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End of the storm
The crisis in the housing market is nearing an end - so strike now
By Brandon Foor
Is the housing market near a bottom? Are subprime woes coming to an end anytime soon?
On Wall Street in 2007, when any company mentioned "subprime write-off", the market dropped 200 or 300 points in a day, easy. This went on for most of the second half of last year. Recently, Citibank announced they wrote off $50 billion. Did panic set in on Wall Street? The market closed up 25 points.
Significant? You betcha. The stock market always looks at a minimum of six months in advance.
For months, all you've heard is doom and gloom. The dollar remains at a 25-year low, oil is still hovering in the $90-a-barrel range, and the Fed continues to inject funds into banks and the markets, both to ease the credit crunch ad for added liquidity. So Citigroup announces one of the biggest writeoffs in the history of the planet and the markets don't tank?
Goldman Sachs is the investment leader of all hedge-fund companies. When other hedge-fund organizations like Morgan Stanley and Bear Stearns are writing off billions, they're making money. So what did Goldman do differently? Goldman made a unique bet. Several major hedge-fund managers within Goldman shorted the housing market in an unknown, little exchange-traded fund (ETF) called MBB. The iShares Lehman MBS Fixed-Rate Bond Fund (MBB) provides exposure to mortgage-backed securities.
On Dec. 18, 2007, Goldman Sachs reported –fourth quarter earnings per share of $7.01, beating the consensus of $6.61 per share. In Goldman's press release, it was noted that overall net revenue in credit products, "operated in a challenging environment characterized by continued deterioration in the mortgage market and weakness in the corporate credit market." They profited greatly by shorting housing.
During the conference call, Roger Freeman, of Lehman Bros., indirectly asked David Viniar, CFO of Goldman Sachs, if they were "long" or "short" on credit. Here was Viniar's response, "I think we are still closer to the bottom ... there are buyers there and, for the right assets at the right price, yes, we would be a buyer."
When Goldman Sachs says it would be a buyer at the "right asset", I think I should be buying the "right asset" in Las Vegas—a home priced way under market value. So I did and I'm closing on my first Las Vegas property this month.
Recent debate can lead one to think housing won't even turn in the U.S. market until early 2009 or 2010. If you wait until then, it will be too little, too late. Critical information, like Goldman's comments and the markets reaction to Citibank's massive write-off, indicates that subprime issues will start coming to an end. When this happens, expect volatile housing markets like Las Vegas to rebound stronger than most cities in the U.S.
While many cities in the West have had a substantial increase in the amount of homes for sale (Phoenix is up over 20%), Las Vegas has only a 1.9% increase. You can see why, all across the city, builders are nearly at a standstill, offering tremendous deals just to build new homes. The area is ripe for a housing shortage and many experts are predicting a one in Las Vegas by late next year. Look at the construction up and down the Strip, and know that with thousands of new hotel rooms will come tens of thousands of new jobs.
It's simple supply-and-demand logic. In the next three to 18 months, thousands of new jobs will enter the Las Vegas—an area already enjoying low unemployment and with virtually no housing being built. Where do you think the new employees will live?
Last month, a home entered the market for $299,000 in Summerlin, near the TPC golf course. It was 2,100 square feet with plenty of amenities. I wanted that house. But in just four days, there were over 10 offers on it and four were full-cash offers. I don't follow where the money goes—I follow where the smart money goes. And the smart money is gobbling up high-end foreclosures with plenty of amenities in affluent areas of the city. These are the homes in which you'll easily gain a higher percentage of return.
I've watched with a close eye the housing market in Las Vegas. The "subprime tsunami" is coming to an end. As an investor, you cannot buy when everyone wants to buy ... that creates a sellers market. There is good money to be made buying a second home or investment property in Las Vegas.
And if you didn't buy between now and the next four months, you're gonna wish you had when 2009 rolls around.
