Investment U e-Letter: Issue #680
Monday, June 4, 2006 John Schaub… Insights From a Real Estate Guru on the Housing Market
by Dr. Mark Skousen, Advisory Panelist, Investment U Since 1990, real estate has been a fabulous investment. But after an unprecedented bull market through 2004 - when houses often sold for more than the owner's asking price, and builders could mark up new homes by 30%-40% above normal - it was time for a break. The Fed raised rates 17 times, and, in the most overvalued markets, the boom turned into a bust. We have already witnessed a significant increase in defaults and a collapse in mortgage REITs and homebuilder stocks. Earnings on mortgage banks and thrifts are off 30%-40%. Inventories are rising and prices of homes and condos are actually falling in California, Nevada and Florida. Yet "real estate is local," as the saying goes. And the fact is, in the long run, it's still the best road to wealth in America… Let's look at what's going on around the country, then I'll share some insights from John Schaub, one of the most successful real-estate investors around. Some Housing Markets Are Still Booming Residential and commercial properties in major cities in New York, California, Florida, Texas, and other boom-towns have skyrocketed over the years, and made millionaires out of millions of people. And good opportunities still abound. To be sure, the housing bust is far from universal. While seller expectations have been lowered, according to the S&P/Case-Shiller U.S. Home Price Index, the actual average selling price of an American home dropped for the first time in six years last month - by only 0.3%! Where's the real estate "bust" in a 0.3% decline? In Utah, I recently met an investor who sold his home two years ago in expectation of a sharp selloff. He's still waiting. Meanwhile, real estate prices rose 12% in the past year in Utah - the Rocky Mountains are still booming. In New York City, where I live, housing prices are climbing, too. So where are the best deals right now? John Schaub: The Real Estate Guru Who's Never Been Bankrupt In his May 21st Investment U column, Alexander Green published a long list of real estate gurus who promoted aggressive, high-risk, nothing-down courses, and noted that all of them have filed for bankruptcy at one time or another in the past 25 years. Robert Allen, Al Lowry, Wade Cook, almost all of them. But he wisely left off the list John W. Schaub, my favorite real estate guru. (I've been recommending his services for over 20 years in my newsletter, Forecasts & Strategies.) That's because John Schaub is a multimillionaire who has never ever come close to writing a bad check. He's bought and sold dozens of houses, all profitably. Schaub teaches classes on buying distressed properties, and he thinks the next year or two will offer incredible bargains for those willing to search patiently for unique opportunities. He recommends looking at tax sales, discounted loans and bank foreclosures. And he avoids high-risk, highly leveraged "nothing down" real estate deals like the plague… Schaub's entire program rests on the concept of buying good quality properties at a discount, paying a low-interest mortgage (preferably from the seller), and earning positive cash flow from dependable renters. This conservative approach is the reason Schaub is still in business after 30 years. Schaub Sees More Bargains Ahead I asked Schaub about his outlook. He warned that after this unprecedented real estate boom, a slowdown - not a collapse - could last for several years. He expects a wave of foreclosures to materialize in the next two years, especially if long-term mortgage rates go up. In Sarasota, Florida, where he lives, he says that sellers have slashed prices 20% or more, and Coast Bank will auction off 480 foreclosures next month. As a professional who has bought and sold hundreds of single-family rental homes, he is waiting to get back in. "You still can't get positive cash flow on most rental properties at these prices," he told me. "They need to come down another 20%-30%." Schaub noted that inventories of houses for sale are not increasing, and that's a good sign. Builders are no longer building in previously hot areas. Homebuilder stocks and mortgage REITs have rallied in the past month. And the Fed has injected a lot of liquidity lately to keep the subprime-lending crisis from spreading. (M2 is growing at a 10% clip). Another aspect of U.S. real estate overlooked by the bears is foreign demand. Because of the cheap dollar, foreigners are coming into the U.S. in droves and buying up real estate, especially in New York, Florida, and the West. Is the worst over? Perhaps. If you're interested in owning rental properties, I urge you to pick up a copy of his bestseller, Building Wealth One House at a Time. He also offers a 6-hour audiotape course, "Buying Property from Owners and Lenders in Distress." Good investing, Mark Today's Investment U Crib Sheet - Most real estate gurus haven't come close to achieving John Schaub's level of success. Indeed, over all, their businesses have failed. Here's why: No Money Down Real Estate Investing: Why Flipping Homes in Today's Market Can Be Dangerous To Your Financial Health
- Real estate, of course, is one of four asset classes your portfolio should contain. Investment U's Fast-Track Investor's Guide, our complete "A-to-Z" handbook for profiting in stocks, bonds, real estate and precious metals, shows you how to pull your whole plan together.
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