Archive for September 2010 | Monthly archive page

John Paulson: Sell Bonds; Buy Stocks; Double Digit Inflation Coming

Robert Lenzner
Forbes Magazine
It could be time to sell your low-yielding bonds and replace them with higher-yielding common stocks.

Multibillionaire hedge fund operator John Paulson, the investment genius who made a killing going short subprime mortgages a few years ago, told a standing room only crowd at New York’s University Club that double-digit inflation is about to rear its ugly head by 2012, killing the bond market, and restoring strength to equities and gold.

Paulson’s warning to sell U.S. government bonds is one of the latest signs that the most successful investors of this generation believe the run up in bonds is over. Paulson especially underscored the attraction of equities with earnings yields of 7%-8% compared to the 2.6% pittance available on 10-year Treasuries.

Paulson listed his favorite blue-chip stocks; JNJ (Johnson& Johnson) at a 3.8% yield; KO(Coca Cola);PFE, 4% yield., as well as C (Citigroup), BAC (BankofAmerica) and STI (Suntrust Banks) and RF (Regions Financial).

Paulson is a pro at buying the distressed bonds of bankrupt companies, and then converting the debt to equity in reorganization and benefiting from the potential run up. He mentioned one of his greatest plays — K-Mart, which emerged from bankruptcy at $10 a share and then skyrocketed to $190 a share.

His crystal ball is for 2% GDP growth for 2011 and 2012 and he warns that the Fed’s promise of quantitative easing should contribute to double-digit inflation over the next few years.

As this is the best time in 50 years to buy homes, Paulson advised his listeners, crowded into 3 separate dining rooms, to issue 30 year mortgages to buy a home as “your debt and interest payments get locked in at record lows, while the price of your home will rise.”

“If you don’t own a home buy one,” Paulson recommended; ” 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.”

Upper Haight Farmers Market Ending

The market at Waller & Stanyan is ending in October for 2010. It currently runs from 4-8pm on Wednesdays.

Deal are being made! New ratifications are up!

Once all the ratifications were entered into MLS, it turns out that the week ending September 19th was the 2nd most active in number of accepted offers in the last 6 months: 141 deals. (The only week with more ratifications was the last week of April during the tax credit crush.)

We won’t have final numbers for the week ending the 26th (yesterday) for 3 or 4 more days, but right now, it looks like it might be as good or better in terms of ratifications.

Inventory is up with lots of new listings, and deals are being made.

Weekly Market Charts

Since there is a lot of uncertainty about what is going on in the market, here are updated Weekly charts through September 19th.

Listings Accepting Offers by Week: Recovering — Increased Dramatically in 3rd Week of September from very slow Start

New Listings Coming on Market: Big September Surge

Listings for Sale: Highest in 6 Months – about 10% above Level of early May

Percent of Listings Accepting Offers by Week: Recovering – Increased in 3rd Week of September to just above Average %

Closed Sales: Very Low (Closings Typically Occur 4-8 weeks after Offer Acceptance, less Deals Which Fall Through)

Listings of $1,000,000 and Above for Sale: Significantly Increasing in recent Weeks

Listings of $1,000,000 and Above: Percentage Accepting Offers – Recovering, but Well Below Spring Levels

Price Distribution of Sold Listings: Past Year

Price Distribution of Listings Currently Under Contract: Big Shift to Listings under $750,000.

35 Beideman Street

Represented Buyer

Parkmerced Farmers Market Ending in October

The market at Serrano & Arballo ends in October for 2010. It’s currently running on Saturdays from 10am-2pm.

WSJ: 10 Reasons to buy a Home

Enough with the doom and gloom about homeownership. Brett Arends explains why owning a home is a good thing.

Enough with the doom and gloom about homeownership.

Sure, maybe there’s more pain to come in the housing market. But when Time magazine starts running covers that declare “Owning a home may no longer make economic sense,” it’s time to say: Enough is enough. This is what “capitulation” looks like. Everyone has given up.

After all, at the peak of the bubble five years ago, Time had a different take. “Home Sweet Home,” declared its cover then, as it celebrated the boom and asked: “Will your house make you rich?”

But it’s not enough just to be contrarian. So here are 10 reasons why it’s good to buy a home.

1. You can get a good deal. Especially if you play hardball. This is a buyer’s market. Most of the other buyers have now vanished, as the tax credits on purchases have just expired. We’re four to five years into the biggest housing bust in modern history. And prices have come down a long way– about 30% from their peak, according to Standard & Poor’s Case-Shiller Index, which tracks home prices in 20 big cities. Yes, it’s mixed. New York is only down 20%. Arizona has halved. Will prices fall further? Sure, they could. You’ll never catch the bottom. It doesn’t really matter so much in the long haul.

