Following big money around isn’t always the key to success, but I’ve always got my eye on them. And now they’ve tipped me off to something massive…

I always like to keep up with what the big boys are doing.

For me, it’s about recognising my limits. I’m a solo (lone-wolf?) investor, generally working with my own capital and finance.

If I had a coupla hundred billion dollars under management, I’d be employing people to analyse the market and find out where the next big things will be.

I’m not a professional analyst by any stretch of the imagination. I’m more of an arm-chair analyst. I spend an hour or two every day reading up on the things that interest me. Sometimes that’s about vintage fighter planes.

However, the research that the big boys produce is often available to the public (though I’m pretty sure they leave the really juicy stuff out.)

But if you can’t read what they’re working with, you can always watch their movements. That can give you an insight into their thinking too.

And so I like to keep an eye on what the big money is up to. Like one of those birds that sits on the back of a buffalo, picking off grubs that get un-turfed.

I’m happy to be an opportunist.

Sometimes they do get into markets where only the big survive – where you need deep pockets just to get a seat at the table, or the ability to wear the risks involved.

But then sometimes, they’re taking advantage of opportunities that are available to everyone. They’re jus the first to tweak on to it.

Take BlackRock for example. BlackRock are the largest fund managers in the world, with almost $5 trillion funds under management.

You can be pretty sure that when these guys get into a market, there’s a pretty hefty report or two backing that play up.

And so what business is BlackRock getting into now?

The mortgage business.

According to the SMH:

BlackRock is the latest company planning to finance investors who buy single family homes, capitalising on soaring rental demand as the US home ownership rate sits at a five-decade low.

BlackRock, the world's largest money manager, would buy loans from a network of partners that offered financing to the firm's specifications as soon as September, said two people with knowledge of the plans, who asked not to be identified.

Its lending partners also would offer funds to renovate homes that would become rental properties, one of the people said.

So think you might hit up BlackRock for a loan to buy a property or two in the US? Well, you’re probably not the kind of borrower they have in mind.

They’re more likely to be after guys like Alex Sifakis, president of Florida-based JWB Real Estate Capital. He estimates he'll need as much as $US30 million a year to fund home purchases.

In the past two years alone, he's borrowed $US13 million, and bought 430 rental properties.

There’s a new type of investor in the US market – the corporate mega-investor.

Property research firm RealtyTrac figures show that mega-investors – companies that buy at least 10 homes a year have spent about $US110 billion to accumulate more than 620,000 properties since 2007.

Think about that for a sec. There are 14 million investment properties in the US. That means that mega-investors have bought over 4% in the past 8 years.

And it doesn’t look like it’s slowing down any time soon. You can take BlackRock’s word on that. BlackRock wouldn’t be gearing up to finance these mega-investors if they didn’t think that the trend was enduring…

… and profitable.

The profitability side of things is easy to understand. Prices are coming back off a low base, the supply response has been muted so far, and there’s a growing rental crisis in America, pushing up rents.

As I said the other day, there’s an old-school boom playing out in the US, and the rules of the game are pretty simple:

1. Prices fell a long way after the GFC, and have a long way to come back. There’s plenty of upside;
2. Home-builders got burnt, and are still scared, creating a housing shortage;
3. Rents and returns are rising; and
4. Household’s continue to de-leverage, giving the housing market firmer foundations.

 

The big guys are looking at this and it’s a no brainer. Warren Buffett has been in the market for years, but now we’ve got some really serious money gearing up to get into property.

What do you think happens to prices when a company with $5 trillion under management takes an interest in property?

“Pow”, that’s what happens.

With solid fundaments and serious interest from some big money, we’re looking at a big few years ahead.

Add to that some bargain basement entry points, and you’ve got the makings of a very attractive off-shore play.

But of course you need to know what you’re doing. We’ve heard too many stories of people getting burnt by rushing in without doing their homework.

Which goes to show that even in a boom/recovery market, we still have to be choosy.

Anyway, I’d like to thank BlackRock’s team of analysts for helping me put this blog together.

Thanks for the heads up guys. I owe you.

What do you think about the US? Is it part of your portfolio?

It’s crazy and sad.

Most Australian real estate investors are completely ignorant, uneducated to the opportunity of investing in a massive cashflow market which at the moment has very little risk attached to it.

Don’t be one of them.

