Cost of Building Houses Up 40% in San Diego

[powayseller]

I also believe in Index funds, and am a big Vanguard fan. Have been for many years…

I sold my house because it didn’t make sense to own an overvalued property whose value was about to plummet. We took the profit. Had we owned the house outright, we would have stayed. My husband loved that house, and he misses the views and over 5 acres we had. If we’d owned it, our mortgage payments would have been zero, and you can’t rent for zero.

I used to call doomsdayers pessimists, but the more I’m learning about the markets, the more I’m turning into one of those doomsdayers too. Now I have to change the label from pessimist to realist, because I’m an upbeat person.

The big mystery is the derivates and MBS markets, where all the money is coming from to keep the game going, the role of the gov’t in keeping the markets stable, and how long the gov’t can keep up the game. I want to be smart enough about it, to protect my family, learn from others, and educate too.

My rant about Sell Now is meant to educate, to widen people’s perspectives. I tell everyone I meet that I sold my house to get out of the housing bubble. I do that to enlarge people’s perspectives. It’s a type of charity work for me.I’m helping someone a lot more if they avoid foreclosure, than I could ever do checking in books at the school library or doing my Treasurer job at the PTA. They easily found another mom to take over the Treasury job, but there won’t be too many people as outspoken as I am about the real estate market.

[docteur]

Vanguard is my second favorite group of index funds. Look into the ifa website though, it’s quite an education.

Realist is the proper term. There is no emotion attached to it and at this point in time, I think you have to be acutely aware of as many markets as possible, because they all impact one another in so many different ways. I never try to understand where they are going, just where they are now. I am more of a trend follower ala the sage advice of “Ride the horse in the direction that it’s going.”

The derivatives market is very scary because no one has a clear handle on it and the MBS arena is so deep and convoluted it’s impossible to predict with any precision if it will implode. Until things tone down I’m simply laying low until I get an investment idea that sends a clear message that the time is now — then I’ll back up the truck and unload the cash. Patience is a very important virtue as is action (when the time is right).

Like all of the others who post on this site, you are an intelligent and caring person who doesn’t want to see others get hurt by the demise of this market. Some will listen and prepare for the enevitable, others won’t (or can’t) respond to the danger that is looming on the horizon and they will be hurt. All you can do it continue to tell the truth as you see it and share your ideas and knowledge with others.

Keeping the dialogue going is what keeps us all safe and I thank Rich Toscano for being courageous enough (early on) to show the folly of this real estate market and to create a venue for all of us to share our perspectives and information with one another.

[SDbear]

Docteur,
I did a quick comparison between the vanguard funds and equivalent IFA funds. For the large cap funds IFA had smaller expense ratios with lesser returns than Vanguard. For small caps IFA had much higher expense ratios than vangaurd but a higher return. I agree vanguard funds are not the cheapest index funds available. But I found IFA funds expensive too. For instance Spartan’s S&P500 fund had only 0.07% expense ratio as against vanguard 0.18% or IFA’s 0.15%. Am I missing something here? Also the index growth both websites quoted for the same indices were different. Is there any specific reason you chose IFA over Vanguard?

Powayseller mentioned that the vanguard money market can contain GSEs. I have some money in Vanguard’s CA tax exempt money market. I get slightly better returns here than from the T-Bills that treasurydirect offers (after tax considerations). But if they have exposure to the GSEs, I would prefer to move them over. The Vanguard prospectus said that the fund contains mainly california municipal securities. Their holdings also does’nt explicitly state GSEs or related derivatives / MBSs. How do I recognize these in any fund’s holdings?
Thanks in advance,
SDBear

[powayseller]

Please call Vanguard to get the holding info. I got so much incorrect info via e-mail. My prime money market fund has GSE stuff in it. I don’t know about the CA tax-exempt fund. Vanguard offers CDs and a treasury fund. However, I am considering other currencies. The yuan has to go up against the $, right?

[docteur]

SDBear –

Index Fund Advisors (“IFA”) has an excellent website that will give the visitor a specific education on index funds (www.ifa.com).

IFA handles Dimensional Fund Advisors (“DFA”) products and charges a “fee” to monitor your holdings. (Only certain Registered Investment Advisors [“RIA”] can sell DFA products, as they are not available to the general public — see http://www.dfaus.com).

