Paulson is Bullish on US Real Estate: What Does He See?

Posted on May 19, 2010

Since I am long CALCQ.PK, I was mildly amused to see that famed hedge fund speculator, John Paulson, was now bullish on US residential real estate, particularly the CA market. You can read some of Paulson’s comments at this MarketWatch article.

He he sees: “prices rising 3-5% in 2010 and 8-12% in 2011.”

The question, of course, is why is Paulson now bullish on real estate?

Since intelligence and great wealth are mutually exclusive, I think it is fair to say that Paulson has absolutely no hidden rational knowledge that would suggest a rise in real estate prices.

At the same time, however, since great wealth is primarily the result of a forced suspension of rationality/intelligence (“the crowd” is always and everywhere irrational due to the fallacy of composition) and morality, I think it is possible that Paulson is privy to some inside information as to the future conduct of banks.

It is quite obvious, I believe, that the big banks can easily reignite a real estate boom via an easing of credit and “wink-wink” business deals with appraisers who would be told to raise estimates of value. Of course, these two courses of action would be irrational and immoral, due to high unemployment, and the supposed legal “wall” erected between banks and appraisers. However, the irrational truth, as far as income and employment is concerned, is that banks could care less if you actually pay back your home loan or not as they flip nearly all loans back to FNM and FRE. In turn, FNM and FRE don’t care if you pay your home loan, as they have an infinite amount of capital. On the appraiser front, I think it’s obvious that banks don’t really pay much attention to conflicts of interests and “Chinese Walls”.

The only real mystery to me, is why the banks have not taken the above approach sooner, in order to reignite housing. My only explanation is that there was more money to be made from a housing crash and free bailout money, than there was from starting a new real estate boom. Additionally, Wall Street had not yet tired of the real estate crash and foreclosure crisis story. However, since large parts of the bailout bonanza are slowly coming to an end, political pressure on banks is building, and boredom with the crash story has set in, it does seem conceivable that Wall Street could invent a new positive myth of growth in order to generate more profits.

A positive myth would be a very welcome addition, given the plethora negative myths that seem to have become the new hot trend on Wall Street. Whether a new positive myth gains traction with others on Wall Street is an impossible question to answer.

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1 Comment so far

Yehuda Fruchter May 19, 2010 10:09 am

Interestingly, concerning the housing market, I saw this article on Yahoo! Finance (http://finance.yahoo.com/news/Mortgage-delinquencies-apf-3683370452.html?x=0&sec=topStories&pos=main&asset=&ccode=). The numbers are staggering and makes one wonder how any sort of positive feedback loop will be created in housing. But, crazier things have happened.

The number of homeowners who missed at least one payment on their mortgage surged to a record in the first quarter of the year, a sign that the foreclosure crisis could worsen.

The Mortgage Bankers Association says more than 10 percent of homeowners had missed at least one mortgage payment in the January-March period. That number was up from 9.5 percent in the fourth quarter of last year and 9.1 percent a year earlier. Those numbers are adjusted for seasonal factors.

More than 4.6 percent of homeowners were in foreclosure, also a record. But that number was up only slightly from the end of last year.

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