That is true, but i also know that while you were at pimco, you spent a lot of time trading and investing in mortgages, so you knew a few things about real estate before starting the encore funds.
What does everybody get wrong about real estate/ it is so easy to make generalizations and assumptions, but i know, and we know having watched for the past four years, that's they are often proven incorrect.
One of the things i would say is if you are in the real estate market as an investor or developer, you have to rely on the boots on the ground, and knowledge of the local markets, and what the market typically gets most wrong is defining a market at the top or the bottom, for instance, at the bottom in 2008, 2009, many are saying that miami had 60,000 unsold, vacant condos when in fact be world number was less than one third of that, and today we already know that miami and miami beach condos are up to $1500 to read thousand dollars per square foot.
Why is there a such a big gap between reality and perception?
I think a lot of it is aggregated data -- extrapolations.
A sensational data that catches the news.
So the consensus in the marketplace, many thought that miami would simply slide into the atlantic ocean, that as a viable city in america or the world, that it really was on its back and could not recover.
Here we are five years later, and miami is very strong.
Ok, so if your experience proves that you need boots on the ground, why do so many people persist in being long-distance investors, absentee landlords who think that they can time a real estate market from thousands of miles a way?
I think there is a flaw in the discipline of many asset allocators who are invested in real estate -- like whom?
It could be consulting firms, it could be large pensions, endowments, foundations -- so they feel more and more pressure to invest in hard assets, pumping more money into real estate, taking it out of stocks and bonds, and making enormous mistakes in the process?
It is the process that is the issue.
Still relying on the clip board, check the box due diligence and what we call desktop due diligence.
You have to be out in the field.
They say location, location -- due diligence on that lot like mobile signing.
You cannot invest in real estate the same way you buy stocks or bonds from a trading floor.
That does not work.
You have to be on the ground, you have to know every block of every community, and you have to do it on a micro level, not on a macro level.
You mentioned miami.
What happens in miami is not applicable to what happens in california.
The different cities in california are all different, and he that goes with the no cities are unique, so you would not compare san diego to the different areas of orange county, l a, san francisco, or sacramento.
Bill, miami turned out to do better than people thought.
As you point out.
Have you got to miami and taken a look at your self to see what was and was not foreclosed?
What is worse than people think?
You have to follow -- and this is one of the disciplines that we engage when citing and doing our due diligence, you walk population growth, job growth, the new millennials who are looking for housing want to be in an urban area, so the city -- you want to be in the center, not on a suburb or the periphery, so going into cities that are growing, where jobs are plentiful, where people can -- tenets can go out there front door and find amenities that they want to fight within walking distance, including public transportation, is critical.
So to answer your question, you go to the -- stockton, california?
Well, we are now looking at stockton.
I would say areas of the midwest remain an issue.
And where you have older, less updated infrastructures without the a miniaturized -- without the amenitized conversation -- i am sorry to interrupt you, but you have been doing this for a long time.
What still surprises you about the real estate market?
This cycle has to be taken into consideration when evaluating the real estate opportunity.
Remember, we had a very different, deep recession that was at the heart of the global financial system, so we knew, and the new normal phrase, to alert people that this would be a 10-year cycle, not a quick upturn followed by fed tightening and another quick cycle.
And location, we are about five years into this recovery, but we are only at the onset of an expansion, so many are saying a business cycle downturn, which obviously would not be good for real estate, is inevitable in two years to three years.
I would say it is more like five years.
Bottom line, if you have made 50% in real estate, now is not the time to sell.
Real estate, remember, includes many different sectors.
Residential real estate differs from office, so in residential, it depends on where you are, erik, because in new york, the apartment markersts are already trading to a low for cap.
A lot of the 10-year-old property because of the lack of supply of new multifamily coming into the market is trading today at a five-cap rate, which as a traditional spread, very expensive 10-year treasury, may look like an attractive historical spread, but there is risk of cap rates expanding as treasury rates rise.
So you look at some of the forecasts for treasury rates, many are saying, working off janet yellen's -- we will tighten six months after the end of tapering.
So if the fed begins to tighten 25 basis points initiative its nine meetings through 2016, we will end up with fed funds just under 4% at the beginning of 2017. treasury rates about 4.5% and mortgage rates about 5.5%. big picture looks different.
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