Where is fair value? Fund manager Jeremy Grantham at GMO, who predicted the bust with remarkable accuracy, said two years ago that home prices needed to fall another 17% to reach fair value in relation to household incomes. Case-Shiller since then: Down 18%.

2. Mortgages are cheap. You can get a 30-year loan for around 4.3%. What’s not to like? These are the lowest rates on record. As recently as two years ago they were about 6.3%. That drop slashes your monthly repayment by a fifth. If inflation picks up, you won’t see these mortgage rates again in your lifetime. And if we get deflation, and rates fall further, you can refi.

3. You’ll save on taxes. You can deduct the mortgage interest from your income taxes. You can deduct your real estate taxes. And you’ll get a tax break on capital gains–if any–when you sell. Sure, you’ll need to do your math. You’ll only get the income tax break if you itemize your deductions, and many people may be better off taking the standard deduction instead. The breaks are more valuable the more you earn, and the bigger your mortgage. But many people will find that these tax breaks mean owning costs them less, often a lot less, than renting.

4. It’ll be yours. You can have the kitchen and bathrooms you want. You can move the walls, build an extension–zoning permitted–or paint everything bright orange. Few landlords are so indulgent; for renters, these types of changes are often impossible. You’ll feel better about your own place if you own it than if you rent. Many years ago, when I was working for a political campaign in England, I toured a working-class northern town. Mrs. Thatcher had just begun selling off public housing to the tenants. “You can tell the ones that have been bought,” said my local guide. “They’ve painted the front door. It’s the first thing people do when they buy.” It was a small sign that said something big.

5. You’ll get a better home. In many parts of the country it can be really hard to find a good rental. All the best places are sold as condos. Money talks. Once again, this is a case by case issue: In Miami right now there are so many vacant luxury condos that owners will rent them out for a fraction of the cost of owning. But few places are so favored. Generally speaking, if you want the best home in the best neighborhood, you’re better off buying.

6. It offers some inflation protection. No, it’s not perfect. But studies by Professor Karl “Chip” Case (of Case-Shiller), and others, suggest that over the long-term housing has tended to beat inflation by a couple of percentage points a year. That’s valuable inflation insurance, especially if you’re young and raising a family and thinking about the next 30 or 40 years. In the recent past, inflation-protected government bonds, or TIPS, offered an easier form of inflation insurance. But yields there have plummeted of late. That also makes homeownership look a little better by contrast.

7. It’s risk capital. No, your home isn’t the stock market and you shouldn’t view it as the way to get rich. But if the economy does surprise us all and start booming, sooner or later real estate prices will head up again, too. One lesson from the last few years is that stocks are incredibly hard for most normal people to own in large quantities–for practical as well as psychological reasons. Equity in a home is another way of linking part of your portfolio to the long-term growth of the economy–if it happens–and still managing to sleep at night.

8. It’s forced savings. If you can rent an apartment for $2,000 month instead of buying one for $2,400 a month, renting may make sense. But will you save that $400 for your future? A lot of people won’t. Most, I dare say. Once again, you have to do your math, but the part of your mortgage payment that goes to principal repayment isn’t a cost. You’re just paying yourself by building equity. As a forced monthly saving, it’s a good discipline.

9. There is a lot to choose from. There is a glut of homes in most of the country. The National Association of Realtors puts the current inventory at around 4 million homes. That’s below last year’s peak, but well above typical levels, and enough for about a year’s worth of sales. More keeping coming onto the market, too, as the banks slowly unload their inventory of unsold properties. That means great choice, as well as great prices.

10. Sooner or later, the market will clear. Demand and supply will meet. The population is forecast to grow by more than 100 million people over the next 40 years. That means maybe 40 million new households looking for homes. Meanwhile, this housing glut will work itself out. Many of the homes will be bought. But many more will simply be destroyed–either deliberately, or by inaction. This is already happening. Even two years ago, when I toured the housing slump in western Florida, I saw bankrupt condo developments that were fast becoming derelict. And, finally, a lot of the “glut” simply won’t matter: It’s concentrated in a few areas, like Florida and Nevada. Unless you live there, the glut won’t have any long-term impact on housing supply in your town.

Source: Wall Street Journal

Quick Market Update

Here are some quick updates regarding the sales of houses, condos, co-ops, TICs & 2-4 unit buildings. (Click on a chart to enlarge)

Closed Sales: Closings in August were down 9% compared with August 2009, which is a bit odd since June & July’s number of accepted offers were relatively unchanged – down 1.6% — from last year. This would imply that either that more deals are falling out of escrow than usual or deals are taking longer to close escrow.

