[bsrsharma]

You should snap it up @ about $300K in a year or two.

[bsrsharma]

Brian,

I was guarded in my comments and limited it to just those cities mentioned in the CNN article. About rest of the markets I am as bearish as any Piggingtonian. (especially Inland Empire – my idea would be for the HUD to take over all distressed properties at some nominal price like $80 – $100/sqft and convert them into public housing and rent it back to the newly “homeless”. Much better than Jim Cramer’s idea of plowing them over) However, for the cash rich (multi-millionaire kind) who want to protect their wealth from the inevitable $ devaluation, prime real estate in those international gateway cities can be a conservative asset. Being international in character protects them from the vagaries of domestic crises.

When it comes to $ collapse, I am not buying the fast “total loss” scenario advocated by some folks (like partypup). I think FED will be smart enough to engineer a gradual devaluation of about 5% per year (on average; peak values may approach up to 10%) over the next 10 – 20 years. Our international linkages, primarily, hordes of Eurodollars, Petrodollars, Sino/Japanese dollars etc., act as a buffer against US $ becoming Mexican Peso. (In Game Theory, this situation is called Prisoners Dilemma. U.S. holds the rest of the world as hostages in a monitory sense. If anybody tries to take advantage as the first mover, everybody will be ruined. That should save us – just like MAD did during cold war!)

Bottom line is, we have to lose at least 50% of the value of $ before we stop becoming a net consumer of global capital. (A rather harsh way of understanding that is – nationally, the average American’s living standard has to fall by half before investors find it doesn’t pay to produce abroad and import for domestic consumption).

[bsrsharma]

These two analyses below by renowned economists will give you the background. Simply put, U.S. $ is in for a massive devaluation in the long run (some think short run, anyway long run includes short run). So, if you have US $ denominated assets like cash/bonds/deposits etc., you will only retain a fraction of the value, say, in about 10 years. So, if you want to protect your wealth from inflation, one method would be to convert your cash equivalents to intenationally valuable assets like prime real estate in major ‘entrepot’ cities in the list. Prime real estate in those cities will retain the value even if rest of the real estate market declines due to international demand. (Remember, when $ collapses, things become cheaper for foreigners to buy).

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Op-Ed Contributor
Save the Day

By STEPHEN S. ROACH
Published: September 25, 2007
Hong Kong

CURRENCIES are first and foremost relative prices — in essence, they are measures of the intrinsic value of one economy versus another. On that basis, the world has had no compunction in writing down the value of the United States over the past several years. The dollar, relative to the currencies of most of America’s trading partners, is off about 20 percent from its early 2002 peak. Recently it has hit new lows against the euro and a high-flying Canadian currency, likely a harbinger of more weakness to come.

Sadly, none of this is surprising. Because Americans haven’t been saving in sufficient amounts, the United States must import surplus savings from abroad in order to grow. And it has to run record balance of payments and trade deficits in order to attract that foreign capital. The United States current account deficit — the broadest gauge of America’s imbalance in relation to the rest of the world — hit a record 6.2 percent of gross domestic product in 2006 before receding slightly this year. America must still attract some $3 billion of foreign capital each business day in order to keep its economy growing.

Economic science is very clear on the implications of such huge imbalances: foreign lenders need to be compensated for sending scarce capital to any country with a deficit. The bigger the deficit, the greater the compensation. The currency of the deficit nation usually bears the brunt of that compensation. As long as the United States fails to address its saving problem, its large balance of payments deficit will persist and the dollar will keep dropping.

The only silver lining so far has been that these adjustments to the currency have been orderly — declines in the broad dollar index averaging a little less than 4 percent per year since early 2002. Now, however, the possibility of a disorderly correction is rising — with potentially grave consequences for the American and global economy.

A key reason is the mounting risk of a recession in America. The bursting of the sub-prime mortgage bubble — strikingly reminiscent of the dot-com excesses of the 1990s — could well be a tipping point. In both cases, financial markets and policy makers were steeped in denial over the risks. But the lessons of post-bubble adjustments are clear. Just ask economically stagnant Japan. And of course, the United States lapsed into its own post-bubble recession in 2000 and ’01.

