Addison Wiggin

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!

US Median Home Price as a Percentage of Average Annual Per Capita Disposable Income

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.

Average Monthly Mortgage Payment on Median Priced Homes

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.

Inflation Adjusted Performance of Median Home Prices vs. S&P 500, 1968-1979

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.

Rolling 3-Year Return of S&P 500 Index Minus Rolling 3-Year Return of ISE Homebuilders Index

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.


Addison Wiggin & Samantha Buker,
for The Daily Reckoning

Addison Wiggin

Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He's the creator and editorial director of Agora Financial's daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar, and Why it's Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.

  • gman

    location, location, location.

  • Bob

    I thought a house’s price went down if interest rates went up?

  • gman

    foreclosures, foreclosures, foreclosures.

  • WaffenSS

    Lowest housing in 50 years is great, lets go for it. The only turd in the soup being, no jobs for people to “buy” a house to get prices to go up. There is going to be 25 million “baby boomers” setting up for the end run. This means in my eye that they will, as a rule, be static and not part of the economy anymore. So, OK, you got all the crevats in place, selling hamburgers with obama care is not going to “buy” a house.

  • fritz

    media propoganda, now shilling for real estate interests.
    sure, stupid, obligate yourself to 30 years with a lender on the proposition that your company won’t arbitrarily close down where you decided to root, or that your company will survive 30 years, so that you can enjoy the luxury of being over-taxed, over regulated and over literate in the business of maintenance and repair before you try to sell it in a future populated by wage-slaves of the 1%.
    could media BE any less connected?
    get relevant, ye fools.

  • gengis khan


    – thatz y ‘i’ live in a yurt – and y ‘u’ and everyone else should too.

  • Dave

    fritz, it would help if read the article, but that would ruin your silly little rant. It wasn’t about buying a house to just to have somewhere to call your home, it was buying one as an investment, whether it was the one you live in or rent. All those non-owners still need somewhere to live and must pay someone rent.

    That being said, investing is all about timing. John Paulson got the timing right the last time around and that’s why he’s a rock-star investor billionaire. If his timing is off this time he’ll end up just another has been. I don’t have the money to bet against him, but I’m betting he’s off and the housing market still has a ways to go down and the fed won’t raise rates for a long time. They’ve already promised another two years.

  • Pfc. Parts

    The real trick to this is to buy a house now on a low down payment loan. If you’re like most people living off investment income the past 10 years, you aren’t going to qualify for a low interest loan, so you end up putting your own capital at risk.

    Addison’s plan works great if you’re a 30 year old who happens to have $50K in the bank and a $150,000/year entry level job somewhere. If you’re standing in those shoes, buy a house now. Heck, buy three.

  • Don Cummings

    Another excellent article. I have been reading the Daily Reckoning for 7 years, and have subscribed to a variety of your pay services off and on – I can think of nothing else in print, tv, radio or any other media that I agree with as much as you guys. Keep up the good work.

  • Steve K

    A long winter is coming for America. With what happened in Japan as the best-case scenario in our rear view mirror, we should not be surprised by a 50% drop from 2006. Goods inflation will not be kept pace with by wage inflation. There will be nothing but more and more foreclosures as when interest rates rise, the remaining adjustable rate loans get piled on top of the rest of the toxic paper in the pipeline. Fannie Mae refuses to unload their inventory and take the hit. Their homes rotate from auction site to auction site and realtor to realtor. There is nothing but destruction taking place: wealth destruction, wage destruction, debt destruction and so on. Housing will not bottom until after the Dow’s date with gold at about $5,000. When that happens, that means America will have a shot at rebuilding because our financial system will have had to collapse. That will be the time to sell your metals, buy stocks, homes, and whatever else hasn’t been burned.

  • BostonVA

    Well said Steve K! Also, Japan had the advantage of a still booming US economy to work against. We don’t have that. The US housing boom was a decoy for a US manufacturing exodus and those millions of lost productive jobs are gone. In a global economy, house prices must be at a level supported by globally competitive wages. House prices have much more falling to do.

  • David40

    I have my doubts about the timing. We are going through the same thing that happened to Japan, and their “recession” has been going on for over 15 years. As long as the government keep using gasoline to try to put out the fire this will not end, and we will not recover.

