Saturday, June 10, 2006

Just Who Is Marcel Arsenault?

Interesting piece on little known real estate investor Marcel Arsenault by John Rubino:

Look Out Below

Back in the late 1980s, Marcel was a hippy/entrepreneur in the Ben & Jerry mold who had spent the previous decade mixing up vats of Mountain High yogurt, eventually turning the brand into one of the most popular in the West and selling it Beatrice Foods for a nice profit. He then started buying up Colorado real estate. “I couldn’t have picked a worse time,” he says now. The junk bond implosion was metastasizing into the S&L collapse, and the value of office buildings and shopping malls was plunging.

But he held on, and in a couple of years was rewarded with the mother of all fire sales. The government began liquidating the assets it had acquired from failed thrifts, and prime properties were suddenly available for pennies on the dollar. Marcel loaded up on empty office buildings and leased them out for a fraction of the going rate—possible because of the low purchase price. The buildings filled up, their values rose, and he leveraged their cash flow to buy more offices, shopping malls and condos. As western real estate values soared, so did Colorado Santa Fe’s portfolio. It now manages upwards of $350 million of property and is sitting on well over $100 million of unrealized capital gains.

In other words, this is a guy who has prospered in both good and bad real estate markets, which makes his current take worth noting. And right now he’s excited—about the prospect of another 1990-style crash. Below are some excerpts from the previously mentioned report. The capitalized headings and italicized comments are mine, the rest is Marcel’s. As your read this, keep in mind that it’s the analysis of someone who for the past fifteen years has been very successfully LONG real estate.
...
THE BIG PICTURE
We believe that the apparent ‘irrational exuberance’ in the real estate market is, in reality, an asset bubble that has been inflated by a flood of capital attracted to real estate. The effect of this flood has been to drive down yields and push up prices. We believe this value trend is unsustainable and that we are at a crucial inflection point. Based on the analysis detailed below, we believe that cap rates will inevitably rise back to trend (and possibly overshoot), thus driving values down dramatically.

HOW WE GOT HERE
Phase I: Stimulus through Monetary Easing. Following the recession and 9-11, the U.S. Federal Reserve implemented monetary easing to a degree not seen in almost 50 years. Cheap money and credit flooded the U.S. economy in an effort to prevent a serious recession (which had the risk of turning deflationary like Japan’s). The lax monetary policy had the intended effect of stimulating consumer spending (particularly on assets like homes and real estate).

Phase II: Illusion Becomes Reality. By 2003, prices of real estate began rising faster than the rate of inflation. In effect, investors began noticing how “profitable” it was to accumulate real assets. Rising prices created a “virtuous cycle” whereby more and more buyers participated in the equation of purchasing real estate. While admittedly rising prices were driving down yields, few cared about yield because the Fed was not rewarding saving. The preferred game was appreciation.

Phase III: Lenders “Pile In” (the final period of play). Given a few years of rising prices, real estate began looking very safe; low rates made the cost of debt very manageable, justifying higher prices and larger loans. By 2005 real estate lending was extraordinarily competitive, (after all, default rates were at historic lows). By 2006, cheap and easy mortgages had grown to epic proportions throughout the real estate industry. “No money down” became the way to purchase a home. Foreign and hedge fund capital poured into mortgage markets chasing yields of the “risky” tranches of mortgage paper (why settle for the 5% yield of “A tranche” if the risky “B tranche” yielded at 8-10%?) With rising property values, the “B tranches” were soon re-rated to “A”, rewarding the buyers with phenomenal appreciation in their mortgage paper. Mortgages become more plentiful and the tide of easy money rises into uncharted territory, and bringing real estate values even closer to rocky shores hidden beneath a tidal flood.

Phase IV: Inflection Point Achieved (the cost of money rises). Satisfied that it had prevented a serious deflationary recession, by June 2004 the Federal Reserve begins to slowly increase rates. By 2006, the Fed Rate had increased from 1% to 4.5% (the “neutral rate” – not deemed excessively simulative by economists). With yields this high, it again makes sense to hold cash at the bank. By 2006, the cost of mortgage debt is returning to the long term average.


THE NEXT FEW YEARS
Phase V: - The Future: Look Out Below. The problem becomes obvious and virulent when real estate values begin to fall. With debt service costs rising, real estate begins to flounder, and more risky real estate ends up on the rocks. As default rates rise, mortgages slowly become more expensive and difficult to obtain (“real estate becomes a four letter word” in the parlance of an old banker). Only brave and knowledgeable entrepreneurs venture onto the scene of real estate wreckage at the lowest tide. Only a “foolhardy lender” would venture between the rocks of the now quiet ebb tide.

The “virtuous cycle” has completed its turn into the “vicious cycle.”

The piece includes a report by Mr. Arsenault with an interesting conclusion, he plans to liquidate most of his real estate investments.

Caveat Emptor!
Grim

26 Comments:

Anonymous Anonymous said...

Man, I can't wait till this bubble bursts....

I must be somewhat warped, because I really, really want it to happen and want to see people lose their shirts and get thrown in the streets.

All I have to say is, what goes around, comes around. I am saving cash and I too will buy these houses pennies on the dollar.

6/10/2006 11:06:00 PM  
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Friday, June 09

6/10/2006 11:42:00 PM  
Anonymous Anonymous said...

Anon. 12:06
So what you're saying is that yiu think that once these prices fall they will fall below what they'll be worth later up the road. But how long do you think it will be before RE rebounds enough to show you a real profit? Don't you think these owners are going to fight tooth and nail to hold on to something that most worked their whole lifes for?
I find your "warped" perspective of being joyful at wanting "people lose their shirts and get thrown in the streets" to be no more than an expression of jealousy like many of those that post on this site who didn't have the nerve to buy before the Bubble and more than likely never will, even in a fully collapsed market.

