The Comstock Partners were written up in Barrons several times. This is from 22 August 1988
Snip
BY ALMOST any measure, residential property values have vaulted beyond the bounds of economic sense. It started in the 'Seventies, when high inflation and low real interest rates turned leveraging real assets at fixed rates into a virtual printing press. As with any boom, the banks, in an era of deregulation, kept lending more and more money for construction and spending less and less time analyzing the economics of each project.
Then came the tax act of 1981, which sharply accelerated depreciation schedules and boosted the perceived cash returns to investors into the stratosphere.
Up to now, making money in real estate has been a game almost anyone has been able to play, as witness the variety of hucksters who, in the wee hours of the morning on cable TV, sing the praises of buying property after property with no money down and interview one barely literate "successful investor" after another.
Stan Salvigsen, Michael Aronstein and Charles Minter, who make up the investment strategy team of Comstock Partners Inc; are sure the music is about to stop.
They've concluded that real interest rates and home prices are much too high and consumers far too deep in debt for the market to keep appreciating. They believe that the overuse of credit in any sector encourages development beyond economic need and eventually brings prices crashing down. Earlier in this decade it happened to oil, rail cars, farm land, precious metals and video games. Now they say that the "rolling depression," as they refer to it, is about to hit people where they live.
-John Liscio
BARRON'S: Why do you think that real estate is no longer a sure-fire investment?
Salvigson: People like to blame it on the oil price collapse in Texas, or the bust in the green markets in the Midwest. But you are starting to see more prices going down on a quarter-to-quarter basis-and not only in the Oil Belt or the Farm Belt or the Rust Belt. That's not a healthy sign when the supply of housing keeps increasing, and the vacancy in commercial real estate keeps escalating.
Q: But the evidence is hardly conclusive.
Aronstein: So far. Some of the cities that have done particularly well are starting to show year-over-year weakness in the middle and upper-middle price ranges. There are a lot of examples where people are unable to sell for what they bought for a year ago or 18 months ago-which is a big change. If we were in the depths of a recession, you would say that might be a cyclical phenomenon. But we are, at least according to popular perception, at a very vigorous point in the economy.
Q: Prices softened a bit in the first quarter, but the}' appear to have bounced back somewhat in the second
Aronstein: This first quarter you basically had an equal amount of advances and declines. That's a big change from what we have seen in the first eight years of the decade, when the first quarter was always strong.
, Q: Still in spite of the Crash, in the year ending June 30 prices are up 3.4% nationally, almost 5% in New York and even more in certain parts of California.
Aronstein: In real terms, they're still basically flat, because if you're carrying an 11% mortgage, after one year you haven't covered your cumulative interest.
Q: But does anybody really look at it that way?
Aronstein: No. I think the average home owner just looks at it as an asset that over a long enough period of time has got to go up.
Q: And he's been right. Over a long enough period of time it has gone up, handsomely.
Aronstein: Generally, but land prices have historically been very cyclical. Anyone buying urban land in the latter third of the 19th century probably didn't live long enough to see it appreciate. In Great Britain, from the Napoleonic wars to the turn of the 20th century-a period of nearly 100 years-prices were down.
The current cycle is pretty much unprecedented, with prices going up, with some cyclical interruptions, since the 'Thirties. It is very hard to convince anybody that there is any historical precedent for a prolonged and severe decline.
Salvigsen: I think it is important also to understand that we are making this call before real-estate prices collapse. Last year we said the stock market was overpriced before it started down. It is much more difficult to make calls like this before a market cracks.
Snap
Some of these guys are now in the big mutual fund in the sky, I miss John Liscio.
I used to record some the new and interesting TV programs like the mutual fund program on CNBC. Recently finding I had no empty tapes to record on but with about 50 left over from the early 1990's with anywhere from 10 minutes to perhaps one hour of interesting stuff, I decided to save the good stuff to one or more tapes. I ended up with about 15 hours of "good stuff", like the head of Comstock Partners, Figgs, Metz, and others like Peter E, who said " I have an outstanding record and tell you to get out of equities now and to subscribe to my newsletter". I see Figgs still on the TV, same old stuff, Metz decided that he could not be anything other than bearish and after being at Big Sur on the Calif coast ( He is a New York guy) just getting ready to chomp down on lunch and someone he had never seen came up and said "Mike, you are wrong", He decided to quit taking calls from CNBC when ever the market went down.
I found that I had hours and hours of major players saying "get out, this is the end" because the DOW had just passed 3000 and was at about 3500 while these guys were hyperventilating. Interesting stuff. |
