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Was John Paulson Right About Real Estate?

March 24, 2012 | About:
shaunconnell

shaunconnell

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Two years ago, billionaire John Paulson made headlines when he told investors, "If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home."

Such strong advice was pretty alarming at the time, because plenty of investors were still licking their wounds from the recent real estate housing bubble crash.

Was Housing a Good Bet?

Paulson should be known for someone who makes big bets, and lot of those bets pay off -- and a lot of them don't. Last year was a rough one for the multi-billionaire, even in spite of his past successes.

Was he right about housing being a great bet? Maybe, but if he was trying to time the market like it looks like he was, his timing was at least a couple of years off.

According to Willow, a lot of markets were still dropping substantially after he made his call. The entire nation as a whole sees housing prices still slightly falling -- where Paulson lives in New York, prices still fell off quite a bit, according to the National Association of Realtors.

Of course, some REITs (like REIT has) have done fantastically, but that's not quite what Paulson encouraged investors to buy -- he seems to have been talking about houses specifically, not funds.

As a question of timing, it wasn't a great call. But it's not necessarily bad advice, especially in light of what we'll discuss below.

Are Houses Still Cheap?

I think housing is absurdly cheap right now in plenty of parts of the country, especially in the context of such low mortgage rates we have.

There's talk about the Fed trying to increase interest rates sometime soon, so this is probably a fantastic time to get a mortgage and buy a house -- if there ever was one.

Remember, interest rates for a house should have the inflation rate -- as well as the predicted future rate -- cute from it over the long haul. If inflation begins to increase, then a low interest loan for a rising market could be an incredible investment in and of itself.

As US Interest Rates recently reported:

"[T]he real mortgage rate is the official mortgage adjusted for inflation. For example, if inflation is 3%, and mortgage rates are 4%, the real mortgage rate is only 1%."
Not every house or every market is the same, but if someone was on the fence in 2010 and 2011, they should jump on board in 2012, because both mortgages and houses are likely to become more expensive over the next five years.

Meanwhile, I'm keeping an eye on the Fed's policies and interest rates... if they begin to shoot up, it completely changes the real estate market for a lot of investors.


Rating: 3.3/5 (13 votes)

Comments

Cornelius Chan
Cornelius Chan - 2 years ago
Meanwhile, I'm keeping an eye on the Fed's policies and interest rates... if they begin to shoot up, it completely changes the real estate market for a lot of investors.Looking forward to an article on that.[b][/b]
AlbertaSunwapta
AlbertaSunwapta - 2 years ago
Current home buyers, in comparison to buyers in much of the last decade, will have much higher levels of disposable income and a greater ability to diversify any savings they accumulate. As long as low house prices and low interest rates persist, I believe Americans can expect changing consumer dynamics.

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