Sadly, the endgame could be considerably more treacherous for the United States than it was seven years ago. In large part, that’s because the American consumer is now at risk. Consumption expenditures currently account for a record 72 percent of the gross domestic product — a number unmatched in the annals of modern history for any nation.

This buying binge has been increasingly supported by housing and lending bubbles. Yet home prices are now headed lower — probably for years — and the fallout from the subprime crisis has seriously crimped home mortgage refinancing. With weaker employment growth also putting pressure on income, the days of open-ended American consumption are likely to finally come to an end. That will make it hard to avoid a recession.

Fearful of that possibility, foreign investors are becoming increasingly skittish over buying dollar-based assets. The spillover effects of the subprime crisis into other asset markets — especially mortgage-backed securities and asset-backed commercial paper — underscore these concerns. Foreign appetite for United States financial instruments is likely to be sharply reduced for years to come. That would choke off an important avenue of capital inflows, putting more downward pressure on the dollar.

The political winds are also blowing against the dollar. In Washington, China-bashing is the bipartisan sport du jour. New legislation is likely that would impose trade sanctions on China unless it makes a major adjustment in its currency. Not only would this be an egregious policy blunder — attempting to fix a multilateral deficit with more than 40 nations by forcing an exchange rate adjustment with one country — but it would also amount to Washington taxing one of America’s major foreign lenders.

That would undoubtedly reduce China’s desire for United States assets, and unless another foreign buyer stepped up, the dollar would come under even more pressure. Moreover, the more the Fed under Ben Bernanke follows the easy-money Alan Greenspan script, the greater the risk to the dollar.

Why worry about a weaker dollar? The United States imported $2.2 trillion of goods and services in 2006. A sharp drop in the dollar makes those items considerably more expensive — the functional equivalent of a tax hike on consumers. It could also stoke fears of inflation — driving up long-term interest rates and putting more pressure on financial markets and the economy, exacerbating recession risks. Optimists may draw comfort from the vision of an export-led renewal arising from a more competitive dollar. Yet history is clear: no nation has ever devalued its way into prosperity.

So far, the dollar’s weakness has not been a big deal. That may now be about to change. Relative to the rest of the world, the United States looks painfully subprime. So does its currency.

Stephen S. Roach is the chairman of Morgan Stanley Asia.
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September 20, 2007, 11:26 pm

Is This the Wile E. Coyote Moment?

Lots of buzz suddenly about the possibility of a sharp fall in the dollar. The Canadian dollar is back at parity with the greenback; there are rumors that the Saudis are planning to diversify into euros, and maybe even that the Chinese might break the dollar peg. A nice summary at Barry Ritholtz’s blog The Big Picture.
I could say that I saw this coming; the problem is that I’ve been seeing it coming for several years, and it keeps not arriving (and I don’t know if this is really it, even now.) The argument I and others have made is that the U.S. trade deficit is, fundamentally, not sustainable in the long run, which means that sooner or later the dollar has to decline a lot. But international investors have been buying U.S. bonds at real interest rates barely higher than those offered in euros or yen — in effect, they’ve been betting that the dollar won’t ever decline.
So, according to the story, one of these days there will be a Wile E. Coyote moment for the dollar: the moment when the cartoon character, who has run off a cliff, looks down and realizes that he’s standing on thin air – and plunges. In this case, investors suddenly realize that Stein’s Law applies — “If something cannot go on forever, it will stop” – and they realize they need to get out of dollars, causing the currency to plunge. Maybe the dollar’s Wile E. Coyote moment has arrived – although, again, I’ve been wrong about this so far.
Much more about all this in a thoroughly incomprehensible paper I recently published in the European journal Economic Policy. Don’t bother clicking if you hate funny diagrams and Greek letters.

[bsrsharma]

From an entirely different perspective: Those markets still provide prime real estate investment oppportunity if you want to protect your wealth from $ collapse. If I were to bet between prime real estate in those international port cities and US $, in terms of holding value over the next 10 year period, I would pick the former.

