banking
> and health care sectors.
>
> A haitus of 20 years in the West before growth can resume seems to
> me to be optimistic.

Nov 07 02:58 PM

[chris coonan:]

Renting would have been a great option for me. I sold my house with 250k in equity in Minneapolis, and bought a house at the top of the market in California in 2005....and then lost 13 years of equity in 2 years.

If I only had rented!!!

And then I had to move in 2007, so I lost everything...and I am sure that a lot of others followed in my footsteps.

Renting would have saved me two hundred and fifty thousand in two years.

Nov 08 01:15 PM

[Karldean:]

The Waltons?

Nov 20 08:58 AM