Here’s my rant for the day…

Whenever I talk about the emerging boom in US property, many people say, “Well, you know what happened last time.”

I know what happened last time. I made a lot of money. But I don’t think that’s their point.

The point I think they’re trying to make is that the US market crashed after it boomed last time, and so that’s what will happen again.

Sure the US might be on the up and up now, but the model is broken, and it will all come crashing down again, sooner or later.

I don’t want to seem unfair, but these people are idiots.

And look, the premise is reasonable. If you see the same stuff playing out again, then you should expect the same results. That’s the definition of sanity.

But what is happening in the US might be similar at some levels (prices are going up) but that hides what’s really going on, on the ground.

And the fundamentals of the current boom are very different.

And look, the real thing to remember about the GFC was that it was a sub-prime mortgage crisis. It wasn’t because prices got too high – it was because they were some dodgy (and in many cases illegal) lending practices. That’s what brought it all undone. So far, I haven’t heard of anything like that going on…

Anyway, the Philadelphia Fed has done some interesting work explaining why, this time it’s different.

(The phrase “this time it’s different” should always be a B.S trigger warning, so I encourage you to take an extremely critical eye on what I’m about to say.)

Anyway, the Phillie Fed starts with an overview of what has happened since the GFC. They note that, peak-to-trough, house prices fell 30%.

Over the same period, housing construction employment also fell by 30%, while new housing starts plummeted 80%.

So far though, the recoveries in house prices and construction have followed different courses.

Median house prices nationally have come back to be just 8% below their peak (which also gives you some idea of potential upside).

However, housing starts are still 50% lower than prior to the GFC.

The Phillie Fed says that this is because home-builders still have cold-feet. Many got burnt by the GFC. Many went out of business. And so the supply response has been muted.

And they reckon we’ll need to see more action on the price side before homebuilders come back into the water. That means the supply response that normally takes the heat out of the market, will take longer to kick in this time. That gives us more upside potential for capital growth.

The other key area of difference between this boom and the previous one is where households are placed. American households were leveraged to the eyeballs last time. This time, they’re being much more cautious.

If you look at the mortgage debt to income ratio, the blue line here, we can see that Americans are continuing to ‘deleverage’…

According to the Phillie Fed, the decline in the debt-income ratio reflects,

a return of prudent lending practices, more vigilant regulatory oversight, and efforts by consumers to repair their balance sheets. The “red flags” are not evident in the current housing recovery. These observations help allay concerns about another credit-fueled bubble…

The other interesting thing to note in this chart is the way that the house price to rent ratio, and the debt to income ratio are no longer moving together. In recent years, house prices have started rising, but so too have rental prices, and many people in the US are talking about a rental crisis as the downturn in construction creates a housing shortage.

The point the Phillie Fed want to make with this is that in the previous boom, debt was in large part responsible for the run up in prices. It created a bit of a feedback loop, where higher prices created more debt, which created higher prices.

This time, however, it’s different. Higher prices have not been driven by debt. Rather, they’ve been driven by a pick-up in rents.

This is how most asset classes work. As the returns on an asset improve, the price of the asset goes up.

And so we’re looking at a more ‘normal’ housing market. In the Fed’s eyes, the recent increases in rent provide some “fundamental justification” for the recent increases in prices we’ve seen, and are likely to see over the coming years.

And so the up-shot is that the US market is performing more ‘normally’, and the dynamics that created the pre-GFC bubble are not in play.

It’s a process of creative destruction. Recessions and crashes often weed-out the worst practices in an economy. It’s a process of evolution.

But as investors, it means the game has changed.

We’re not looking at a re-run of the GFC. Rather, we’re looking at a whole other ball-game.

And the new rules are pretty simple:

1. Prices fell a long way, and have a long way to come back. There’s plenty of upside;
2. Home-builders got burnt, and are still scared, creating a housing shortage;
3. Rents and returns are rising; and
4. Household’s continue to de-leverage, giving the housing market firmer foundations.

That all looks pretty good to me…

And so what’s old is new again. This is an old-school boom. I know what I’m working with. I know how to make money in a market like this.

And from my point of view – the more people who are scared of a GFC re-run the better.

Get out of my way idiots.

Here’s a slightly different question…

You can get 15-20% cashflow in the US… and you only have to spend $50,000 – $75,000 to buy the property outright.

Why do you persist with the Australian market?