[bsrsharma]

Arabella is 4000sf lot on average. Portico is 3200sf lot on average.

Both are glorified Condos. Insane to pay more than $300K for these chicken coops.

[bsrsharma]

My recommendation is to rent a house in the covenant of Rancho Santa Fe and watch the market depreciate

That may not be the smartest move if you are sitting on $3.5M – 4.5M. Your risk of loss on $ plunge are far higher than price drops in RSF at that price level. I think anyone with more than $1M cash has serious value erosion risk sitting on US $ compared to good RSF grade real estate.

[bsrsharma]

As far as foreclosures, my "opinion" is that even very high end areas will suffer foreclosures but the more recently built high end areas will suffer more foreclosures than the more established high end areas.

SD, Can you please explain that analysis? I thought most of the very high end transactions are cash and hence immune to foreclosures. In fact, if $ depreciates low enough, a lot of foreign buyers may find estate grade property (multi million kind) in places like RSF irresistible. That should keep the prices from plunging.  

[bsrsharma]

where do people buy their groceries

Considering the narrow roads, if I lived there, I would buy my groceries online from Safeway/Vons (unless I wanted to just go out for a drive). In recent years, I have become a good online shopper but poor in-store shopper. (When I go to a store, I don’t remember where all the stuff is and have to run around searching. Too embarassing to ask where potato chips are!)

[bsrsharma]

what is a reasonable price to purchase this property?

$400K max when the cayote hits the bottom of the canyon!

[bsrsharma]

Signs of the times?

SIGNS

——————————————————————————–
Reply to: [email protected]
Date: 2007-09-25, 10:54AM PDT

I have approximately 50 real estate agents signs that are free to anyone who wans them. Rectangular and square shape. Not sure of what they are made of. These are the signs that the agents have hanging on the posts in front of their listings. These agents are no longer in business and do not want these signs. Free to whomever wants them.

Location: VISTA
it’s NOT ok to contact this poster with services or other commercial interests

PostingID: 431815848

[bsrsharma]

I sold my house in ………….. last ……….. I listed my house at what my Realtor recommended, and it sat for … months. I then started lowering the price, every couple of weeks. My Realtor thought I was being too aggressive. But, by that time I had started reading Piggington, and conditions reminded me a lot of the early 90's. I finally got an offer, and sold at about ….% off of the original listing price. My Realtor and my neighbors shook their heads at poor silly me. I laughed all the way to ………….. where I am renting until…?

 

My experience too. This pattern is going to happen a lot during the falling edge of the price curve. Sadly, many Realtors have such a weak grasp on macroeconomic fundamentals that when the tsunami hits them, they think it is just heavy rain.

[bsrsharma]

They could have converted it into a National Monument titled “Your Tax Dollars at Work” and sold miniature (Made in China) Titan missiles as Souvenirs for $19.95

[bsrsharma]

why now

Same ship anology. If you see a large ship sinking, you won't notice anything for a long time. Once a critical point is reached, things happen much faster. It is a non-linear phenomenon. Paul Krugman calls it Wile E. Coyote moment. The Coyote looked down on Aug. 17, 2007 and is falling now.

[bsrsharma]

he made it an awful lot easier for the speculators and irresponsible borrowers

He was not a Banker; He was a Central Banker. He can't provide adult supervision to stupid lenders/bankers. His mission is to keep the FFR as low as possible and money supply sufficient without causing undue inflation and promote near full employment. On those grounds he was excellent. Considering the challenges in his tenure, he performed brilliantly.

Folks, the US economy has been taking water continuously from 1970s onwards. He engineered the ship without sinking it for 20 years! To understand his genius, mark my words – this ship is definitely going to sink in the next 20 years. May be, once underwater and drowning, people will understand what a heroic job he did.

[bsrsharma]

Bloomfield Hills that had listed for $525,000 sell for just $130,000 at the auction.

Wow! Bloomfield Hills is like Beverly Hills for Michigan. 130K for a house there? Can you set up a port-a-potty for that much in 90210?

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