I recently did an interview with Jack Clark Francis the co-author of Contrasting Real Estate with Comparable Investments, 1978 to 2008. He’s a distinguished professor at Bernard M. Baruch College, served on the Federal Reserve, taught at Wharton School and the University of Washington, and authored publications about real estate, investments, derivatives, and finance.
Tell me a little bit about your background.
Grew up in Indianapolis and got my BA and MBA at Indiana University. I was a paratrooper and company commander of 300 men. I left after two years during GI bill, went to UW to study under Bill Sharpe who won the Nobel Prize for Economic Sciences. I got my PHD at UW and then taught at Wharton. I spent two years at the Federal Reserve as an economist then went to Baruch in 1971 and stayed there ever since.
In your real estate article you spoke about subsidies that support real estate prices. Do you think the U.S. Government should limit these. If so, how?
They should limit subsidy. The federal government should have never gotten in mortgage business in 1938 through Fannie and Ginnie. In my opinion, the government should run schools, highways, defense, policy departments, but should not get into mortgage business. It’s just welfare program guaranteed by the Treasury. It allows government chartered entities to borrow at federal interest rate plus 30-40 basis points above the T-Bill rate. They take billions of dollars to buy pools of homogeneous mortgages. Over years the government accumulated trillions of dollars worth of mortgages effectively pushing down mortgage rates. Economist estimate the effects of government intervention have lower interest rates about 1%.
According to the Wall Street Journal, FHA represents 23% of all loans originated in Q209. How do you think this impacts real estate prices?
FHA were on the books since 1934, but didn’t start to pick up until 2008 when Fannie and Ginnie stopped buying. Now it’s much higher than 23%. Another welfare program. Once you make mortgage’s NINJA’s (no income, no job and no assets) you have to go bankrupt.
Get out of the federal housing business. You can’t give politicians trillion dollar investments, can’t let politicians run the business.
James, your generation is going to be poor people. Your generation are beggars. Fed Funds rate is .20%. The government is financing a huge amount of debt by Treasury bills with practically zero interest and these notes are due within one year or less. They keep rolling it over, which is easy when interest is about zero. When interest gets to 4% we will feel it big. Shooting from the hip without aiming, the federal deficit is over half financed with Treasury bills.
20% interest rates and 13% Treasury rates are coming again.
In your article, return on real estate over the last 31 years is 5.68%. Do you the past is a reasonable prediction of what real estate will return in the intermediate to long-term?
To be honest, I’m a little more emotional and afraid more than anything. Unless, the government does something about getting out of the housing market I’m concerned about the future.
You said, “The heterogeneity that causes real estate to be illiquid with high transaction and search costs.” As information becomes more perfect and the real estate industry more transparent through the internet, how do you think that will investment prospect of real estate?
This is outside my scope, but companies like Incolo provide a very interesting proposition. The electronic real estate market will add lots of value through options and transparency. I love the idea.
Case-Shiller is the most widely used home price index (HPI). You used it for your data from 1987 to 2008. How accurate do you think it is and what flaws might it have?
It is undoubtedly the best. Flaws? Let me think if it has any. It’s pretty spot on.
You mentioned, “If an investor is willing to gamble that history will repeat itself, it is worth noting that the average returns from equity real estate investment trusts (REIT’s) far surpassed the returns from physical real estate during our sample period.” Do you suggest investors wanting to invest in real estate to all divert to REIT’s?
Absolutely, no. Strange thing. When market was going up consistently, just leverage the REIT, then you’d make more money. In the long run, Roger (co-author) and I don’t think REIT’s will do well. Nobody’s that good and real estate will get bumpier.
REIT’s are mutual funds. Perhaps the good years are over for the industry. You have to remember, in years when real estate just went up it’s easier to be a profitable REIT.
Do you own your own home? Investment property?
Yes, I own my own home. And no, I do not own investment property.
My favorite question, What are some suggested readings you have?
Stocks, Bonds, Bills & Inflation (SBBI) by Ibbotson (co-author with Francis) and Real Estate Investment Trust: Structure, Performance, and Investment Opportunities. SBBI sells for $125, you should be able to buy an older version for $20 on Amazon.
Where do you see yourself in the next 5-10 years?
I’d like to retire by 68. Well actually, as long as my students enjoy me and I get to co-author with my colleagues I’ll keep doing it as long as I can.
