[davelj]

Actually, technically, it’s not a “zero sum” game; it’s a “market sum” game, less frictional costs (spreads, commissions, etc.).

[davelj]

If I wanted short exposure, I’d invest in the Prudent Bear Fund. It will do very well if the market tanks – and conversely will do quite horribly if the market goes up. Unless you’re prepared to spend at least 10 hours a day at it, I wouldn’t bother shorting individual stocks. Too much can go wrong. I am a firm non-believer in MPT and CAPM.

[davelj]

At some point over the next 2-3 years, all of the major stock market indices will be lower. We’re headed into a slowdown, if not a recession. Corporate profit margins are near an all-time high – they will mean revert. Valuations are also quite high – they will mean revert. The housing slowdown will ultimately filter through the rest of the economy. Betting on which direction the guessers that guess what the other people are guessing will push the market in the short term is a sucker’s bet over the long term. Invest in what you truly know and understand (for most people, that’s cash and short-term treasuries); stay away from everything else.

[davelj]

Yeah, a lot of people don’t fully realize the impact of mello roos and HOAs. I generally use a multiple of 25 to come up with a present value of the difference (that’s a 4% discount rate, or 7% less 3% fee inflation). So, if you have to pay $500/month more (or $6K/year) in HOA/mello roos relative to another property, that’s a present value of $150K. It adds up.

[davelj]

Yeah, there’s a bit of a bubble going on down there. Construction between Playas and Puerto Nuevo is absolutely incredible. The majority of the buyers are Californians financing with home equity from their primary residence in the U.S., as this is cheaper than getting a loan through a Mexican bank or U.S. finance company. There are, however, a couple of finance companies that now offer semi-reasonable rates (say 2.5% above LIBOR) because they’re funded with a line of credit through GE Capital, which gets AAA-rated funding itself. So the funding options are getting better. And, yes, you can now get construction loans there no problem as long as the title issues are clear.

I think there will be pretty sharp declines in prices over the next few years as home prices here decline and as the speculators down there move out of the market (yes, there are lots of speculators operating in the coastal Mexican properties). Having said that, you can buy a 15th floor 2BR/2BR condo right on the ocean with a pool, gym, etc. for about $250K these days. The same thing would cost you $750K+ in San Diego, depending on where you are of course. My guess is you’ll see a 30% or so decline in prices down in Mexico. They’re just building like mad down there – and only a fraction of the units are pre-sold.

[davelj]

First off, I enjoy many of the topics you post, Powayseller. However, virtually all of your posts are basically regurgitations of other people’s research and thinking (which you credit, of course). This is fine, of course. These topics are still interesting more often than not. But I assume that if you’re going to start a consulting business that you are going to do your own original research – obviously, as otherwise it would have little to no value to paying customers. Consequently, I’m curious as to why so few of your topics have original research or thinking. I would expect this from the average forum participant (who is not an industry professional), but not from one that expects to build a presumably for-profit consulting business around his/her observations. Having said that I wish you the best of luck. Regarding consulting, after all, “If you’re not a part of the solution,there’s good money to be made in prolonging the problem.” (source: despair, inc.)

[davelj]

Ditto La Jolla Renter’s suggestion. You need to be at least 5% to 10% below the closest comps for both recent sales and current listings. Otherwise you’re going to chase these prices downhill over the next year or more.

An Example:

I have a friend that lives in Carlsbad in a fairly typical condo development. She put her unit on the market six months ago at $410K (she bought it in 2000 for $180K) because two units had sold above $400K in mid-2005. There were four other units for sale priced between $360K and $400K, but hers has a very nice view and more upgrades. She got an offer early for around $405K but it fell out of escrow because they had an argument over closing costs. Big mistake. Six months later she’s offering her unit at $360K and the other four units are priced between $299K and $340K. Nothing’s sold in a year. She hasn’t even had a lowball offer in months. My guess is she’ll end up selling this thing next year sometime at around $325K and the others will clear between $275K and $300K, still all modestly overpriced by the way. If she had just listed it at $380K six months ago it probably would have sold. The point: Don’t be her.

[davelj]

A company’s only got a low P/E until the “E” goes away. The reason many cyclical companies trade at seemingly low P/Es – like the builders right now – is because their “E”s are about to go in the toilet, thus ultimately raising their P/Es to more “normal” levels. Virtually all housing stocks are going to suffer going forward – manufactured and otherwise. All housing and related stocks are a sucker’s bet right now – this housing correction is going to play out over several years.

[davelj]

In the current market, you can just pretend the “-” and whatever number follows it aren’t there. The lowest price in the range is the price the seller is going for and anyone who pays above it is nuts. My guess is that in a year or so we won’t see any more of these silly ranges.

[davelj]

Yup, I’m with Rich word for word. I’m a major real estate bear and on the fundamentals ALONE you could come up with lots of otherwise logically bearish conclusions. But having lived through the Greenspan era as an investor, one can never ever underestimate to what ends the government will go to defer economic pain into the future. Nothing is out of bounds, I’d say. Thus, a 30%-35% decline in the median price seems about right to me, as I’ve posted before. I don’t, however, trust the government to let the market get to a “true” equilibrium over the next few years (such as a 50% decline). After all, we never reached equilibrium on the Nasdaq (well, yet…), why should the housing market be any different?