There are less expensive RIAs who will “manage” your portfolio of DFA funds, and the least expensive I could find was Dr. Steven Evanson, a brilliant guy who also uses Vanguard products (www.evansonasset.com) Spend some time on his site. He has over a billion dollars under management and apprears to be a very fair and honest person (based on what I have read on his site and via other comments from clients of his).

Obviously, picking a manager and a group of funds to invest in is a personal choice. A pretty good site that I have found to compare DFA and Vanguard products is http://www.altruistfa.com/dfavanguard.htm

After lots of research, I have concluded that DFA and Vanguard are the best funds out there and I prefer most of the DFA funds over Vanguard, but both are excellent choices.

I guess the other thing to look at when comparing fees/costs is the net return after fees, which granted is sometimes very difficult to determine. Sometimes (albeit rarely) higher fees are charged because of a better mix, higher quality management team or some other factor that produces a higher net return, all things considered.

I know of several CTAs that charge as much as 25% of profits (one charges 50%) to manage accounts but they oftentimes return from 20%-40% per annum (pretty risky stuff but surprisingly consistent). Quite frankly, I don’t mind paying high fees if I can secure high returns, regardless of the investment vehicle (and that includes real estate) but most of the commodities stuff have standard deviations that make me dizzy, so I stay away from them.

I like Treasury Direct because it is simple to use and I never go out longer than 90 days. Besides I am a simpleton at heart, and I am merely parking money for a short time, always looking for my next real estate investment, which is where I have created 99% of my wealth. In a good market, you can’t beat the leverage you can get with real estate.

Having said all that, investments cycle and I think real estate is riding downhill so I am slowly moving into other investments besides treasuries (but still staying liquid by using products like index funds, ETFs (short term) and equities (Berkshire Hataway, series “B”).

I cannot help you on the GSE question.

[Anonymous]

Docteur

Great posts, thanks for the insights. I felt compelled to make a few points. I am a CTA and as a result I have been analyzing this housing market the same way that I would analyze a big picture trade that I would enter into.

Obviously because of my profession I think diversifying into commodities is a good idea LOL! However, all kidding aside, there is a phrase in the trading world that goes something like this “cash is a position.” This is especially true with shorter term rates at 5% now.

I study cycles very closely and without question we are at a cycle top in real estate. However, since this move up in price here is a straight momentum move that has extended to 4 standard deviations of many measures, it is without fundamental support. It is difficult to fade momentum moves in price because at times they can go so far beyond what can be reasonably forecast. Although we are spot on time wise with the cycles, valuations have gone way further.

As a trader I have disciplined myself to take profits when they are there and to move on without looking back as second guessing will kill you as a trader. I sold my home last year in August for a profit of over $1 Million and am content based on my models to wait for a drop or reversion to the mean type of move, to re-invest. Staying in a cash position with the funds that I have as part of my portfolio for real estate is a prudent play at this stage.

It is hard to believe that anyone could honestly tell me that taking a profit like that was a mistake. Just anecdotally without boring everyone with all of the ratios that I have looked at to conclude we are at a top, there are so many things that as a trader are so eerily similar to 2000 in stocks. It is simply the talk of the town wherever you go, the equivalent of the Nasdaq 10,000? Time Magazine cover sell signal! Can anyone out there name a time when all someone had to do is do what everyone else was doing without regard to risk, and the result would be they would become wealthy beyond their wildest dreams? This has never happened in history and it is not happening now

I was laughed out of the room when I told everyone I knew that Jan 1 of 2000 I went to 100% cash in all of my stock related accounts including retirement accounts. I had no idea that the magnitude of the drop would be what it turned out to be. But we were extremely extended pushing 3 standard deviations, and the bond market was in a significant downtrend which has always been bad for stocks. However, we at that time were only extended about 70% of the price extension that we have now in real estate in standard deviation terms.I dodged the whole selloff without losing a dime, and very few people laugh at that move now.

This stage in real estate is the same in my view, except for one thing that is significant. Our whole local economy is more leveraged in one area that it has ever been, and that is real estate. Itleast when stocks broke they were somewhat ancillary parts of people’s portfolios, where real estate is the core of most people’s net worth here. If we get a crack in the RE market it will have far reaching economic effects. This diversification nonsense in employment the bulls mention is just a crock. Look at the increase in the % of new jobs created since 2000 in So Cal and what industry they are in? The answer is in OC it is 48% of those new jobs since 2000 are real estate related, what great diversification!!!

