Buy a House!

04/06/12 Baltimore, Maryland – A little more than a year ago, a very successful professional investor declared, “If you don’t own a home, buy one. If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home.”

Since that declaration, house prices have continued drifting lower in most parts of the country. The Case-Shiller index of national home prices is down about 4% year over year. Even so, we’re betting this professional investor was merely early…not wrong. US housing isn’t just cheap; it is the cheapest it has been in more than 40 years. And when one considers the possibility that inflation may rear its head soon, housing looks even cheaper still.

If you think we’re crazy, you’re not alone. The housing market is a complete bust right now. The following chart shows the median home price in terms of per capita disposable income. Based on this calculation, home prices are lower than they have been in 40 years!

And it isn’t just that home prices have fallen a long way. For most home buyers, the price of the home is only one part of the true cost of a home. Mortgage rates matter as much, or more, than the purchase price itself. In other words, buying a house is not just a bet on real estate; it is also a bet against interest rates. For the typical buyer of a home who takes out a 30-year mortgage, an increase in interest rates is just like an increase in the price of a home.

Today, because home prices and interest rates are both at extremely low levels, the cost of buying a home with a 30-year mortgage is at an all-time low. To illustrate this stunning fact, the chart below shows the average monthly mortgage payment on the median-priced home, expressed as a percentage of per capita disposable income.

If you can get a mortgage, you are basically taking a reverse bet on the bond market. You could be a long-term borrower at fixed rates, instead of a long-term lender. Right now, you can borrow for 30 years at around 3.3%. After the mortgage tax deduction, for some people the net effective interest rate is nearer to 2%! That’s going to prove an awesome deal if we see inflation again.

But here’s the factor that clinches the case for investing in residential real estate: the long-term supply and demand for housing. Let’s start with supply.

Consider how long it will take to bring new supply to the market. As investors, we want new supply to come slowly.

The number of housing starts is currently lower than at any time in at least the past 50 years. Moreover, new construction is only about half the long-term average. Again, good news for investors in housing, since this means that new supply is growing very slowly.

Meanwhile, housing demand — based simply on demographic trends — should rise inexorably for years to come. Take the growth in households — driven by population growth — and apply a home ownership rate. Demographically, the US is still a growing country. By 2030, there will be 370 million Americans. Even using the long-term average home ownership rate means we’ll need 1.1-1.2 million new single-family homes per year.

In other words, busted markets don’t last forever. The cure for low prices, as the old saw goes, is low prices. Furthermore, a bet on the housing market is not merely a bet on real estate; it is also a bet that inflation will rise.

The US economy may be idling in neutral for the moment, but inflation is revving its engines. How should you prepare?

“Buy gold” is the time-honored answer, and we don’t quarrel with it. But an alternative answer, especially this time around, might be: “Buy a house.”

That’s the advice offered by a growing — but still small — number of very successful investors. John Paulson is one of them. He is the guy who said about a year ago, “If you don’t own a home, buy one. If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home.”

He was early…and his hedge fund performed very poorly last year, mostly because he was too early betting big on a rebound in the US economy. Double wrong! But we still think Paulson’s call on housing may be close to the mark.

Despite his dismal performance in 2011, Paulson is the guy who turned one of the greatest trades of all time. Betting against the housing market, he netted a cool billion dollars for himself in 2007. One fund he managed rose 590% that year. Today, he is one of the richest men in America…still.

His advice today is very different than it was in 2007. “Buy a house,” he says.

And he has put money where his mouth is…He already owns posh digs in Manhattan on 86th Street, plus a Southampton house he nabbed in 2008. In 2010, he snapped up an 8-acre ranch in Aspen for a cool $24.5 million, before buying a Fifth Avenue condo at a 23% discount to the asking price. (This 26th-floor pied-à-terre will be his “guest house.”)

Let’s flash back in time for a second…

Another successful investor gave similar advice in 1971 — the dawn of one of America’s biggest housing bull markets. The investor was Adam Smith (George Goodman) on The Dick Cavett Show. Here is a snippet from that conversation:

Smith: The best investment you can make is a house. That one is easy.

Cavett: A house? We were talking about the stock market. Investments…

Smith: You asked me the best investment. There are always individual stocks that will go up more, but you don’t want to give tips on a television show. For most people, the best investment is a house.

Cavett: I already own a house. Now what?

Smith: Buy another one.

How good was that advice?

Houses, as an investment, trounced stocks during the inflationary 1970s. The chart below tells the tale.

