Monday, December 6, 2010

My Take on Real Estate… Not the Forecast You Want

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Let’s pick up where I left off in Where Real Estate Is Headed… Part I. The survey I did from blog readers as well as my firm’s Street$marts subscribers yielded almost identical results; you are short-term (five years or less) negative on housing and long-term (10 years or more) positive. That’s pretty much as expected and probably similar to what folks would say around the country.

As you would also expect from reading my posts for a while, I usually disagree with the masses and do here as well. For the past 30 years, interest rates have been declining. So not only for new home buyers, but refinancers too, have only been able to make the correct decisions. Lock in a conventional 15 or 30 year mortgage and you only had to wait a short time to refinance and reduce payments or even withdraw equity. Use an adjustable rate mortgage and you were pretty much guaranteed to see your payments decline. The mortgage rate environment was simply the most favorable in the history of the market.

Why is that important? If the landscape continues to be that of lower and lower payments, demand for houses increases. And when demand increases, prices tend to rise too, until so much supply floods the market that the tide shifts in the other direction. The major tailwind (think jet flying with the wind) housing has seen since 1981 has just about died out, unless banks want to loan money without interest.

Almost as important, since the great experiment of using and living on more and more leverage (borrowing) has imploded, there’s simply not the access to capital there once was, even for good credit risks. Banks and other lenders have sharply tightened their lending standards and they are not going to make unlimited amounts of capital available like they did during the “Go Go” years.

To go one step further, we all know how important the Baby Boomers have been to the economy, financial markets and housing. Now that they are in or approaching retirement, a very large number of Boomers will downsize their lives. For many, their single biggest asset is their primary residence. Not only won’t this group be huge purchasers of real estate, they will likely be net sellers into a market where most of the 30 year tailwinds have dissipated or turned into headwinds.

In a nutshell, the longer-term prognosis for interest rates is stable at BEST, but rates will likely begin a 20 to 40 year period of rise sooner or later. Access to capital has been diminished and Baby Boomers have become net sellers. So overall, I find the former compelling case to own real estate pretty hard to swallow.

I am going to turn to the technical side with some charts and graphs. Below, you can see how new home sales have fared since the 1960s. Right now, they are back to levels usually seen at the end of recessions and right before they begin a new rising period. If this was a “normal” recovery, new home sales should be very strong in 2011 and 2012. I believe that the deleveraging process is going to trump this and 2011 will not be a bang up year, but I would love to be wrong here!

To support my point, look at chart below regarding the job market. I think it’s from Casey Research, but I cannot find the attribution. I did not create it. An important driver of real estate prices is the employment climate. Real estate super agent Judy Cooper sat with me for an hour and shared her thoughts from decades of experience. From a local level, she thought that some of the major macro trends could and have been overcome by a strong jobs market, which makes sense. The problem is that non Fairfield County Connecticut hasn’t seen a truly good employment scene in a very, very long time. We are one of the few states where people continue to leave and the business environment is and has been somewhat hostile towards corporations.

The chart below shows the massive job losses during the crisis and sharp comeback earlier this year with the government’s tsunami of programs and money into the system. But the past four months haven’t been encouraging. If this was truly a “normal” recovery from a recession, the jobs market should turn much stronger almost immediately. While I would love to see, I am certainly not planning on it, especially in non Fairfield County Connecticut.

To overwhelm you a little more, below is another great illustration, courtesy of economist supreme David Rosenberg, formerly of Merrill Lynch and now of Gluskin Sheff in Toronto.  This shows the number of residential vacancies in raw numbers as well as in percentage terms.  While it’s horrifically ugly to look at, the rate of ascent is clearly unsustainable and should begin to rollover shortly.  That’s the good news.  The bad news is that it’s going to take years and years to soak up all of the excess inventory.  Organic population growth will certainly help, but this is not solved overnight. 

While Americans are typically optimistic long-term, and rightfully so given our history, I think it’s premature on the real estate front with so many factors working against. I think the best case scenario is for stability over the next 10 years, meaning -5% to + 10%., but I repeat; I would LOVE to be proven wrong!

FYI, I will be on CNBC’s The Call at 11:05am on Wednesday, November 24.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz

Heritage Capital LLC


  1. this is good site 03147891418
    i like this

  2. The chart below shows the massive job losses during the crisis and sharp comeback earlier this year with the government’s tsunami of programs and money into the system. But the past four months haven’t been encouraging. If this was truly a “normal” recovery from a recession jobsmarket should turn much stronger almost immediately.