The bond market has recently broken as it appears the foreign buyers are unwinding their positions that caused long term rates to invert and stay low. I think regardless of rates the selloff has begun, but it will be more severe if rates change significantly from here forward.

Aside from all of this,it is simply not prudent to have more than 25 or 30% of your portfolio in any one area regardless of what that area is. I am a professional trader and still do not exceed this ratio in my trading accounts. At the very least people should be scaling back their exposure to this sector of the economy at this point.

Sorry for the length of this post

[powayseller]

Chris, I have a tiny sliver of knowlege of these things, but have the same ideas as you, and I didn’t get into tech stocks either. I would like to hear your position on these points that I alread posted elsewhere: I’d like to sell my index funds and indiv. stocks (except increase Berkshire B & pick up a pawn shop), and put the rest of the money into cash. What form of cash? CD? Treasury? Euros? Yuan? A portion in precious metals? I’m undecided, but I believe a major recession is coming due to the dependence on RE, which is starting to unwind. Fallout will extend to banks, GSEs, and a financial collapse cannot be ruled out. The dollar is a risky place to be, esp. as the above happens and China starts to diversify.

[docteur]

Hi Chris,

Great post. Thanks for your insights and for the kind words.

I too bailed on the market before it tanked but I haired out early, in December of 1999. I took a nice profit but didn’t have any huge positions. I told everyone I knew to get out, but alas no one really listened to me (the froth and mania was unbelievable but not near as bad as this real estate market), except my personal trainer at the time, who left the market with 10 times his annual income (I put him in QCOM options).

Many of my friends literally went bankrupt riding the market all the way back down. My brother-in-law, who was in Dell Computer at the time, rode a two year, $ 180,000 profit all the way down into a dark hole (buying on the dips), resulting in a $ 30,000 loss. I warned him three times to sell but he wouldn’t listen. (I was trading options, futures and currencies at the time, because my primary business, real estate, wasn’t doing all that well).

I am 100% in cash now (but looking at taking some small positions in index funds, ETFs and Bershire Hathway – B, but short term until I see a real trend) because even though the stock market is trying to move ahead, I think this housing bust is going to have far, far reaching consequences and impact everything but the absolute most conservative of investments, resulting in any short term gains in the stock market being compromised by a much larger force (maybe even a world wide depression). I think a lot of folks are going to get hurt badly, not just in the US, but worldwide. Quite frankly, the current world financial situation scares the crap out of me.

I sold my last large development project in early 2004 to one of the largest public builders in the US, just after I started to see what I perceived to be small cracks in the market. Flush with cash, they made me an offer I just couldn’t refuse. At first I thought I had sold out too soon as the market continued to climb after I sold, but now I see the timing was perfect (pure luck). If I was to sell that same project today, I would probably receive $ 20 Million less (about half of what I sold it for) due to huge cost and fee increases over the last two years and the general slowdown in the market. As you know, it’s always good to sell on the way up, not on the way down.

I structured the sale so that I pay no taxes until I am a very, very old man and maybe not at all if I die before the contract is due (this was done through a series of trusts and a private annuity agreement, which will ultimately benefit my children). So now I am sitting on a huge amount of cash, am completely debt free and am patiently waiting for a good investment idea to surface and when it does, I’m backing up the truck (but not before I share it with members of this website). I am totally willing to wait as long as it takes and it may take several years (as you know, patience is a huge virtue in the world of investing).

I am clear that it wasn’t intelligence that blessed me but sheer luck of being in the right place at the right time. (I have been in the wrong place at the wrong time twice before in my life and lost everything I built up as a young man not once, but twice). But the wisdom gained via my mistakes has made me realize that it is much better to be conservative with your capital and focus your investments, as opposed to taking huge risks. The cardinal rule is capital preservation. The second rule is don’t get greedy, you’ll never go broke taking a profit.

The bottom line is this website is a great place to learn and share knowledge that comes from many perspectives. I am truly humbled by the members’ willingness to share their experience and insights in this real estate market (and other markets) and blown away by the level of intelligence and candor shared in the forums. (Sheesh, there are “experts” out there charging $ 500 – $ 1,500 an hour for information not half as useful as what I find here). Hopefully, we can all help one another to gain more knowledge during the uncertain times that lie ahead, helping to keep us and our families safe from financial ruin.

