Once the Genie Is Out of the Bottle, She's Out!(Those with cash should invest in real estate now)

The statement above means: once people learn how to make money in residential real estate, there is no going back. Many people believe that real estate as an investment is dead, buried and never to be seen again, but I sincerely believe they are wrong. As I write this, there is a new class of millionaires-in-training who are preparing to get wealthy in real estate. They are buying all the foreclosures, in good areas, they can find. About 3% of the population is busy in this enterprise and about 30%, 10 times more, are people who will tell anyone who will listen that real estate investment should be talked about only in retrospect. Let them talk, while the smart ones are out there. Oh, by the way, not all the smart ones are Americans. Many from across the pond are here spending like they have 50% more money than they do…well actually they do as many currencies have a very positive exchange rate with the dollar.

Why am I so sure about real estate investment? During my early financial training in the securities business, I watched a small-business environment become a mega-industry, showing how great wealth can come from inauspicious beginnings. When I was active as a stockbroker in the 1960s, the number of shares traded in a day would not quite equal the number of shares traded in a minute today. A billion shares change hands each day the markets are open now; about 6 million changed hands then. The ‘60s even had a mini stock market crash and managed to get up to 28 million shares May of 1962. How could this almost 100-year-old business become a giant in its most recent decades? I will be happy to give you my eyewitness account.

The mutual fund industry came to life in those swinging ‘60s. The growth of the Fidelity Group of Funds, for instance, was so phenomenal that one of the fund managers, Gerald Tsai, became a superstar and launched his own fund that was oversubscribed upon the offering. How could this happen? Thanks to mutual funds, ordinary people, not just bankers and corporate presidents, could take advantage of the stock market by making small investments, and they did in droves. In turn, the mutual funds would buy the common stock offered on the stock exchanges and volume started to build. From here, Congressman Keough authored the House of Representatives HR-10 bill which became law and the Keough accounts for retirement were born. Today they are better known as IRAs. Once the ball got rolling, there wasn’t any stopping it and people found the stock market a fine place to invest their money thanks to the new-found security and simplicity of mutual funds and IRAs.

The stock market had its setbacks as well and people lost money, swearing that not only would they never invest again, that the stock market would never rise again. Wrong! But it does sound familiar. As volume grew, the brokerage houses began inventing some of wildest investments commonly known as derivatives and the rest is history. A billion shares a day is nothing to sneeze at and we are only just beginning. In the 1990s, the Internet craze hit Wall Street and the “new economy” pushed even the poorest of Americans to find a way into the market and receive riches beyond their wildest dreams.

At the dawn of the 21st century, Wall Street ran out of steam and all the riches started to look like “fool’s gold.” People pulled out, gains turned into losses, and the stock market came down. Again the thought was “it’s over and it isn’t coming back.” For the general public, “never” lasted only about four or five years. That’s when investors and stock market gains returned.

Now let’s take a look at real estate. I bought my first house in 1968 for $37,500, and five years later I sold it for $43,000. It took 6 months to sell, which wasn’t unusual at the time, and the profit was about right. I bought a bigger house for $44,000 and 3 years later I sold it for $72,000 over a weekend. Wow! How did I yield that tremendous return? Inflation, inflation, inflation! What got it going? Believe it or not: oil. It came with an embargo that drove prices up. Houses couldn’t be built for the same costs because building materials were spiking. Sound familiar? Starting in the early ‘70s, everything went up in real estate in Southern California until the late ‘80s and early ‘90s when the aerospace industry, one of the largest employers in the state, stalled with the end of the Cold War and moved to less-expensive states, triggering a mini-recession. Prices fell and didn’t return until the middle ‘90s. What helped bring the market back was the Federal Reserve cutting interest rates and ushering in 30-year lows in rates in 1993. By now you must be getting the picture.

The turn of the century also brought an unprecedented attack on our shores that changed a stock market recession into the beginnings of another bull market in both the stock market and the real estate market. What facilitated this was another drop in interest rates by the Federal Reserve to 40-year lows in the early 2000s and we took off, full speed ahead, until we hit the wall. Is everything the same as it was in all the earlier times? Not exactly, but we are a pretty smart nation and we will figure out how to get rolling again. If it doesn’t appear to be happening, check the underlying data and you will see that we could be close to or have already hit the bottom in a number of real estate markets. The fact that real estate is more a local phenomenon and the stock market a national one should be noted as some real estate markets will soar from this point and some may never rebound.

Five to ten years from now, we will look back, wonder what the fuss was all about, and ask why we all didn’t take advantage of the opportunities. That also never changes because as they say, hindsight is 20/20.

I have tried to paint a picture of the investment world and why we always say it’s changing while it basically remains the same. At least now you can tell the “naysayers” to take a hike and feel confident, based on history. Like I said, the genie is now out of the bottle. I’ve told you why you should be investing in real estate. There is no going back. Time to make your wishes come true!

Yup. Had a few exchanges with folks who believed that their house were located in Naples FL. or Los Angeles, or wherever, that a house that was not affordable was not affordable and the sooner of later, there would be a reversion to the mean.

More recently, I had a conversation with a good friend from Yorba Linda CA who had advised that I purchase a house immediately in mid 2006. This August, he was lamenting that his ["can't lose"] house was dropping in value at about 20K per month.

Houses should not be considered to be investments in the usual sense. If you are in a good area, buy at a reasonable price / opportune time, and the USG continues to debase the currency, you will come out better than if you have rented on average ... and if you are wise enough not to become entangled with a home owner's association, you might actually gain a measure of freedom by owning rather than renting.

