John Paulson Says the Time to Buy a House in the U.S. Is Right Now
He's bullish on real estate and gold, and thinks inflation is lurking around the corner. Taking California as an indicator, the hedge fund guru says sunny California has recently been a leading indicator for a positive turn in the housing market.
"And it turned positive seven months ago," Paulson told the group. "I think we're about to turn a corner."
And he's bullish on the U.S. economy. Paulson says he thinks we are at the tail of the credit crisis, which has stifled much home buying. He believes we are in the midst of a sustained recovery with a less than 10 percent risk of a double-dip recession. But while he's bullish on America, he's not as optimistic on Europe, calling it the "one soft spot" in the world.
Paulson said he denominates all of his assets in gold and is bearish on the dollar. And he thinks we'll see high single and perhaps even double-digit inflation in three to five years, which he why he has been known to advise buying as many homes as you can stuff in your pocket.
Paulson bet against the subprime mortgage market, earning between $3 billion and $4 billion for himself in 2007 alone. He is the subject of writer Gregory Zuckerman's "The Greatest Trade Ever: How John Paulson Bet Against the Markets and Made $20 Billion." Of course, his actions stirred up strong emotions and criticism in the U.S. He was highly criticized for creating the Abacus fund for Goldman Sachs, basically a bundle of bad loans, and then betting against them, making windfall profits on the backs of people who were losing their homes to foreclosure. Goldman, of course, also played both sides of the game, buying credit default swaps against the bad assets in case they failed, which they did. Both reaped billions.
But Paulson claims his shorts had no impact on those families. "Without us, the mortgage market would have existed exactly as it did," says Paulson. "(Short-sellers) were a tiny portion of that market, maybe 2 to 3 percent."
So who were the culprits? The mortgage brokers, says Paulson.
"They only cared about generating fees, they falsified appraisals, " he said. "... this was the sad underbelly of mortgage finance in the U.S."
Paulson said his investment methodology has always been to short high-quality, but misplaced credit. When he went looking, he found subprime mortgage-backed securities. As he dug deeper he found mortgage lenders were lending out millions of dollars to borrowers with the poorest of underwriting standards -- they didn't require jobs, assets, or even a credit history. And of course it was zero-down payments for these borrowers. As many put it, lenders essentially put a mirror up to a borrower's nose and if he fogged the mirror, he got a mortgage loan.
"Basic underwriting standards were nonexistent," says Paulson.
So where were the rating agencies? Pauslon says he did argue a bit with the rating agencies, because their modeling techniques actually bewildered him. He exposed a logistical hole in their data. The agencies are backward-looking, but there has never been a period of time in the history of statistical real estate data when housing prices decreased. Thus the models didn't even figure in the possibility that housing could fail -- hello, crater.
"And Moody's says it doesn't speculate,' " said Paulson.
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