[one_muggle]

Re: Shorting

Like most of you, I knew (as best as anyone can) that Countrywide was going to take it in the pants so I shorted them in a “Fantasy Stock Game”, but did not with my own money and good thing! I got hammered in the game because the short came up three days, THREE, before the stock collapsed. At that point it was sitting almost 15% higher than when I shorted it. For a short, you not only need to know the stock is dropping, but also have a timeframe. THREE days–arrgh! Good thing it was fake money (and no not the recent american dollar–actual fake money)

-one muggle

[one_muggle]

Give it a bit more time. For my area (San Gabriel Foothills) I have never seen so many For Sale AND For Rent signs, nor have I ever seen it take so long for an otherwise good house to sell. I suspect a couple of things are going on:
1) The current labor market it freakin tight here–we are scraping the barrel looking for highly skilled technicians and engineers. Anyone smart enough with numbers (and you hope your engineers are) can see that even with a six figure salary, it is not such a good deal when houses here start at about $800k. Long term, this will hurt the area, but short term, people feel VERY secure in their jobs–hence risk taking is high.
2) Suicide loans–remember they only started going away a couple weeks ago (I know it seems like longer).
3) Some otherwise smart people I know, who were waiting for years to buy, just pulled the trigger. They claimed to get great deals during the recent “Buyer’s Market”.
4) Schiller effect. When I watch price/sqft it has been sliding downward over the past year. People are (or were) still trading expensive houses to each other from HUGE amounts of equity made over the past 36 months. The market for starter homes here is very quiet. This sends the median up as the lower priced homes stop selling.
Think about it: The 100% LTV and similar loans are GONE. Who do you know that can save $160k in cash to put up a downpayment for a starter home around here(without first selling a home)?

The water cooler attitude is still “I can’t wait for the housng market to drop so that I can buy a home (or second or third).” WHen the attitude shifts towards fear–that will be the time to look for dropping prices. As job losses start, some people will sell their homes and flee the region as fast as they can. Once 20/20 shows re-runs of the 90’s and TNT shows a ‘Falling Down’ marathon the slow but steady flow of what is left of the middle class in LA, likely will rocket.
God forbid we have a real earthquake.
I had left the area a couple years ago for business and the movers said that for every five trucks they send out of CA, three come back empty.

BTW: I’ve been getting warnings from my brokerage house: “The last recession caused the S&P to drop 30-40% IS your portfolio ready?”. It’s really hitting the fan–and possibly worse then I had thought.

-one muggle

[one_muggle]

In an article about the negative savings rate (sorry, I can’t find the link) the author explained that the savings rate is misleading since it does not include investment in assets, which blows my mind, if true. He said that investing in stocks or RE, including buying or improving your own home, even 401K’s are NOT considered savings… By that measure, I save very little.
Now that I have a reasonable stash of emergency cash, all my money goes to investments in retirement accounts and brokerage accounts (mostly equities), mortgage payments, and the rest consumer spending. With the exception of some short term cash I save for vacations, I don’t “save” much, but I am stashing away ~20% of my income–and have 6-9 months of salary in cash.
I found it strange that, according to that article, I would not be considered a “saver” since I am not adding cash to my accounts every month!
Go figure.
If the article is correct, I would think that there would be very few savers. Either you spend your paycheck every week, or you are investing. I would think only a rare few keep stuffing money into cash accounts, once they have a cushion or a plan to invest it in the near future.
-one muggle

[one_muggle]

FYI:
not my opinion, just FYI
http://www.businessweek.com/bschools/content/feb2007/bs20070213_189035.htm?chan=top+news_top+news+index_b-schools

-one muggle

[one_muggle]

RLA: I agree, except that you cherry picked the best time in history for RE(at least modern times) and one of the best locations. What I compared were the national housing market to stock indexes for the very reason CONCHO points out–Timing is everything.
But that really applies most for short-term investing in either RE or stocks. I can find several examples of stock gains that blow away even the recent SoCal RE gains, even with leveraging. But that is with perfect hindsight–I would take perfect hindsight in investing over any other method–Just ask the CEO’s that have been nailed backdating options!
I don’t espouse stocks over RE for investing. But stocks carry only their cost as a liability–not so for houses. The stock market taken as a whole has beaten the RE market -as a whole- over ANY 20 year period in history. I agree that one may use massive leveraging in RE, but one can leverage to buy stocks as well–some in straightforward ways, such as leveraged stock accounts, and some in stupid ways like I saw in the 90’s. I knew otherwise intelligent people who maxed out their credit cards and took out home loans to buy tech stocks… ouch. Leverage in stocks became much more regulated after the huge market crashes in decades past. I wonder if we will see any measures taken on RE leveraging if this bubble turns out as bad as some of the real bears have been predicting. I doubt it.