In the 1970s, US stocks returned about 5% annually — failing to keep pace with inflation. Still, it was an up-and-down ride. In 1974, the stock market fell 49%. But here are the average selling prices for existing homes in the 1970s, as inflation heated up:

1972 — $30,000

1973 — $32,900

1974 — $35,800

1975 — $39,000

1976 — $42,200

1977 — $47,900

1978 — $55,500

1979 — $64,200

That was a pretty impressive run-up in home prices. Today, I think we could be on the threshold of another once-in-a-generation buying opportunity in the housing market.

The homebuilding stocks seem to agree. Many of them have doubled during the last five months from their very depressed levels. Although the ISE Homebuilders Index is still down about 80% from its 2006 peak, it has been gaining steady ground relative to the rest of the stock market.

The chart below shows the rolling three-year price performance of the S&P 500 index, minus the rolling three-year price performance of the ISE Index. As you can see, the ISE has been lagging far behind the S&P 500 for most of the last five years. But during the last few months, this index has been closing the gap…and looks like it is about to begin a period of outperformance relative to the rest of the stock market.

So we like select homebuilding stocks, but we don’t love them. Unlike the housing market itself, homebuilding stocks have priced in quite a bit of good news already. Not surprisingly, therefore, the insiders at these companies have been doing a lot more selling of their own shares than buying. (Pulte is one conspicuous exception.)

We also like housing-related stocks. As Chris Mayer, our colleague over at Capital & Crisis, observes, “Companies such as Lowe’s (LOW) and Home Depot (HD) would benefit from a recovering housing market…as would the makers of flooring, Mohawk Industries (MHK), the makers of kitchen cabinets, Fortune Brands Home & Security (FBHS) and a whole bunch of stuff in between…In a robust housing market, good fortune would also smile on A.O. Smith (AOS), which makes water heaters for homes.”

But again, we don’t love these stocks. Not at their relatively rich valuations. Even so, we’ll be combing through this sector very carefully for promising investment ideas. In the meantime, for those with the means and the inclination, the best buy in the housing sector is an actual house!

This picture is unequivocal. US home prices are very, very cheap today. “Cheap” does not preclude “even cheaper,” of course. Home prices could certainly continue sliding. But even if that were to occur, mortgage rates might begin rising, which would cause the effective price of a home to increase.

Obviously, buying residential real estate at both a housing market low and an inflationary low would be the optimal entry point — in fact, it would be a screaming buy. And that’s exactly what today’s circumstances seem to be offering.

Perhaps that’s why a large number of very successful professional investors are licking their chops over opportunities in the US residential real estate market.

This out-of-favor asset class has attracted the attention of David Ackman, a hedge fund manager with a fondness for contrarian investments. He calls them SFHRPs, an acronym for “Single Family Home Rental Property.”

“The best investments we have made are the ones no one else would touch,” Ackman explains.

As housing prices have continued drifting even lower, Paulson and Ackman have picked up a little bit of company. The US housing market is becoming a central focus of several “deep value” investors. Over the past weeks, I’ve bumped into three very successful professional investors who were much more eager to talk about their real estate investments than about their stock market investments.

One gentleman in particular, who has made billions of dollars for his investors by buying deep value stocks, was much more eager to talk about his recent real estate investments than his recent stock market investments. He was talking glowingly — if not giddily — about the opportunities in real estate he was coming across.

“I’m not finding much to buy in the stock market at the moment,” he explained. “But real estate is a different story. I wish I had the capital to act on more of the ideas that are coming across my desk.”

We asked this investor if he was concerned about the risk of real estate prices falling even further.

“Nah,” he said as he waved the question aside, “I assume the housing market will remain soft for a while. But the kinds of deals we’re finding should work out well, even if the housing market keeps sliding for a bit. Besides, there’s one lesson I’ve learned repeatedly as a value investor in the stock market: You can have good news or cheap prices. You can’t have both.”

The US housing market has absolutely no good news…but plenty of cheap prices.

Regards,

Addison Wiggin & Samantha Buker,

for The Daily Reckoning

Home #1

4950 Makena Road, Lot 9 is a 4 bedroom/4 bathroom residential condominium in the Makena Place subdivision. It is a detached single family home, however, they are set up as condominiums with an association and dues. The home is situated 40′ from the ocean and was sold fully furnished. It was on the market for 252 days, it sold for $8.1M, and was originally listed at $8.788M. The home consists of 3,717 square feet of living space with an additional 743 square feet of covered patios.

Home #2

7640 Makena Road is a 2 bedroom/3.5 bathroom “hawaiian style” home. As you can see, it is situated on a private promontory and surrounded on 3 sides by the ocean. The home isn’t for everyone, but for the right buyer, this could be as close to heaven as you can get! It’s only 3,000 square feet, but it also has an additional 1,400 square feet of covered/uncovered patios. It was on the market for 554 days, sold for $4.8M, and was originally listed at $6.495M.

