Proof that all that glitters ain’t gold.
Elvis impersonators, flashy lights, pretty girls with costumes made up of more feathers than fabric… it’s got it all.
And every casino in Vegas is crammed to the rafters with suckers looking for an entertaining way to throw all their hard-earned money away.
You roll past the poker, the black-jack, the roulette wheel. But hang on, who’s that over there? It is! It’s Warren Buffet!
What’s he doing in Vegas? You don’t become the world’s third richest man by backing a rigged game – unless you know the game is rigged in your favour.
And who’s that sitting next to him? It’s old boy Larry Fink, the chief of Blackrock – the largest money-management firm in the world. And to his left is John Angelo, from Angelo, Gordon and Co.
Together, these guys control more wealth than many nation states. So what are they doing in Vegas? What game are these guys backing?
Property?!? What, are they crazy? Everybody knows the US property market is a disaster zone. Sure, there have been some solid signs lately, but property prices nationally are still 30 percent lower than they were at the peak almost 6 years ago, way back in mid 2006.
And a lot of Americans still find themselves deep underwater.
But as you’re scratching your head, you remember the golden rule of investing.
Buy low, sell high.
And that’s exactly what these guys are doing. If you follow the big money in America right now, it will show you that the serious investors believe that the property market has bottomed, and we’re launching into an upswing dynamic.
And if you follow the scale of funds being directed into property, it tells you that these guys believe that a lot of property markets over-corrected in a big way in the downturn. That is, prices fell too far and a lot of high-performing properties are massively undervalued.
Las Vegas is a case in point.
In the run up to the housing peak, Las Vegas and Nevada led the country is housing construction, and it was one of the hottest housing markets in the country.
Then the bubble burst.
Between 2006 and early 2012, house prices in the city of lights fell a staggering 62 percent. It was the biggest fall in any US metropolitan centre, and the real estate market was smashed to pieces.
But while it was clear that prices were over-valued before the crash, prices seem undervalued now. A lot of people got very badly burnt in the crash, and as the saying goes, once burnt, twice shy. This is keeping a lid on demand for what are now, very cheaply priced homes.
And this gap in demand is being filled by Buffett and the boys. They know that the market has overcorrected on the down-side – and there are some awesome bargains to be found.
And so large investment funds have been snapping up land and properties in Las Vegas and other cheap markets across the country. They’ve also been very active in the foreclosed property market, where they’ve been snaffling up some incredible bargains.
They’re not bound by sentimentality and fear, and just see an investment for what it is – the promise of a particular return at a particular price.
And though the eyes of a cold-blooded accountant, investing in US property makes a lot of sense right now.
This is all a classic play for Warren Buffett. He’s not a short-term, get in and out quickly kind of investor. He’s made his fortune by backing major macro trends, and keeping an eye on the big picture. He’s a master at positioning.
And he’s also done it by keeping a level head, and knowing when the market has lost touch with reality. He gets out when things are too hot and people are too excited, and he gets in when people become too pessimistic and the market is undervalued.
He zigs when they zag.
And this is just what he’s doing in property. He’s buying up bargains because people just don’t trust property right now – for no good reason. Just fear.
Fear that the normal cycle in housing is somehow busted. That the good times will never return. Sure it was the mother of all downturns, but in Buffett’s words, “housing will come back – you can be sure of that.”
That’s why Buffet has been aggressively bidding for billions of dollars of distressed loans and underwater properties. He’s also buying up mortgage brokers and their loan portfolios, real-estate vendors, and even brick-making companies.
He’s going all out to take on a massive exposure to the US property market.
And will he be right?
Well, no one knows the future. But I can tell you one thing: no one has made much money betting against Warren Buffett in the past 50 years!
And while it does seem clear that some markets in the US are massively undervalued, there are also some tried and tested recovery dynamics on his side.
In a cyclical market like housing, it all comes down to supply and demand.
On the supply side, the crash knocked out a lot of supply. A lot of real-estate vendors and homebuilders went underwater. This is holding back the markets ability to respond to increasing demand, which therefore gets translated into increasing prices.
Sure, there was probably an over-supply of houses during the peak. But that was six years ago. The market is a lot tighter than what it was.
The other key factor is demand. The US economy is holding up and confidence is returning. During the GFC, a lot of young people returned to the nest, creating ‘doubled-up’ households.
In 1985, only11 percent of 25-34 year olds lived with their parents. In 2010, that percentage had almost doubled to 21.6 percent.
I remember being 25 and I remember being 30. I guarantee you this is about economic necessity, not choice.
So as America’s economic fortunes continue to improve, and as young people feel more and more financially secure, they’ll be super-keen to head out on their own. They’ll be eager to form a household of their own.
Between 2008 and 2011, America added an average 650,000 households a year. In the year to September 2012, that had spiked to 1.2 million households.
This translates into a huge pick up in demand. And with supply still constrained, that will quickly translate into an increase in prices.
These are the fundamentals that are pulling the big money to the table.
…and with that momentum, remember you can’t pick bottom. Well at least I can’t.
But, I’m not silly enough not to recognise momentum and we now have it in the USA market.
You can sit on the side-lines and watch, be a spectator and miss yet another opportunity or you can get on your bike and pedal like crazy…
I know what I will be doing.
What will you do?
There is also a yield play, and an exchange rate play for Aussie investors, but more about that another time…