Thomas Hoenig’s Side-Pocket: Don’t Look at Your Real Estate!

August 23, 2010 1:39 pm

We all know that the housing market is a mess. The prices are still moving lower in many areas and that should pose a significant problem to municipalities. But does it? I recently received my tax bill, due in November of each year. While the assessment of the price of my home went down, the millage rate went up, as did the tax. Some of this is due to increasing costs, but there is a good amount of money that homeowners in my city will be paying for those that have foreclosed or are simply not paying. This is not good for the overall economy either.

In an attempt to pacify the U.S. homeowner, Thomas Hoenig (President of the Kansas City Fed – and inflation hawk) said today that homes should not be looked at a top investment choice. (paraphrased)

Does that mean that he would like for most to discount the fact that their homes are worth less and believe that no matter how low values go, all will be fine? Is this just a courtesy call from Mr. Hoenig that is quietly telling us that there is a great amount of downside left for housing prices?

It appears that Mr. Hoenig would like for us to play the game called side-pocket that is often associated with hedge funds.

In general hedge fund side pocket investments are illiquid investments which the hedge fund manager places into a side pocket account. Mechanically the side pocket account is simply an entry on the hedge fund’s books which is tracked separate from the liquid, non side pocket investments. The structure is flexible so that an asset can be deemed a side pocket asset at any time – either at the time of purchase or at a later date. Typically a follow-on investment to an investment in a side pocket account will also be placed in the side pocket. Hedge fund managers will usually place an outside limit on the amount of assets which can be placed in the side pocket investments, usually calculated as a percentage of the fund’s assets and based on the purchase price of the side pocket investment.

Hear no evil, see no evil about the price of your house… Just pretend that it was never important, although they all said how important home ownership was before. But, never mind that! Just listen to what they say now…Right?

What are his comments really predicting?

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