Notorious R.O.B.

I’m in court all this week, so blogging can’t help but be light. But I did want to pass on an interesting conversation I had last night with a friend who is a Wall Street guy and a sharp reader of the economic scene.

I asked him whether inflation expectations were influencing people with money (like him) to buy real estate, a theory of mine that I wrote about over at 7DS. His answer surprised me.

He thought that inflation wasn’t the reason for the increase in cash buyers, but that foreign money seeking safe haven was. His view is that with the dollar getting more or less devalued by our Federal government policies, foreign buyers are finding bargains to be had in the United States.  This MarketWatch story more or less matches up with that idea.

But the reason was fascinating. These wealthy foreigners are basically more aware of political risk in their home countries than they are economic risk of the U.S. market (in his view).  For example, a Chinese businessman who has made millions from exports to the U.S. doesn’t want to repatriate those dollars back to China and entrust the money to the Chinese banking system (and no sane person would, he thought). So rather than bringing those profits home, the Chinese businessman just buys real estate in the U.S. to park the money here.

For example, he knows a custom builder in the Millburn area. Said builder put up five houses, all over $2M in price. One Chinese buyer bought three of them, in cash.

Apparently, the same goes for Europeans and South Americans. A lot of the rich are worried about political and fiscal situation in their home countries, and are seeking safety. They’re buying gold, commodities, etc. and American real estate.

This is one guy’s opinion, of course, but it’s interesting. Is there anything like this going on in your markets?

-rsh

On my 7DS blog, and on AOL, I wrote about the phenomenon of super-rich people paying cash for expensive ($5m plus) homes in California. And I wondered what it is that they knew that the rest of us didn’t. Here’s the post on 7DS, and here’s the one on AOL.

Well, turns out, the rich do know things we don’t. The largest bond fund in the world, PIMCO, is dumping U.S. government bonds:

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits.

Apparently, Bill Gross thinks the interest rate is too low on Treasuries given the risks. Risks? Aren’t US Treasuries supposed to be “risk-free”?

Not when you’re running monthly deficits in excess of $220 billion and printing money to deal with it.

Turns out, what Gross is expecting is inflation. He is quoted in a March 4th radio interview on Bloomberg as follows:

Gains in so-called headline inflation matter more for the U.S. economy than Fed Chairman Ben S. Bernanke suggests and rising oil prices may cut U.S. gross domestic product by a quarter to half a percentage point, Gross said March 4 in a radio interview on “Bloomberg Surveillance” with Tom Keene.

“Bernanke tends to think this doesn’t matter — at least in terms of headline versus the core — we do,” Gross said.

I speculated that the reason why the rich were paying cash was that they were expecting significant inflation. The super-rich are far more likely to have access to people like Bill Gross than you and I. Higher interest rates would be the result, and declining value of cash. Since mortgage rates (like all bonds) track US Treasuries, we all can expect higher rates at some point in the near-ish future to compensate for the effect of real inflation.

Turns out, now IS a great time to buy a house. But only with fixed rate loans or with cash. Failing that, gold, ammunition, canned food, and anti-biotics.

Cheers!

-rsh

About a week ago, the good folks at Trulia released their “Rent vs. Buy Index” of the largest 50 U.S. cities by population.  The full list of the 50 cities is available here as a PDF.  Given the current economic trends, and the rising interest by consumers for rentals, this is a great time for people in real estate to be talking about renting vs. buying.

Trulia didn’t post their full methodology but it does look like they did a good deal of work.  From the blogpost describing the Rent vs. Buy Index:

Total costs of home ownership include mortgage principal and interest, property taxes, hazard insurance, closing costs at time of purchase and ongoing HOA dues and private mortgage insurance, where applicable. Total costs of homeownership include an offset for the tax advantages of homeownership, including mortgage interest, property tax and closing cost deductions.

Total costs of renting include rent and renter’s insurance.

Based on these factors, Trulia concludes:

Price-to-Rent Ratio of 1-15: It is much less expensive to own than to rent a home in this city

Price-to-Rent Ratio of 16-20: It is more expensive to own a home in this city are The total costs of ownership of a home in this city are greater than the costs of renting, but it might still make financial sense depending on the situation.

Price-to-Rent Ratio of 21+: The total costs of owning a home in this city are much greater than the costs of renting.

The analysis was for 2BR apartments, condos, and townhomes — so the rent/buy for single family residences might be different.  But the index is a useful tool nonetheless.

Since I’ve written on the rent vs. buy decision before, I thought it would be interesting to look a bit closer at the ratios — although I don’t have the actual numbers that Trulia used — to see what, if anything, might pop out.

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