[davelj]

For me personally, if I were married and had two kids I wouldn’t dream of living in the San Diego area (or any other “glamour city”) on less than $200K per year (remember what those CA state taxes do to you, nevermind the high prices of everything). And that’s the bottom of the barrel bare minimum. Obviously, it can be done, but at what price (unless you bought a house you’re comfortable in 10 years ago)? Sure, you can buy a house using a funky mortgage that’ll ultimately bite you in the ass, or you can rent for the rest of your life. And you can cut corners every which way you can, but then what’s the point? You want to enjoy living where you live, right? And then how about the stress? I know it’s a cliche, but stress is a killer, or so I hear.

Frankly, I don’t see how single people live comfortably on much less than $100K per year here. And I don’t consider myself a spendthrift, either. But after taxes, housing, etc. it really adds up here in “America’s Finest City.” Don’t get me wrong, I love it here and have no plans on leaving. But I would not live here or anywhere else where I had to constantly think about finances. It wouldn’t be worth it to me. I’d rather live in Charleston or Memphis and sleep at night. But that’s just me.

[davelj]

I don’t disagree. However, I think the issue at hand is IF you have to have a currency, or IF you’re going to peg the value of a currency to something (commodity or otherwise), gold (and to a lesser extent, silver) is your best choice because it is far less bad than all the others for all of the above-mentioned reasons.

[davelj]

Doug Casey on the intrinsic properties of gold as a store of value and medium of exchange:

1. It is durable. It won’t evaporate, mildew, rust, crumble, break, or rot. Gold, more than any other solid element, is chemically inert. This is why foodstuffs, oil or artwork can’t be used as money.

2. It is divisible. One ounce of gold—whether bullion, coin, or dust—is worth exactly 1/100th of one hundred ounces. When a diamond is split, its value may be destroyed. You can’t make change for a piece of land.

3. It is (relatively) convenient. Gold allows its owner physically to carry the wealth of a lifetime with him. Real estate stays where it is. An equivalent value of copper, lead, zinc, silver, and most other metals would be too heavy.

4. It is consistent. Only one grade exists for 24-carat gold, so there is no danger of owning 24-carat gold varying in quality. Twenty-four-carat gold (pure gold) is the same in every time and place since gold is a natural element, unlike gems, artwork, land, grain, or other commodities.

5. It has intrinsic value. Gold finds new industrial uses each year. Of all the metals, it is the most malleable (able to be hammered into sheets less than 5-millionths of an inch thick), most ductile (a single ounce can be drawn into a wire 35 miles long), and the least reactive (it can stand indefinite immersion in seawater, does not tarnish in air, and can withstand almost any acid). Next to silver, it’s the most conductive of heat and electricity and the most reflective of light.

6. It is of finite supply and cannot be created by government. Gold can, of course, be debased with impurities or falsified in weight, and governments strapped for revenue have tried those tricks. But a trader can protect himself with a pair of scales or a vial of acid, although a familiar and trustworthy hallmark of a coin saves him that trouble. Unlike currency, gold cannot lose value because of government mismanagement. On the contrary, it tends to gain value because of government mismanagement. The amount of above-ground gold (by weight) has typically increased by about 2%-3% per year historically.

These superlatives, which have not changed over the last several thousand years (unlike paper money), make gold uniquely well suited as a medium of exchange and a store of value. Thus, arguments that gold’s value is “mystical” are ridiculous.

[davelj]

In answer to your questions:

(1) Why didn’t they prevent any of the other recessions we had, if it was possible to just prevent a recession?

In the past, the Fed has TRIED to prevent recessions, but obviously hasn’t always succeeded. Volcker was the last great Fed chairman. He understood the cleansing aspects of recessions and let the ’81-’82 recession crush both inflation and a lot of balance sheets. At the time he was unpopular and didn’t care. But ultimately his actions were vindicated. Fast forward to Greenspan. After the first recession of his tenure (’90-’91) he decided he didn’t like not being liked. Consequently, he decided that lowering interest rates at the mere hint of any bad news was how he would run the Fed, giving rise to the “Greenspan Put,” the stock market bubble, the real estate bubble, etc. All Greenspan cared about was the applause from Wall Street. Based on his comments, I’d say Bernanke is in the Greenspan mold, but only time will tell.

(2) What tools would the Fed use to prevent a recession?

Lower and lower and lower interest rates (again).

(3) What makes anyone think that we can have repeated asset bubbles that never are allowed to burst, that this is even sustainable?

No one with a functioning brain believes this. The only issue is TIMING, which is critical. There were lots of stock market bears as far back as 1995… most of them are now out of the asset management business, despite being fundamentally “correct.” They had to wait SIX YEARS for some measure of vindication. That’s a career down the drain in asset management unless you’ve been around a LONG time and can withstand the criticism. If you haven’t already noticed, bubbles can last A LOT longer than anyone would think. They all burst in the long run, but that long run can be an awfully long time.

[davelj]

What was the all-time high for San Diego County’s median sales price?

I see different stats all the time, one for new/builder homes, one for condos, one for previously occupied homes, etc. But I never seem to find the all-time high median for the simple, straightforward single-family residence. Not that it’s extraordinarily relevant in the real world, but it is the headline after all.

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