What’s holding you back?

The US crash shows us what we should, and should not, be scared of.

I've been thinking a lot lately about the next step for the Australian real estate market. There are many opinions out there on what happens if our real estate market crashes.

I have found that you can predict the future by being a keen student of past trends and cycles. A great example is what happened in the US 7 years ago and where that market is at now.

I remember when the US market ‘crashed’.

People went nuts talking about a ‘lost generation’ and how it would take America 30 years to dig itself out of a hole.

Steve Keen was patting himself on the back for being the only ‘economist’ to pick it, and then said that it was coming here.

He’s still saying it’s coming here. Any day now. This time for sure…

But fast forward 7 years – just 7 years – and where are we at? US house prices are rising, have past peaks in most states, and people are now talking about a rental crisis.

Yep. A rental crisis.

That housing glut that was meant to leave America in a puddle for 30 years dried up surprisingly quickly.

Too bad if you didn’t follow Warren Buffett’s lead and buy in at the bottom. The bottom’s now long gone.

Anyway, the Enterprise Foundation estimates that over 20m Americans are in “housing stress” – where 30% or more of their income goes on rents. Over half of those, or 11 million, spend more than half their incomes on rent.

On their figures, about half of all renters spend 30% of their income on rent, while 25% of renters spend more than half.

This, in their eyes, is a “rental crisis”.
I’d have to agree that this looks like a problem. The question though is where it comes from.

In part it’s been driven by the unequal recovery of the US – where QE has juiced up the top end of town, and hasn’t done a whole lot to help poorer Americans – who typically are the ones who rent.

So if you’re not earning very much, it’s easy to spend a lot of your income on rent.

But it’s also true that housing costs are increasing. Rents are rising, and so are house prices and mortgage payments.

And since rents are rising faster than lower-level incomes, more and more Americans are finding themselves in “housing stress”.

And why are rents rising? Well you remember that glut that was going to take 30 years to unwind. Turns out it didn’t take that long. Actually, it was more like 3.

Take a look at US vacancy data. Vacancy rates have come way off, from a peak of over 11% in 2010, to a current rate just under 7%.

To Australians who are used to vacancy rates typically in the 2-3% range, 7% might sound like a lot. But 7% in America is actually the lowest level since the mid 80s!

As I said, so much for that glut.

And the absence of available rentals isn’t because everyone took advantage of the market bottom and bought into their own place.

Home-ownership rates have actually fallen to lowest levels since the mid 90s.

So there’s a shortage of homes, there’s a shortage of rentals, and rents are getting too expensive for many people.

Suddenly America has a housing crisis on its hands.

Just 7 years after an apocalyptic housing market ‘crash’, America has a housing crisis again.

And this is why I roll my eyes when I hear characters like Steve Keen banging on about 30-50% declines in house prices.

Seriously bloke, it’s been 7 years already. Give that milking cow a rest.

And look, we’re looking at some testing times for the market right now. It’s going to be interesting to see how it all plays out. We’ve got a few headwinds coming at us – government regulations, rate hikes, foreign buyer breathers…

But the biggest swing factor in all of this is sentiment.

I think it’s not entirely impossible that we could see a fall of 7% in the next year or two. That’s not my prediction. But I can see that it is possible.

And that could happen if the market gets spooked. The GFC is still fresh in people’s minds. A lot of people thought it was coming here. If the sentiment of the herd goes sour, then a fall of 7% could be possible.

But the question is, for the investors with staying power, at what point do the market fundamentals kick in and give the market a floor.

As the US showed us, those fundamentals can kick in surprisingly quickly. Almost no one saw it coming.

… except Warren Buffett and friends, perhaps.

And the fundamentals that have taken us here are still in effect. I’m talking about the lowest interest rates in a generation (even if they’re inching higher). I’m talking enduring shortages. I’m talking population growth and our major cities bursting at the seams.

And a lot of people point to the construction boom we’re currently enjoying. There’s a lot of supply coming on-line. That will give us a glutty market, and prices will go into free-fall.

But America had a construction boom too. And for a few brief years, America had a glut too.

But for a ‘glut’ to have a real impact on prices, the housing supply needs to be matched to housing demand.

And if you look at where supply is being added, it’s mostly in inner-city shoe-boxes.

