The Dangerous Middle – Investment Horizons Should be Very Short or Very Long

The market is starting to get interesting from an investment point of view.  We are seeing some very good opportunities, but with one definite caveat:  You either need to be a very short term or a very long term investor.  The reasoning for this is that the market is going to go through a very rough patch and I think the stimulus packages are going to fall short. 

As Clinton was leaving office and Bush coming in, we were in the beginning of a recession.  However, at the same time mortgage lending rules were getting less restrictive which was pushing up housing prices and allowing people to pull money out of their homes to spend.  Without this, consumer spending would have fallen and we would have worked through a moderate recession and probably be in the early to middle stages of an expansion.  However, with access to easy money, we started buying everything in site.  In 2005 this had risen to ridiculous levels as $595B was taken out of homes through re-finances and pumped into the economy.  In 2006 it was $687B and 2007 it had fallen to $470B.  The important point is that this money was taken out of houses whose values had been inflated and put directly (tax free) into the economy to create demand for things like cars, pool, boats, etc. as well as creating numerous jobs.  Over that three year period, $1,752,000,000,000 was put into the economy tax free (unlike income which is taxes, a loan on your home is not) and spent on goods and services.

The effect of this money is magnified as every dollar I use to buy something from you allows you to buy something from somewhere else.  Therefore, each dollar into the economy results provides more jobs and services than just that dollar would reflect. 

Contrast that with the $750,000,000,000 that is being put into banks as part of the current bailout.  None of that market is earmarked to go into the economy, but rather to go into banks to help save the mortgages of the homes that drove the growth in the first place.  The easy way to look at it is that there is a hole in the ground that needs to be filled and although we don’t know how big it is, it is probably at least $1.7T big.  The government is pumping the first $.75T into that hole now.  I’m not an economist, but I don’t think that will solve the problem – and we haven’t even addressed the exploding credit card debt that has to be repaid before people spend more money.

Because of all of the above, I think that we are in for a rough three to five years (A newsletter I read called this last election “Electing the Janitor-in-Chief”).  Therefore, you have to have a really short time horizon (less than 4 months) or a really long time horizon (over 7 years) if you are going to invest in real estate.   If you jump into an investment with positive cash flow, but then find yourself needing to get out in 3 years, you could get hurt.

I want to be careful to point out that this is only of investors.  If you are looking for a family home and will be putting down roots and getting the tax benefits of home ownership vs renting, the picture is completely different.

Based on this, for my investor clients, we are either looking at making purchases at Trustee Sales with an eye to a quick fix and a flip, or looking at homes that show a positive cash flow with a reasonable (25%) down payment.  Fortunately, those deals are now out there.