Doug Casey is an American free-market market economist, financial author and entrepreneur. He has been writing a monthly investment newsletter, the International Speculator since 1979 and I always find his ideas quite refreshing.
I the paragraphs below, he is interviewed by Louis James, editor of the International Speculator.
L: So, Doug, it’s well known that in addition to investing in resource stocks, especially gold juniors, you also have a passion for playing the real estate market. What can you tell us about real estate in today’s world?
Doug: Real estate has been very, very good to me. The reason that’s true is that I buy only things that I like myself. I don’t try to second-guess what other people may want. If you do that, you’re guaranteed to wind up with mediocre stuff that nobody really wants. I have an inclination to buy unique properties, as opposed to commodity-type stuff. That approach is not for everyone, but it’s worked for me.
But let’s start with the big picture. I’ve bought real estate in many countries, all around the world, and I find that it helps to have an international view.
L: We’d expect no less from the original International Man.
Doug: You wouldn’t, I know. But most people still think like medieval serfs, tied to the land of their birth. People say that real estate is a local market, and of course that’s true. Location, location, location – you have to know enough to pick good locations, so you should deal in an area you know well. But at the same time, if you take a global view, with over 200 countries in the world to look at, you have 200 times the chances of finding an anomaly – either on the buy or the sell side. Those anomalies make for exceptional deals, exactly what you want to capitalize on. It also gives you a better idea of what the market likes, what works, what doesn’t, and so forth. If you’re isolated and insulated in just your little community, you’ll never get one up on the rest of the crowd.
L: That makes sense, but let’s start with the U.S. real estate market, because that’s where most of our readers are.
Doug: It’s also the epicenter of the financial quakes spreading around the world today.
L: A lot of people have to be looking at what seems like a degree of economic recovery, and wondering if real estate has bottomed in the U.S.
Doug: Real estate has definitely not bottomed in the U.S., and probably not anywhere else either. You have to take a long-term view of this. Remember that through most of U.S. history, residential real estate was not viewed as an investment. You didn’t buy a house to make yourself wealthy selling it to someone else. It was viewed as an expensive consumer good that depreciated – you bought or built a house to live in it, just as you bought clothes to wear or a horse to ride. It was just a part of life – a necessity, a convenience, but an expense.
But then, especially just after World War II, the government started to institutionalize mortgages, which is to say, add huge leverage to the housing market. That’s what has transformed houses into speculative vehicles. That trend has been building momentum over the decades, as more and more debt was centered on real estate. Mortgages turned into commodities futures contracts. It was a huge change from the days where you knew your banker, he knew you, and he was lending his own money.
The result has been a huge amount of overbuilding, in residential, office and retail commercial real estate. It’s going to take years and years to work this off. In addition, the entire psychology of the market has changed.
I don’t believe this recession is going to end the way all the other post-WWII recessions have – with a new and bigger boom. This is a major, secular turning point. It’s not just another cyclical low to use to load up for the next run up.
L: Okay, so, U.S. real estate is still headed down, and maybe headed much farther down if this recession turns into the Greater Depression you’ve been calling for. But at some point, it will have to hit bottom. How will anyone who wants to own real estate in the U.S. know when it’s time to buy?
Doug: I think the economic depression we’re embarking on now – a depression being a period of time in which the average person’s standard of living drops significantly – will be much worse than the one in the 1930s. So we can look at how bad things got then, as a minimum guideline for when to start looking for a bottom. For example, Greenwich, Connecticut, was one of the hottest, glitziest real estate markets back in the late 1920s. A look at comparable prices in the newspaper ads from the period indicates that residential property fell 90% over a period of about five to ten years. There’s no reason that couldn’t happen today, especially in overbuilt markets like Florida, California, etc., but it could easily be much worse.
L: Why do you say that?
Doug: Because in those days, most people paid cash, to start with. If you had a mortgage, you usually put at least 20% down, and the length of the mortgage was generally five years. Today, with even prime mortgages having much less money down, lasting 30 years, and floating rates, there’s much more leverage.
But there’s another reason. The bottom back in the 1930s was famous for people being able to buy properties for just back taxes. Today, you can buy square miles of some cities, like Detroit, for back taxes alone – but nobody’s doing it. No one sees the $500 minimum bid as worth it, partly because the properties are likely to simply remain tax liabilities well into the future.
I’ve got to say that this is the big elephant in the room that no one is talking about. To me, more important than the overbuilding, more important than the amount of mortgage debt, is that real estate taxes are completely out of control in the U.S. Nobody talks about this, for some reason, but the fact is that in many parts of the U.S., you’ll pay 2% of the assessed value of your house to the government, just to live in it. There are people across the U.S. paying $10,000, $20,000, and even $50,000 a year in taxes on what are actually quite normal houses.
L: You think you own your house, but you have to pay rent to the government, or else.
Doug: Exactly; if you don’t pay rent to the government, you’ll find out who really does own your house very shortly.
This is cash money that has to be coughed up, whether you have a job or not. And a lot of people are still going to be losing their jobs in the years ahead. We aren’t anywhere near the bottom of the employment situation. So, I think there are going to be large numbers of places – and I mean all over, not just places like Detroit and Flint, Michigan – where you’re going to be able to buy whole tracts of McMansions for past taxes. But you’ll think twice before doing it, because those taxes are going to continue.
Click here for the full interview.
Source: Conversations with Casey, November 18, 2009.
