Compelling Reasons to Buy Now

This past week our listings saw an average of 2.8 showings each.   Traffic and activity is definitely picking up and this is verifiable by the steadily increasing pending sales, which are up over 10% from just last week since I reported them in our weekly E-Newsletter.   We should expect an increase this time of year.   Seasonally, January and Feburuary are usually the low points for both home sales and prices in any given year.   So with that, 2011 only gets better from here.

Last week, I had some great discussion and exchange with a great friend and client, Rob Lochman.     I can always count on Rob for some very insightful commentary on the state of the market.   My interactions with hime remind  me of the one thing that this blog is missing:   Interaction!   I encourage thoughts, comments, feedback and would love to see more of it here.

For this week’s entry, Rob has given me permission to publish his latest thoughts on the state of the market.   So, read below what one of our clients  think about and then tell me what you think!

From Rob Lochman:

So the gloom and doom crowd is back:

It is interesting to me how group think has changed from “ real estate is always worth more next year than last, to real estate is never going to be worth as much as it was in 2007 ever again.  

What would Warren Buffett do?   He would shun conventional wisdom.   He would look at the real hard facts and tune out the screaming mob.   Here are the facts as I see them:

1.        Real estate in Charlotte is now down to 112.59 on the Case Schiller Scale.   Given a 3.4% increase since 1987, the true value of the index should be roughly 137.   This implies that real estate is trading at a 18% discount in Charlotte to what œnormal inflation would indicate.

2.        Interest rates are unbelievably low.   Average rates for 30 year fixed are still below 5%.

3.        Oil prices continue to rise.   This automatically causes inflation because it takes more dollars buy oil and therefore everything else- including property and building materials.

4.        US Debt(Threat) level.   The Treasury cannot continue to print money/ sell debt at the rate it has without significant inflation risk.   This problem is compounded by an electorate that demands high levels of government benefits but is wholly unwilling to pay the taxes to support them.   This something for nothing mentality will push the federal government to the brink of insolvency (which will make the value of the dollar plummet).

5.        Land- they aren™t making it any more.   I think we are on the precipice of the end of sprawl.   Continued demand for oil from developing nations will push prices higher (If you believe the world is running out of oil, this will happen even faster).   In turn the 50+ year practice of turning farm land into suburbs will gradually become economically unfeasible due to the expense of commuting by car from far flung suburbs (which results in fewer net $ to spend on rent/mortgage) and the elevated costs of building materials for single family homes.   Once the profit for builders is squeezed out by these two forces, this type of development will cease. (PS- even electric cars won™t likely stop this because of the costs of expanding the electric grid to include further suburban development)

6.      Total Value- as an asset class, real estate appreciation follows inflation, so it is an automatic hedge against it.   Not only that, but locking in at historically low interest rates on your largest monthly expense makes you nearly impervious to interest rate risk.   It is also the best asset class at keeping you dry/ warm.   Cash, gold and stock certificates do a pretty poor job of this.

7.      Leverage- how do you think that Wall Street makes money?   They use leverage to maximize their return.   For most of us humble non Wall-St tycoons, the 80/20 leverage we get on our house is about the best we can do.   If you buy a $250k house today, with 20% down- you only have $50k invested.   So if your house goes up 3.4% for 30 years (to $682k), your return on your $50k is 9.1% annualized.   Wall-St would pay 5% to make 9% all day long.   This fact is why homeownership œcreates wealth.

8.     Lastly- back to Case Schiller- if it takes 5 years for housing prices to get back to what would be œnormal inflation (index=162 by 12/2015), people who buy now could expect to live in an investment that™s value rises at 7.5% per year over those 5 years.   This assumes that inflation will not soar as a result of the oil/debt death spiral in that time frame.

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