Bill

6/11/2006 06:11:00 AM  
Blogger grim said...

This forum is a karmic nightmare.

grim

6/11/2006 07:47:00 AM  
Blogger rymingrealtor said...

This forum is a karmic nightmare

Splain???
KL

6/11/2006 07:51:00 AM  
Anonymous Anonymous said...

Sounds easy but if it were, then there would be no such opportunities. If and when a collapse materialises, you better have a lot of cash, a good lawyer and very sharp elbows! Nobody gives away their life's savings without a fight, banks are not in the business of throwing off assets without at least trying to recoup the debt, they will do a lot of forgivness/restructuring before they finally capitulate to do firesales. The number of properties on the market with liens/tenants etc is already high. Wait til this downturn hits.

pg

6/11/2006 07:57:00 AM  
Anonymous Anonymous said...

No jealousy here. Its always nice to see oneone get smacked down after they have been bragging about how much there houses have gone up. Its the market psychology that I don't like. Too many people, thinking they are all getting rich quick, bragging and acting like there is no such thing as the pipper.... This is what I have seen in NNJ. Others might disagree (i.e people who own RE and are shaking in their boots). Whatever, I don't care. Its like watching the boxing champ brag about how great he is, only for him to get KO'd by a no name in 90 seconds. It just feels damn good.
Its going to be damn good when I see a line of foreclosures on the streets and the blank looks on peoples faces. Ha....

6/11/2006 08:08:00 AM  
Anonymous Anonymous said...

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6/11/2006 09:11:00 AM  
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6/11/2006 03:50:00 PM  
Anonymous Anonymous said...

This forum is a karmic nightmare.

Awww, a little Schadenfreude never hurt nobody, especially if it's well-deserved (aimed at smug self-styled RE 'genii' who are starting to get their comeuppance)..

6/12/2006 11:57:00 AM  
Anonymous Anonymous said...

So many blogs, so little time. Got to get back to work on my own real estate sites. Enjoyed the visit. Stop by my site if you have a chance.

6/20/2006 01:24:00 PM  
Anonymous Anonymous said...

. Be It Ever So Humble: Never apologize for the appearance of your home. After all, it has been lived in. Let the trained agent answer any objections. That's the job of your Realtor�.
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6/20/2006 08:18:00 PM  
Anonymous Anonymous said...

Here's the home buying process into a single weekend. She does it by compressing the real estate marketing budget into a much tighter timeframe than normal .

6/21/2006 08:58:00 PM  
Anonymous Anonymous said...

You can do a lot to For example, curb appeal sells: do some landscaping. Plant some flowers. Remember that the front door greets buyers. Make sure it offers potential a bright, warm welcome.

6/21/2006 10:26:00 PM  
Anonymous Anonymous said...

Hint #11 for . You Can Sell Pride Of Ownership. Cleanliness counts. Potpourrie works. So does a nice-smelling stew simmering on the stove. Happy buyers often tell us: "I liked the smell of the home." And you'd be surprised how many people walked away from a "perfect" home because "the owners were smokers."

6/22/2006 07:27:00 PM  
Anonymous Anonymous said...

. Pets Underfoot? Keep them out of the way ... preferably out of the house. Many people are acutely uncomfortable around animals. Nothing can stop a sale faster than man's best friend, wagging its friendly tail at a prospect with an allergy.
Go here for more ideas.

6/23/2006 05:05:00 PM  
Anonymous Anonymous said...

watch "absorption rates" closely. It's a time-tested yardstick for home sales. Does it prove that the Housing Bubble has already popped? You bet it has.

6/24/2006 01:57:00 PM  
Anonymous Anonymous said...

Even if you sell your home "as is, subject to inspection" � you can do a lot to . A top-notch Realtor� will probably hand you a list of at least a dozen things you can do to help improve your sale. If they don't, well, maybe you need to .

6/24/2006 06:29:00 PM  
Anonymous Anonymous said...

Hint #5 for . Loose knobs, sticking and squeaking doors and windows, warped cabinet drawers, and other minor flaws detract from home value. Fix them. Most buyers assume there will be ten hidden problems for every one they see.

6/25/2006 07:34:00 AM  
Anonymous Anonymous said...

. Never Stay In Your House With House Hunters: Let the agent handle it, and remove yourself if possible. Remember that the Realtor� has worked many hours with these people, and knows what they're looking for, and how to work with them. Let the Realtor� do the job without interference.You may feel that an agent isn't showing the important features of your home to the prospect, but the agent knows people aren't sold by details until they've become emotionally involved with the "big picture" of your home. The presence of any member of the seller's family can't help. It always unnerves possible buyers. It often prevents a sale.
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6/25/2006 12:33:00 PM  
Anonymous Anonymous said...

The average home is currently on the for about 4 months before it goes to contract. Around 15% of initial real estate contracts never make it to a successful closing ... something goes wrong, and the frustrated seller puts the home back on the real estate market .

6/26/2006 07:46:00 PM  
Anonymous Anonymous said...

Blog-hopping is a habit I am trying to break since my own real estate work requires a lot of attention to detail. Then I run into a blog like yours and I�m reminded about how the internet expands our views positively. Thanks for the read. Visit my site if you have a chance.

6/26/2006 09:13:00 PM  
Anonymous Anonymous said...

Nothing beats a good blogging trip, but I think I have to get back to work on my own real estate sites. May as well stop on a high note, which your blog seems to be. Thanks for the read. Visit my site if you have a chance.

6/27/2006 03:10:00 AM  
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