Deal with Corporate-Government Collusion Or We’re Doomed as a Nation
A friend of mine who runs a very successful hedge fund cautions me to expect inflation, and suggests that perhaps it’s a good time for me to get back into real estate. But our discussion so far leaves me unconvinced:
Friend: May be time to buy real estate again.
Craig: Yes, I really think that dollar-denominated assets have to appreciate. Real estate scares me, though, with the glut of foreclosures, etc.
Friend: Yes, but it’s always darkest before the dawn.
Craig: The fundamentals of real estate don’t appeal to me, especially Americans’ gross inability to compete in the global marketplace; we expect to live like kings, but we’ve fallen behind technologically, educationally, and ethically. For every kid like yours (self-directed, over-achiever) there are 50 young human slugs with substandard educations, each expecting to grow up affluent. They all face a considerable shock.
Friend: Boy, you woke up on the wrong side of the bed this morning!
Craig: Ha! Yes, I’m pretty pessimistic — especially for Americans and our prospects for the short-term. I think we’ve made some tragic mistakes, most concerning institutionalized corruption, and I struggle to imagine a soft landing. I’ve linked a few articles I’ve written on the subject.
Reading parts of Jeremy Rifkin‘s new book doesn’t put a smile on my face either. I quote:
The vast majority of Americans have what might be called a quasi-religious relationship with business. Their Calvinist faith in the marketplace and their hatred of big government –to the point of equating it with a kind of godless socialism — blinds them to corporate greed, letting businesses get away with a form of socialism for the select, and pauperism for the people. Many Americans mistakenly believe that the American dream flows inexorably from an unhampered free market and they close their eyes to the long history of corporate-government collusion. As long as Americans continue to believe that markets perform best for society when unencumbered by the government, while they wink at a political process in which elected officials allow business trade associations to draft legislation that would benefit them at the expense of the rest of society, we are likely doomed as a nation.
The supply/demand balance of real estate still looks bad, I agree that we may have a couple years of relatively mild price declines left. That said, rental yields are starting to look good.
The house I’m planning to close on next week would have an annual rent of 6% after deducting taxes (3%). If we assume another annual 2% for maintenance, we still have a 4% yield, which is better than you can get in most financial assets.
Admittedly, this home is short sale, and I’m buying it at about 15% below my estimate of market price, but even without that, you’re still getting over a 3% effective yield for an owner-occupied home. With a good credit score and 30% down, I can get a 3.2% 15 year fixed mortgage, which means that the return on my invested capital (the 30% down) is approximately 6%… a pretty decent return, especially when you’re sick of being a renter.
Prices still have not fallen enough to make being a landlord compelling to me (since you need to allow for some vacancy rate, and that lowers the yield), but they are close.