Home #3

4541 Keoneoio Makena was sold before it was listed. It has 6 bedrooms and 6.5 bathrooms all under 6,901 square feet. Now, hold on to your hats people; it sold for a cool $15M.

These sales occurred in mid-December, so perhaps the rush was on to find a home for the holidays. Whatever the reasons were, we can say that there is a market for high-end Makena Beach properties. The downside, you will see, is that there are no listings that are currently available in the $4-$6M range. I have picked a few for you to look at.

High-End Makena Beach Properties For Sale

1. 4690 S. Makena Road (MLS# 346191) is an “old Hawaiian” style property. It has 3 bedrooms and 3 bathrooms under 2,968 square feet of living space. The reason to get this home is that very few homes on Po’olenalena Beach come on the market and this is one. This one is currently listed at $8.990M and is on just under 1/2 acre of land.

2. 4950 Makena Road, Lot 2 (MLS# 349474) is a residential condominium with 4 bedrooms and 4.5 bathrooms under 4,318 square feet of furnished home. This home is listed at $10.2M.

3. 6900 Makena Road (MLS# 345607) is my pick for 2012. This listing has 600 feet of ocean frontage and is bordered by sandy north and south beaches. It is listed at $17M and is a 2 bedroom/2 bathroom home with 2,337 square feet of living space and a 400 square foot studio ohana. The parcel of land is amazing at just under 1.4 acres beachfront. This property may not be for everyone, but for the right buyer, this could be the one.

by HawaiiLife.com

According to data from the National Association of REALTORS®, February’s Pending Home Sales Index slipped 0.5 percent from the month prior, to 96.5.

The Pending Home Sales Index is a monthly report which measures the number of homes under contract to sell, but not yet sold, nationwide.

The index is benchmarked to a value of 100, the average level of home contract activity in 2001, the first year that pending home sales data was analyzed. It also happened to be a year of historically-high levels of home contract activity. Therefore, a Pending Home Sales Index reading of 100 suggests a strong housing market nationwide.

The index has read north of 90 since October 2011.

On a regional basis, February’s Pending Home Sales Index varied :

• Northeast Region: -0.5 percent from January 2012
• Midwest Region : +5.7 percent from January 2012
• South Region : -3.3 percent from January 2012
• West Region : -2.6 percent from January 2012

Mild weather may have helped the Midwest Region last month but even regional data can only tell us so much. Like everything in real estate, housing data must be local to be relevant.

Throughout the South Region, for example, the area in which contract activity fell most on a monthly basis, there are states which performed better than the regional average, and states which performed worse. Furthermore, even within those states, there are some cities which over-performed, and others which underperformed.

It’s why we can’t put too much stock in national housing news. Buyers don’t buy nationally — they buy locally.

Today’s home buyers and sellers , therefore, should look beyond the national Pending Home Sales Index and into local market drivers. The Pending Home Sales Index can paint a broad picture of the U.S. housing market but for data that matters to you specifically, it’s not as widely helpful.

To get relevant, timely local real estate data, talk to a real estate professional.

Posted on March 28, 2012 by CENTURY 21 All Islands

One of the more popular condominiums for potential buyers looking for a second residence or a place to call home in Wailea has become Wailea Fairway Villas. With a prime location bordering Wailea’s Old Blue Course, well-manicured grounds, and enjoying magnificent ocean views, it is easy to see why. As Maui has an extremely segmented real estate market, let’s take a look at how Wailea Fairway Villas has been faring during the economic recession.

By looking at the chart above, we can see the clear descent in average sales prices since the 2007 peak of the market ($801K) to what may be considered the bottom in 2010 ($560,488). But let us dig a little deeper:

This time, incorporating data from the two sales in 2012 at Wailea Fairway Villas (as of 02/18/2012), we can see current market conditions shaping the overall outlook. From its peak in 2007 of $721 per square foot, to its bottom of $480 per square foot in 2010, it has recovered nicely to its current $577 per square foot.

Wailea Fairway Villas is one of my favorite properties in South Maui in its price range, offering what few others can: A central Wailea location, pristine golf-course inspired grounds, ocean views, and access to the amenities that make Wailea one of the most sought after locations in the Pacific. The information above is not intended to project future performance, but rather to emphasize to those who keep waiting for the other shoe to drop: Maui is a long-term equity market, if you wait too long, then you may be priced out of the market.

via mauihomeandcondo.com

A beachfront home on Kauai has gone on the market for $24 million. The seller is Bill Jurika, a San Francisco-based private investment banker.