If you’re a family of 5, a glut in inner-city shoe-boxes is totally irrelevant. You need a house, or at least a large town-house. And if there’s a shortage of them, you’ll just pay what you have to pay.

So this is my thinking. There is a chance we’ll go down the same path as America.

That’s sounds scary to the people who don’t know, but as I’ve told you, the American path involves some great buying opportunities at the bottom, and a quick return to profit.

If you see Warren Buffet making a play here in a year or two, don’t say I didn’t warn you.

Are you expecting a property crash?

What markets will be the big performers in 2016?

…and will Steven Keen EVER be right?

I was writing the other day about some of the challenges facing Aussie property. Just to be clear, I’m not worried about a ‘crash’ or the ‘bubble bursting’, or any of that rubbish. I just think there are a few factors that could put a cap on the current cycle.

And that’s the thing to be mindful of. Markets move in cycles. And after several years of strong price growth, the chances of slower growth outcomes increases with every passing year.

It’s just a reality.

And as the cycle gets long in the tooth, the opportunities to benefit from immediate market growth get harder to come by. That’s why right now I’m working my existing properties harder, and looking further afield for my next buying opportunities.

And when you think about it in this light, the US market starts to look pretty interesting.

Because the cycle is still young in America. The economy has taken its sweet time to gain traction, and the housing market has dawdled along with it.

But now, that seems to be turning.

And the clearest read on that is in the rental market. Rents are rising quickly (much more quickly than incomes) and now people are worried about an affordability crisis.

The Wall St Journal was running the story:

“Much of the problem is attributable to simple supply and demand. The job market has improved and millennials are entering the labor pool in force, boosting household formation. But in a structural shift for the real-estate market, new households are much more likely to be renters than buyers.

In the first quarter of 2015, the number of U.S. households was up by almost 1.5 million from a year earlier… but the net increase was entirely due to renters, while the number of owner-occupied households fell slightly. That’s broadly been the case since the housing bust, with new household formation consistently coming from renters rather than buyers. The homeownership rate hit a 48-year low, according to estimates published Tuesday by the Commerce Department…”

So there’s a few things I take from this.

The first is that this seems to be what you would expect. At this early stage of the cycle, you’d expect household formation to come from renters.

So when the GFC hit a lot of people moved back in with their parents, or back into share-houses. And young kids who were thinking about moving out decided they’d be much better off staying put.

So for a few years there, household formation went into reverse. The number of US households actually shrunk.

But now that the economy is gaining traction, the younglings finally have the courage to go it alone.

(Or their parents finally have the courage to turf them out of the nest.)

And so the number of households is growing again. Starting with renters. After the renting pool grows, people will get back into buying and the owner-occupier class will rise.

But in the meantime, as all these new people compete for rentals, the rental market gets tighter and tighter. And vacancy rates have fallen to a 30-year low.

And as the rental market tightens, rents start to rise.

And across the country, rents are now 3.5% higher than a year ago. That might not sound like much, but it’s decent in a country where inflation is minimal. And it’s accelerating.

And in some states, it’s much higher. Like in the booming tech states and cities, like San Francisco, San Jose and Denver. Rents in those cities are growing between 5 and 8%.

This is classic cycle stuff.

Because as rents start to rise, two things happen. First, the cost of renting vs the cost of buying starts to even out. And so the people with a deposit do the sums and decide they’re better off buying.

Housing demand grows.

And the increase in rents means that rental yields start to rise.

At the margin, properties become more attractive to investors. They’re willing to pay a little more.

And so housing demand gets a lift from two sources.

And that, of course, translates into higher prices.

And so we’re looking at a resurgence in American house prices in some areas. It will be patchy at first, but as the economy strengthens, and the rest of the country comes online, we should see broad-based increases in house prices.

And so there’s an ‘early-buyer’ opportunity here.

House prices are lifting in some areas. Make no mistake about that. But there’s still plenty of bargains to be found.

And that’s the amazing thing about the US right now. In America you can pick properties up for $50K.

I’m not talking deposit. I’m talking in total. $50K!

And with a tighter rental market you’re looking at cashflow of $10K a year.

Do the maths. That’s a 20% yield.

I love Australia, but show me anywhere in the country where you can get those numbers.

So with the Aussie market facing some headwinds, I’m taking the time to do a bit more gold digging in the US.

You just can’t argue with those numbers.

Anyone done well in the US in recent years?