Tuesday, September 09, 2008


Real estate bargains are available, but they are getting picked off. The "news" is that the foreclosure rate is going up. The fact is that clearing prices are being reached.

Hank Paulson will leave his government office and go back to the private sector at the end of the year. He has accomplished what he set out to accomplish. Goldman and the other investment banks will no longer have a half government-half private entity to compete against. Quasi government corporations have always been a bad idea. Entities such as the TVA and the US Postal Service are unfair to competitors and they smother cost saving innovation. Take a look at the change in the cost of a postage stamp over the past 50 years and you know what I mean.

A lot of people defend the post office. The fact of the matter is that the post office has hindered economic progress. How much gasoline do you suppose the US Postal Service uses in home delivery? The marginal cost all Americans pay for gasoline is higher because we insist on wasting gasoline to deliver the mail.

Americans love daily home delivery, but if the postal service were not a monopoly, Americans would love the instant delivery of mail via the Internet. Someday, perhaps when the price of gasoline hits $10 per gallon, the post office will cut home delivery to once per week. To assuage the emotions of the public, the cut will be accompanied by a sharp reduction in the cost of a stamp. Some years from now, parents will tell their children about how it used to be that a man would drive ones utility bill all the way to ones house. How silly?

Yesterday, Paulson put Fannie and Freddie Mac out of the mortgage hedge fund business. Hallelujah! He also cut off their ability to lobby congress! Hallelujah! Hurricane Ike is stirring up the waters of the Gulf. It was more than 50 years ago when President Ike warned about the Industrial - Military Complex that lobbies congress for the benefit of investors and congressional leaders. McCain strikes a cord with his "Country First" motto. It is time for the congress to stop voting for ethanol, wind, and housing subsidies. It should not be the roll of government to determine which businessman wins. Can you imagine the lobbying that would take place if there is a government run health care system?

Yesterday, the rate on Fannie Mae 30-year mortgage paper fell 47 basis points!

This has to be one of the largest one day drops in the price of a mortgage ever. The irony is that even after the drop, investors should buy second homes on variable rate mortgages. They should buy today with a variable rate and then wait about a year to refinance at a fixed rate. With yield curves still inverted throughout much of the world, there is going to be a continued fall in the price of commodities and a continued fall in the fixed rate cost of money.

Those adverse to variable rates should buy real estate now, at fixed rates. The supply of new homes coming on the market is the lowest in years. It will take a few years before is lots of new construction. The inventory of homes on the market, particularly in depressed resort markets such as ocean front at Myrtle Beach, is high because sales are so low. As the sales pace picks up, the supply on the market is going to decline rapidly, while the best bargains disappear.

The last time there were such good bargains in the second home market was in 1991!

Not that every home on the market is offered at a bargain price. Many people who bought high cannot bring themselves to reduce there asking price to current market prices. Those who must sell are taking a beating.


When the stock market turned, November of 1990, during the middle of the last real estate recession, Wachovia and other bank stocks showed relative strength and then real strength. By November of 1991, Wachovia's share price had increased by 100% before broad indexes of housing prices had turned up.

Today in London, the broad financial index is up 1.46%, the broad transportation index is up 1.63% and the broad basic materials index is down 1.06%. What more could the housing industry want? Lower materials costs, lower mortgage rates, improved consumer net income as a result of falling energy prices and limited new supply?