  • B Williams

    maybe its just a merry go round …. in the begining there was real estate.. and there were kings that owned it and peasents that were allowed to live on the land for work in the fields and the roads. Sometimes the peasents even thought they owned the land but those thoughts usually evaporated when the kings interests came first. Now we have papers which say we own the home and land — unless you borrow to obtain it in which case the kings still own it — and now you will ask == ok how do i get a home without borrowing? And the merry go round goes around again …….

  • Ed

    Gold has no property tax.

  • CT

    Yurts are good, so are Tepees. All else needs to be leveled and turned into dam filler. Those with gold will need to find fortified caves.

  • Road Scribe

    Sure thing darlin’! Only when I can afford to buy a home outright and not have a mortgage. Once upon a time I had a 900.00/month mortgage to pay and it took me 3 years to sell that property. Only when the banksters get their act together will I even think about buying another house. If you want to know why, then listen to Joyce Riley’s The Power Hour as she has just been given notice that the home she paid off 3 YEARS AGO will go into the foreclosure process.
    Unfortunately this is a sad truth for many prospective home buyers these days as the globalist bankers gobble up properties and sell them in lot deals to their buddies.
    If you would like to learn even more of why your economy is being implode from within then
    you only have to look at
    The choice is yours.

  • oh please

    it is an absolute falsehood for this author to state low interest rates contribute to low home prices. the lower the interest rate, the higher the price of the house. why? so simple! the less you pay in interest, the more you can afford to pay for the house. when banks are giving out loans, they look at what you and i can afford to pay EACH MONTH. if interest takes up a smaller slice of the monthly pie, the they will give you a bigger loan. this author obviously missed the explosion in home prices fueled by low interest rates, held low by the federal reserve. come on mr author! if rates increased to only 6% what do u think will happen to home prices? they MUST go down because if a buyer is paying more for interest they have less money left to pay down the principal and will qualify for smaller loans only. this author is telling us white is black, and black is white. rates can’t go much lower or they won’t be able to sell any more us treasuries – but interest rates cal certainly go higher. and when they do, home prices will collapse yet again – especially since wages are NOT keeping up with real inflation and are not likely to with job losses as well as the private bankers (aka the federal reserve) counterfeiting our hard earned dollars into wheelbarrow tinder.

  • John

    I agree with the above comment.

    I am in the market to buy a house, but the fact that the government is keeping interest rates at an artificially low rate is bothersome.

    All the rest of the government money thrown at the housing market is also troubling. I would not rule out a strong dead cat bounce in the housing market, but gold and silver will still be doing much better. I would feel much more comfortable buying a house if interest rates were where they need to be to keep our money intact

  • Starving Steve

    There are four things that could still cause home prices to decline further:

    a.) Interest rates will go up, and this will be a kick in the rear-end of the housing speculators;

    b.) The baby-boom population born just WWII will be retiring soon, and they will have to unload big pig single family houses in the snow-belt. This will be the kiss-of-death to home prices, especially as the market for high-priced luxury homes collapses onto the just recovering msrket for smaller and more modestly priced homes;

    The final kiss-of-death for home prices will be rising carrying-costs including the price for fuel, electricity, insurance, subdivision dues, water and sewer costs, and property taxes. Rising maintainence and repair costs will add to this toxic combination;

    And the baby-boomers who haven’t saved a dime as part of their lifestyle are most unlikely to be bailed-out again by banks and again by HUD, especially when baby-boomers are beyond their work years.

    Inflation might force other markets higher, but not the market for old clunkers-of-homes (former palaces) in the snow-belt.

  • Starving Steve

    The baby-boomer generation was born 1946 through 1959, inclusive.

    The baby-boom generation were a generation of debtors and speculators.

    Now that the dead-beats in the baby-boom have to retire and live with less, their aging homes will be a rope around their necks.

    As windmills and solar panels produce next-to-nothing in energy, the cost of power is headed upward. This will bankrupt the boomers, even and especially in the sun-belt states which require cheap electric power for cooling.

    “The comeupance of the baby-boom,” the next spectacle to unfold in this Great Recession.

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