And as far as Joe Average–True, it is easier for him to leverage to buy a house. But I really think Mr. Average is much safer and better off plunking down a few hundred bucks per month on an index fund (which dollar cost averages) as an investment rather than RE (your own home is a different calculus). The index, unlike a single stock, will not go to zero, you can buy (almost) as little or as much as you want for <$10/trade, and sell it just as fast, your fund will never have a leaky roof, termites, balloon payments, lack of renters or a 6% commission to sell. With that said, a savvy investor can make money in either RE or stocks. But Mr. Average is rarely that savvy, just lucky that RE has gone up or flat for a decade. I doubt Mr. Average is prepared for a major RE swing down. Leverage works both ways and it is not as easy to go bankrupt now as it was in the early 90's due to recently passed legislation. Cute timing on their part, don't you think? -one muggle

[one_muggle]

Simple index funds tend to beat the overall nationwide RE market over the long term. Of course individual stocks and individual RE markets can significantly beat or lag–the trick is getting in on those leaders early. IMHO one may spend time watching and learning about any market (RE, stocks, bonds) and beat the averages–again, this is usually over long periods of time.

I think the fundamental reason the stock market (broad index funds) should beat the broad RE market over time is that selling/buying (as opposed to developing) existing RE is typically zero sum. Wealth is transferred in the transaction, not truly created. Microsoft (love em or don’t) has helped make businesses more productive, and has helped to create entirely new industries. Overspeculation aside, which happens in stocks as well as RE, a share in Microsoft is worth more now than when first issued because the company has created value.
-one muggle

[one_muggle]

Raybyrnes , I don’t think one needs to be arrogant to think that it is the market that is nuts, and not oneself. In 2001 people were claiming a housing bubble in LA, simply because prices had gone up–which they hadn’t been doing for years. But one look at the fundamentals would show that it likely was coming out of a period of undervaluation.
Looking at those same fundamentals, the markets in SoCal are excessively overvalued by most every metric.
The only possible alternative to massive overvaluation is the emergence of a new economic model, and while this is possible as with the industrial revolution where manual labor was rendered ever less valuable, it is unlikely. To what does one attribute a completely new valuation for US RE? The internet? Globalization? Over the long term, both tend to drive prices down, not up, as better information and easier access to other markets brings efficiency.

The last time I heard that hundreds of years of business sense and economic theory was the old way of doing things was in the late 90’s stock market. Many people were making serious money day-trading without knowing what they were doing, while others that “knew better” were saying how crazy it all was. It turns out, it was crazy but some people still got very rich off of the insanity. In 1998 I was expecting it to crash, but over the next year or so, people were still raking it in–then it crashed. The same people that said the enormous P/E’s were justified due to the “new economy” become raving bears overnight, now claiming the market was dead!
The really interesting parallel here is that it took another 2 years for the market to bottom–and that is with highly visible, highly liquid assets (one may see the actual price of their Google stock whenever they choose–unlike houses, and may sell their shares whenever they choose for as little as $10, unlike houses) Still it took 2 years for the market to bottom. How can anyone expect that an illiquid, highly opaque market can find a bottom in less time is beyond me.

There are few positive surpises left, such as loose lending practices or low rates, huge inflow of foreign capital, to boost prices. Significant salary increases might do it, but businesses tend to see that as labor costs, which are inflationary. At the same time, several negative surprises are possible, such as natural or manmade disasters, increase in unemployment, high inflation, much higher rates, strict lending practices (already happening), slowdown in foreigners purchasing our debt or massive foreclsures as Wall Street pulls money out of mortgage backed securities (already happening).
It is true that no person knows what will happen, but in terms of mathematical probabilities the expected value falls heavily on negative rather than positive appreciation.
-one muggle

[one_muggle]

sdnativeson, I am confused by your statement about internal Chinese debt. They hold about $1Trillion US, are you saying they have loaned out nearly all of it? And to whom is the bad real estate debt, US or internal?

$1 Trillion really is a chunk of money (no kidding ;^) )
To put the amount in perspective, one article (I believe in the Economist), said that the Chinese could use the money to buy US RE–but they would need to purchase ALL sellable land in 5 or 6 midwest states to use up the cash. It certainly puts into perspective the nearly $1 Trillion in ARM resets predicted for 2007 AND 2008.

A trillion here, a trillion there, eventually it all adds up to real money.
-one muggle

[one_muggle]

My TIAA-CREF account is finally allowing us to buy into their REIT. For some reason, California wouldn’t allow us to add the REIT to our CREF retirement–until, of course, the most massive boom in real estate had run its course.
Now that I can buy into it, I am allocating 5% of new money to it–but I have 30+ years until retirement and I am bullish on looong term RE. Besides, they own commercial RE, which is looking good right now, and, as was previously mentioned, they make money off of rentals, etc., which is looking up. BUT, before getting too excited, go back and read the President of TIAA-CREF’s message that came in the same newsletter that announced we could finally buy their REIT–it was decidely guarded, if not bearish.

Lastly, it’s good to remember that RE really is local and much of the country is not in a bubble. TX, MI, NC, GA, etc. have not broken out of their long term trends–unlike SoCal, Boston, D.C., FL, NY, which have (had) gone completely unhinged.
I anticpate that a geographically diverse REIT, such as the TIAA-CREF will take significant collateral damage during the housing shake-out, which might be a great time to buy it, for long term (10+ years) IMHO.

-one muggle

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