However [big time] even with tax breaks, in the words of Robert A Heinlein, there is no such thing as a free lunch.

.... there is no possible way someone without a credit history and a low to no down payment like illegal aliens received loans. No mortgage lender would loan them money without the ability to track their past residential history much less credit history with no guarantees where they would be living in the future.

Loreldan,, you don't seem to understand the mortgage dynamics of the past several years.

What happened was a scam, a con game, a swindle.

Specifically, it was a classic Pigeon Drop " in which a mark or "pigeon" is convinced to give up a sum of money in order to secure the rights to a larger sum of money, or more valuable object. In reality the scammers make off with the money and the mark is left with nothing."

The "pidgeon" of this scam was the mutual fund manager of your own 401K. Therefore, you, loreldan, by proxy, were the pidgeon.

The illegal aliens, the deadbeats without jobs or very low paying jobs or the middle class guy with a middle class job borrowing three times more than he could afford to repay were merely the tools of the scam.

The mortgage mess was created by loan brokers who were not lending their own money. They were just creating phony Pidgeon Drop mortgages to sell to gullible investors. Let's be clear here. That "gullible investor" was NOT the house "buyer". It was a mutual fund manager in maybe your own 401K or a foreign investor wanting to invest in the U.S.

At the time, the stock market was not red hot like it was during the Tech Bubble and interest rates on CD's were pretty low.

However, Americans were lining up for big mortgages that they promised to repay at a good interest rate after a few years at an introductoray "teaser" rate.

As a long term investment, those mortgage loans seemed pretty good and Wall Street's customers wanted to buy them up.

So, loan brokers would write up mortgages, they would be bundled up in financial instruments and would them be sold off to your 401K manager or to that foreign investor.

Everytime that happened, the loan broker would get a good commission.

Life was good for a loan broker.

There was one problem, however. Although there was a high demand for that product and investor wanted to buy more and more of those mortgage loans, the supply of credit-worthy borrowers was running out.

What to do?

Simple.

Just sign up borrowers without a snowball's chance in hell of repaying the loans. Mix those loans up with better loans in a package and they will still buy them up like hot cakes on Wall Street.

So, the loan brokers started creating mortgages by getting anybody, ANYBODY with a pulse (and even some dead people without pulses, as investigators discovered) to get their names on mortgages. The worthless mortgages were then sold to eager Wall Street investors, maybe the manager of your own 401K.

As the demand for these "great investments" grew, illegal aliens, native born Americans without jobs or good credit, people with good credit wanting to borrow three times what they could actually repay to buy a house at three times the price a real market could actually bear and even dead people had their names put on these Pidgeon Drop mortgages.

And Wall Street's customers just kept buying that worthless paper up.

For the loan brokers, it was just like writing a commision check to themselves, having a drunk downtown sign it, taking the check to your 401K manager than then having your 401K manager give him your 401K money in exchange for that check.

That is why loan brokers were getting filthy rich.

Every time such a worthless Pidgeon Drop mortgage was sold on Wall Street to a 401K mutual fund manager ....KA-CHING..... the loan brokers got richer with commissions.

The loan brokers who rounded up illegals and dead people's names to put on the dotted line for "loans" they could never hope to repay knew exactly what they were doing: They was swindling YOUR mutual fund manager out of YOUR money and they knew it.

How's your 401K doing lately?

The mutual fund managers and investors around the world, plus the legions of Freepers who used to argue that there was no such thing as the Housing Bubble all swallowed the loan broker's Pidgeon Drop swindle hook, line and sinker.

The loan brokers who left the game early got filthy rich. The ones who stayed in the game too long are now in deep kimchee because the "pidgeons" wised up and are no longer buying their worthless product.

Before you invest in real estate anymore, you need to ask a simple question: what is it *really* worth?

It’s not hard to figure out. Take the price of the land itself, which you shouldn’t base on land with a house on it, but an empty lot in the area.

What’s it going for?

Then look at the parts of the house: foundation, lumber, drywall, plumbing and sewer, electrical, doors and windows. Add labor costs. Most suburban residential homes are *really* worth about $125,000.

So why are them priced to sell at $500,000, and note that they are not selling at that price.

Importantly, even if foreclosed, they might be sold at auction for $350,000.

But is that worth it? If so, why? Just because somebody says that it is worth it?

The zinger is that such homes sell at high prices *only* because of easy credit to so many people that they are willing to pay two or three times the real value of the house.

And what if credit stops being so easy?

Yep, no doubt that a lot of people still think the old days are still here, and that house prices will keep going up. The old expression for people like that is “Rubes”.

1.The baby boomers are done buying houses to raise their kids in.

Don't their kids need to buy houses to in turn raise their kids in ? Or are they going to rent for the rest of their lives ?

One in five US women remain childless in life (pops). There may not be a need for as many houses.

Part of the recent runup in prices was due to bubble behavior in lending, and due to Mexican illegals buying houses on no-doc lending, and people buying houses on spec.

Once the prices come down to a more reasonable level, won't the following people start buying?

A) Legal Immigrants

Maybe, but they will not be able to do it with liar loans, "no money down" deals, crazy ARMs, or anything like that. Expect the mortgage market to tighten and that alone will keep a lot of people out of houses. Which is how it should be.

B) Those who have been saving to buy a house

Those people should be able to buy houses assuming they have good credit.

C) Foreigners with cash

I don't know. If you mean "for investment", do foreigners buy houses as opposed to commercial real estate?

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