Mr. Jurika built the house with his wife, Michelle, and it was completed around 2005. The 9,000-square-foot home has four bedrooms and 6½ bathrooms and is on 1.3 acres, including 400 feet of beachfront along Anini beach. The Balinese-influenced home is built of concrete, wood-covered reinforced steel and coral stone imported from the Philippines, where Mr. Jurika grew up. The home has several covered verandas and Brazilian teak wood floors.

Mr. Jurika says he is selling partly because he and his wife have separated and are using it less than they used to. “It’s a dream home, you can’t replace it,” he says. “No matter what somebody paid me for it, it’s still going to be hard to leave it.”

Matt Beall of Hawaii Life Real Estate Brokers has the listing.

There were a total of 5 oceanfront home sales in Makena in 2011 and three of those sales were in the oceanfront community of Makena Place which is near Makena Landing and the condos of Makena Surf and Na Hale O Makena.

The sales volume for oceanfront homes in the Wailea/Makena area is down from 2010 (which had 6 sales and a total volume of $57.6M) but the average sales price in 2011 is up 10.45% to $10,606,233 thanks in big part to that record high sale.

“Big Beach, Big Waves”

The beach is stunning, but the current is quite strong and the waves tend to break right on shore. Not often a good swimming option for inexperienced swimmers, but definitely worth a visit.

“Heaven on maui”

“Best beach I have ever been to”

“Vow Renewal at Maluaka Beach, Makena, Maui”

“Big beach and heavy surf”

Where

Most desalination water plants take water from the top 325 feet of the ocean, “which has a lot of environmental negative elements,” says Robinson. But, he says, Deep Ocean Hawaii’s electric pipe harvests water from 2,000 feet below the surface — “where the water is pure and it is going to have less ecological impact” — and desalinates it onboard its ship using reverse osmosis.

Different 
Method

Deep Ocean Hawaii uses a ship called The Spirit of the North, whereas other Hawaii companies that sell purified seawater pump the water into onshore purification plants in Kona. The 150-foot ship pumps up the water from three to four miles off the Waianae coast, and transfers it at sea to a cargo ship.

How Much

The ship can pump and purify 130,000 gallons of water a day, but the company is increasing that to a million, says Roger Ulveling, president and CEO of Deep Ocean Hawaii and a former director of the state Department of Business and Economic Development. “We have taken technologies that have existed in other locations and put them together into a process that has solved the problems (of previous technologies).”

Other Uses

Deep Ocean Hawaii says it is in discussions with the state to 
supply water in emergencies when the normal water supply is cut off.

By Mark Brislin

Some things To Do in Maui

From breathtaking beaches to serene gardens, cultural sites to underwater playgrounds, Maui offers several days worth of diversions. The island is especially popular with active travelers since it offers plenty of opportunities to explore the great outdoors. But after hiking in Haleakala National Park or whale watching off the island’s southern or western coasts, writers urge you to visit Maui’s historic sites. Some of the best include the Whalers Village Museum or the Lahaina District, home to numerous plantation towns, ancient Hawaiian churches and the largest statue of Buddha outside of Asia.

Luau

Cliché as it might seem, many travel writers and recent visitors insist that you can’t go to Maui without participating in a luau. One of the most famous is the Old Lahaina Luau, located along Front Street in the town of the same name. Travel experts praise the luau for its authenticity, fine food and entertainment.

The Road to Hana

Maui’s most famous road is also one of the most romantic and iconic in the world. Stops along the way allow tourists to explore Hawaii’s lush forest, wildlife and waterways. A tip from travel writers: Start along the road in the early morning, when you can avoid heavy traffic. The Road to Hana is best enjoyed at your own pace.

Beaches

In Maui, deciding which beach to visit depends a lot on your favorite color. Take your pick of white, gold, black, red and even green sand; the different hues are a result of minerals found in the volcanic stone from which the sand was formed. Writers and recent visitors especially suggest Kaihalulu in East Maui, better known as Red Sand Beach.

Nature

Maui’s upcountry offers some of the best hiking and most awe-inspiring natural sights in the United States, and perhaps even the world. An almost universally loved hiking and eco-tourism destination in Maui is the fabulous Haleakala National Park, which contains several waterfalls, hiking trails, views of the ocean and an almost surreal volcanic landscape.

• Those interested in seeing the back-country — complete with virgin waterfalls, remote wilderness trails, and quiet, meditative settings — should head for Haleakala’s upcountry or the tropical Hana Coast.”– Frommer’s
• Get ready for an otherworldly experience at Haleakala National Park. It’s astonishing volcanic landscape so resembles a lunar surface that astronauts practiced mock lunar walks here before landing on the moon.” — Lonely Planet

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