Accepted Offers: down a little over 1% from August 2009. The number of homes going under contract each month has been very steady for the last 4 months.

Distress Home Sales (bank-owned & short sales): looking at the period of June, July & August, the number of closed distress home sales is a tiny bit lower than in the same period last year. (However, May 2010, for whatever reason, was over 40% higher than May 2009.)

Percentage of Listings Accepting Offers: relatively steady over the past 4 months in the 16% – 17% range, and a bit below the average % for the past 12 months. The August 2010 figure of 17.1% disguises a wide range between property types however: the percentage of house listings accepting offers was 20.3%, for condos it was 17.1%, for TICs it was 12.5%, and for 2-4 unit buildings, 11.7%. The last 2 property types have never quite recovered from the 2008 market downturn, and changes in condo conversion and tenant eviction laws.

New Listings (by Week): as of September 5th, no great surge of new listings has entered the market, though the typical autumn surge begins after Labor Day, which fell on the 6th this year.

Homes for Sale (total during the month delineated): the number of listings actively for sale has been steadily dropping since Spring, but again this usually changes in September.

Sold Listings vs. Expired & Withdrawn Listings: the number of expired/withdrawn listings exceeded the number of closed sales. This is only the second time in the past 13 months where this has occurred. Apparently, a lot of sellers tested the market with prices buyers weren’t willing to pay.

Luxury Home ($1.5m+) Listings Accepting Offers: much lower than recent months, but almost identical to August 08 & August 09.

Months Supply of Inventory: generally pretty steady over the past year at 3.5 to 4.5 months of inventory. By property type, the MSI for houses is typically lower than the MSI for condos, which is lower than the MSI for both TICs and 2-4 unit buildings.

Average Days on Market (for listings accepting offers): relatively steady for the past 7 months at between 59 and 66 days. Again, this varies widely by property type, with houses typically with fewer average days on market, and TICs and 2-4 unit buildings with significantly higher DOM.

What Costs How Much…and Where

Low, High & Median Sales Prices & Average Dollar per Square Foot

SF MLS Home Sales: February 15, 2010 – August 15, 2010

Median Sales Price is that price at which half the properties sold for more and half for less. It may be affected by “unusual” events in any particular period or by changes in buying trends, as well as by changes in market values.

Dollar per Square Foot ($/sq.ft.) is based upon the home’s interior living space and does not include garages, unfinished attics and basements, rooms and apartments built without permit, decks, patios or yards (all of which can still add significant value). These figures are usually derived from appraisals or tax records, but can be unreliable or unreported altogether. (Out of every 10 sales, perhaps 6 – 8 gave square footage, from which the average is calculated.) In the charts below, neighborhoods are listed in order of median sales price. A price followed by a “k” references thousands of dollars; if followed by an “m”, it signifies millions. “REO” refers to the sale of bank-owned properties, typically pursuant to foreclosure.

Low Price & High Price are self-explanatory, but be aware that the low price listed might be for a home that needs significant work just to be habitable, while the high price sale may be for an Architectural Digest quality, panoramic-view home. All things being equal, a house will have a higher dollar per square foot than a condo (because of land value), a condo will have a higher $/sq.ft. than a TIC (quality of title), and a TIC will have a higher figure than a multi-unit building (quality of use). All things being equal, a smaller home will have a higher $/sq.ft. than a larger one. When comparing median prices and average dollar per square foot, remember that the average size (and quality) of houses or condos of the same bedroom count can vary widely by neighborhood (usually due to era and style of construction). Thus one neighborhood’s 3-bedroom house can have a higher median price and yet a lower average dollar-per-square-foot than another neighborhood — because its 3-BR houses are significantly larger.
Distress Sales: During this 6-month period, 19% of the 1232 HOUSE sales through MLS were either bank-owned (REO) or known short sales (lender reduced outstanding loan amount to allow the sale to close). However, though such sales are now scattered throughout the city, fully 71% of these 229 distress house sales took place in the less affluent, southern band of neighborhoods running from Bayview to Oceanview. For CONDOS, 14% of the 1117 sales through MLS were REOs or known short sales, and 62% of these 160 distress condo sales took place in either the eastern neighborhoods with lots of big newer developments (SOMA, South Beach) or the southern border neighborhoods.
Median and average statistics are generalities subject to fluctuation due to a variety of reasons: how they apply to any specific property is unknown. Averages may be distorted by one or two sales substantially higher or lower than the norm, especially when sample size is small. Sales not reported to MLS – such as many new-development condo sales — are not included in this analysis. All figures should be considered approximate and are derived from sources deemed reliable, but may contain errors and omissions, and not warranted.