Finally, in response to one post that stated wealthy people wouldn’t waste their time on this website (paraphrased), I say wealthy people spend 99% of their time researching and planning and 1% of their time implementing. This website has broadened my perspective enormously and I sincerely thank all of you for sharing your insights, data and opinions.

Anyone with wealth who doesn’t continue to listen and learn and remain open to new ideas is a fool and is someone who is soon to be painfully parted from his/her cash. Believe me when I tell you this, those of you who visit this website are miles ahead of the general population in your knowledge of financial matters and some of you will be the captains of capital tomorrow, or at the very least, financially secure. This is a very exciting place to be!

[Anonymous]

powayseller

Here are my general thoughts on the marketplace as a whole, and how they relate to this topic. I have once again gone to 100% cash in both stock and retirement accounts that trade stocks. My futures trading in bonds and S&P is short term and essentially uncorrelated to trends, so I could easily have a short term bias at any given time that would be completely contrary to big picture views. Based on the divergence between bonds and the indices I am of the opinion that a significant selloff is imminent, which will set up a great buy point somewhere in the typical OCT/Nov time frame.

Mid term election/congressional election periods are the most bullish historical periods to buy stocks so I will be looking for a setup at that time. I am presently short the S&P as of this morning (Fri) but I will exit that trade quickly as it is a short term trade and already profitable.

I cannot recommend any long side stock trading at this moment, but in the fall we certainly have a good potential buy point setting up. There are a few things that could change that but it is a long explanation.

The biggest problem the indices have at this point which is the same as real estate has, is the negative divergence with the bond market. Historically these types of divergences have resulted in some of the biggest selloffs on record ala OCT 87 etc. I have no idea if that is what we are looking at, only that a decline will occur soon. Most seasonal highs in individual stocks occur between now and July except for a few counter cyclical industries which I do not bother with.

Gold is very extended upward, and generally declines at this time of the year from a seasonal perspective even though it isn’t dropping at the moment. I would never go long with this setup at hand.

This may sound a bit odd, but I do not follow the dollar much so anything I would say there would not be worth much. I generally do not stray much outside of the us in investing as I find more than enough opportunity here to do what I want to do, and I try and specialize in a few areas as that is how I function the best.

I think one of the things that could happen is that the real estate selloff that will be clear to everyone by the fall, even the bulls, and it will scare alot of people out of the market, flippers, and others as well. They will exit and look to the next “great” way to get rich without working hard, and that will be stocks and hedge funds. This cannot happen overnight due to the lack of liquidity in real estate and it will be far less liquid if a selloff occurs. This shift would occur over probably a years period of time maybe longer. That cycle in stocks has generally lasted 2 years in the past, so the last one year of it could be powerful if this shift occurs.

By that time it is also possible that the Fed will have shifted back into an easing mode to stop what has started which will help stocks rise, but will not help real estate initially as there is much more of a lag there in that relationship.

This asset shift will act as a big catalyst for a big climb in stock prices itleast into mid next year. Be careful with hedge funds as many of them are highly leveraged in the real estate business right now and are not going to survive a big selloff if one occurs. This problem with the hedge funds is also going to create a problem unlike what we have seen previously as they go in and out in herds and if they decide to head to the exits in real estate it could create a very sharp downmove in a shorter period than what we have seen historically.

Hedge funds have been buying 30 yr bonds to lock in rates as they have been better than what they thought could be gotten elsewhere and this has contributed to the yield curve inversion that occurred recently. This recent action could easily be them unwinding these positions and you can see how powerful this downmove in price(rise in yields) has been the last 2 weeks. Magnify that by a large multiple for the real estate effect as the numbers are much larger.

Kind of a long answer, I hope there is some value in it. Keep in mind that this is just a general view of what I expect will happen, but that certain things could change it between now and then especially a large bond rally if it occured which does not seem likely. It is however how I am going to play this whole thing financially so my money is where my mouth is. ALso, sorry as it is kind of off topic except for a small portion of it. T-bill money at 5% is not a homerun, but not a bad place to be while awaiting the next opportunity.

[Author]

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