Buying Opportunity Ahead
There is a saying on Wall Street, “Bulls make money, Bears make money, Pigs get slaughtered.” Right now, we are in ‘pigs get slaughtered’ territory. The only people buying now are Greater Fools blindly buying because prices have always gone up.
Housing markets, whether they be single family, multi-family, high end, low, end, Class A, Class C, have been distorted beyond all functional recognition, and are decoupling from the natural forces of supply and demand thanks to intervention of monetary stimulus by the Federal Reserve.
High end single family sales are growing, while mid to low end single family sales are cratering. Roughly 30% of US single family sales are cash sales, with increasingly foreign buyers now that the Chinese credit bubble is going ”pop”, and the Greek exit of the EU unfolds.
Multifamily, be they Class A, B, or C are at peak valuations thanks to land value adjusting to years of Fed driven monetary stimulus. In the case of Class C apartments, occupancy rates are at all time highs thanks to falling real incomes and increasingly fewer people able to afford a home.
After six years of Federal Reserve money printing, the result is a Frankensteinian economic monster, riddled with unintended consequences and serving no-one, except those at the very top.
To get an idea of how absurd things have become, have a look at the price chart for the Standard and Poors 500 Index, which serves as a rough barometer of US economic health.
To the left of the chart you can see how the ’87 crash (Black Monday) and the S&L Crisis are these quaint little blips compared to the economic expansion, and corrections, that follow.
The Dotcom boom marked massive venture capital investment, and even more massive a consumer spending as everyone bought PCs and began integrating technology into their lives.
Importantly, but largely unnoticed, in 1998 Long Term Capital Management blew up. LTCM was the world’s largest hedge fund at the time, and it’s failure should have taken down most of the big Wall Street Banks. But Alan Greenspan came to the rescue, printed money, bought out LTCM’s losing positions and allowed the banks involved to survive. This act put in place the understanding on Wall Street that became known as, “the Greenspan Put”. Aka: Be as irresponsible as you want to be with your financial shenanigans, I will always be here to bail you out.
Because the massive lapse in judgement demonstrated by LCTM doesn’t reflect well on Wall St Elites, it didn’t receive much attention at the time. Plus, the Dotcom boom was still in full swing.
In 2000 though, ridiculous valuations made even Greater Fools wary, and VC’s stopped funding ridiculous IPOs. (If you remember, David Bowie tried take “himself” public in 2000. J) And the Dotcom crash followed.
Real estate investors weren’t heavily impacted by the Dotcom crash, unless you were in San Francisco, or Santa Clarita County. There was a dip, though not the crash that stocks experienced.
In 1999, a merger between Citigroup and Travelers Group was held up by Glass Steagall; the law passed in 1933 that placed limits on the securities trading activity commercial banks could engage in, and the affiliations commercial banks could have with securities firms. Due to Travelers Group having recently acquired Salomon Smith Barney (bond trading, see Liars Poker), this was a problem.
Not a big problem though. The Travelers CEO, Sanford Weill, put a call in to his lobbyist attorneys and soon after President Clinton was saying that the Glass Steagall law is no longer appropriate, and the law was repealed with the passing of the Gramm Leach Bliley Act.
This, along with the deregulation of derivatives, led shortly to the concoction of Credit Default Swaps (CDS), Collateralized Debt Obligations (CDO), Synthetic CDOs, and by 2004 the Housing Boom was well under way.
The craziness of the mortgage market was probably the most prominent feature of this period. The omni-presence of Di-Tech.com on TV, sub-prime, low doc, no doc, liar loans. The huge fraud that it was, in October ’08 it all came crashing down.
With Wall St being connected to real estate via the mortgages it was packaging, when the correction arrived, property values crashed along with the overall economy.
**Important for us to observe; the very bottom price tick of the S&P Index in January ’09 coincided with some of the best multifamily buying opportunities in decades.
Fear was rampant in banking. There was the bailout, but there was still a lot of uncertainty. Foreclosures in all asset classes were increasing every month, Asset Managers were overwhelmed and multifamily REOs were being let go at prices that were 10-20% of what they were just a year earlier.
Throughout 2009, with banks fighting for their lives, and not knowing what would happen, it was buying season. If you were wholesaling apartments, and in the market, deals were everywhere.
We are approaching a similar time today, in mid-2015 that we were in mid-2008.
The Zero Interest Rate Policy implemented by the Fed has inflated every asset class, real estate included, way beyond natural supply/demand market forces, and is at the end of its rope. Banks are far bigger now, due to the post ’08 consolidation, but also more fragile.
A price correction is looming, and when it happens, it will be “Buying Season” once again for apartment entrepreneurs.