Thursday, October 30, 2008


From October 1973 to December 1974, real estate, as measured by an REIT index, declined 32%. Buyers in December 74 could not know the recession was over, indeed the declaration that there had been a recession occurred many months later. Buyers in December did know that the yield on real estate investment trusts had reached 12.9% at a time when 30 year treasury bonds yielded 9%. Buyers who bought in December 1974 and sold in August of 1979 made 245% cash on cash return on their investment in addition to very fat dividends.

The fall in real estate from August 1979 until July 1982 was even more dramatic. The total decline was 56%. Even so, at the market bottom, the yield had reached just 9.5% while 30 year treasury bonds were paying 15.5%. Buyers in July 1982, before the recession was official, made 113% in less than 5 years plus more fat dividends. Those who bought levered bonds did even better than real estate buyers.

The decline from 87 to 90 was 38% and once again, the adventurous who bought real estate during the recession did very well. From October 1990 to December 1997 they made 232% cash on cash plus fat dividends that started at 11.12% in October 1990.

The decline before the 2001 recession was 33% and the subsequent gain was 177% plus dividends that started at 8.8% in November of 1999. In this case, the time to buy was even before the recession started!

The average peak to trough over the past 35 years has been 39.5%. The biggest decline was 56% from 1979 to 1982.


VNQ, the Vanguard REIT, went down 56% from March 2007 to yesterday. During the same period the S&P 500 went down 35%. Real estate is cheap relative to Stocks. The yield on the VNQ has shot up to 8.34% while the yield on stocks is about 3%. You earn 278% more in dividends on the REIT. The 30 year treasury bond yields 4.1%, less than half the REIT yield.

In the early 1980's the FOMC was eager to kill out of control inflation. Short term interest rates were raised to 19% in 1981. The great majority of people thought rates were going even higher. The US Government had to offer 15.5% to sell its thirty year guaranteed rate of return. It was very difficult to see that it was time to buy real estate during the summer of 1982 when 30 year mortgages required the payment of 17% interest and while short rates were still around 15%. Those who bought had no way of knowing that short rates would be down to 9% within a couple of months.

Yesterday, the FOMC cut short rates to 1%. The 30 year mortgage has been bouncing between 5.9% and 6.4% but this rate needs to fall to 5.5% to be in line with treasury rates. Those who buy real estate now should get a low cost variable rate loan, like the ones being offered at credit unions at 4.5%. One can earn 8% on 4.5% borrowed money, in addition to making capital gains on the entire asset value.

Please note, all of the above returns except the previous sentence were cash on cash returns. The person who bought real estate with leverage most likely made many times the cash on cash returns.


Our common sense tells us to buy when prices are low. The decline of 56% over the past 19 months is as large as the biggest decline in the past 35 years. Our government has boosted the monetary base by 48% in just a few weeks. While I and others have complained about the negative precedent set for the future, we do not deny that the investment of 700 Billion Dollars by the Federal Government will provide a tremendous boost to our economy.

Those who keep trying to declare this crunch to be a repeat of the great depression do not know their history. The response of the government after the market crash of 1929 was to shrink the monetary base by half, this fed has increased it by almost half. Obama , Pelosi, Frank and Reid are anxious to move forward with the same New Deal style programs that caused the Great Depression to take years to end but the dramatic pump priming already done by the treasury and FOMC is going to work by the time the congress can make too many mistakes. Ben Bernanke wrote his thesis on the great depression. He is well aware of the mistakes made by the Fed. He is not inclined to repeat them.