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April 17, 2006 at 2:50 PM in reply to: UT Sunday Home Section article “Is there a buble? Do the math” #24297
powayseller
ParticipantI absolutely do not believe the government inflation numbers, but not because I’m a cynic by nature. I’m actually pretty trusting, and question things which don’t make sense. So I ask myself, how can inflation be 2%, when most things I buy are going up 10% – 20% per year: housing, health insurance, higher education, gas and heating oil, property taxes? These are the big ticket items that we all need to pay for. So what if clothes from China go down every year? That doesn’t balance it out at all, if I only spend 5% of my income on clothes? Meanwhile, I spend 75% of my income on stuff that’s going up at a pretty good clip. Now tell me, what is inflation really?
Although we are 75% in cash right now, I believe we are losing 3% annually, at least, to inflation. Oh well, at least I still have my principal, right?
I can’t do what ChrisJ did. He’s a clever trader. I’m a conservative value investor. I only lost $4K in tech stocks, because I bought Lucent after it crashed off its lofty heights, to $7/share, and then it went down to $2.50. I bought BKR.B and UPS during the tech runup. Someone like me can’t just back up a truck and expect to pile on something good. I need a long-term idea I can hold onto. For example, in 2000, I got into 6 different index funds, and I am up quite a bit. Now I want to get out of those funds, find some recession proof stocks, and diversify out of the US Dollar. I’m not a daytrader. Just a good old-fashioned buy-hold investor.
April 17, 2006 at 1:18 PM in reply to: UT Sunday Home Section article “Is there a buble? Do the math” #24293ParticipantWelcome to the forum! Can you give us some info from out in the field? How is corporate spending? Assuming you sell products to companies, are they in a purchasing mood? Will company capital investment take over when the consumer slacks off?
As far as the economy, in my opinion, a recession is coming, and it will be nationwide in scope. I wish I’d received more feedback on my recession post from a couple days ago. Lest you think it’s gloomy, I believe a healthy economy consists of ups and downs, so a recession is natural. How many economists predicted a recession? Economists are usually full of hope, aren’t they, as they work for companies whose interests they must promote, or they are so far removed in an ivory tower, that nothing fazes them (sort of like those Ponoma housing bulls whose study was based on the ludicrous assumption that housing will go up 6% anually).
I also wrote a post about the SF housing market. It is more resilient, and was during the last downturn. I didn’t know why, but the higher-paying jobs are a plausible explanation. However, even there the ARM usage has been high, and wherever there’s an ARM, there’s a likely foreclosure lurking in the near future.
ParticipantWelcome back sdrealtor. I missed reading you around here.
Good luck on the deal. Sellers need to wake up! I hope yours accepts the offer.
I believe there’s plenty of business for both you and Bob, so you can give him a break. Unless of course you care to present your data…so it can be scrutinized by everyone else. Are you up for it?
ParticipantSeeking Cover If the Prices of Homes Fall from the New York Times, concludes that the Case-Shiller housing index is a hedging tool best left to the pros. A difficulty with the product is that the positions are weighted more heavily in favor of homes prices declining (lenders, homeowners, builders), and without oppositing positions (i.e. homes prices will rise), the liquidity for trading isn’t there.
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Mr. Mueller advised homeowners to hold off “until there has been at least a year of trading and you can see there’s liquidity.” Otherwise, “you’ve bought an option, you want to get out and no one’s buying today, or all week, for that matter.”Mr. Cordaro is hoping that institutional investors will take to the new vehicles and then “individuals can piggyback on it.” But he counseled against using them to gamble.
“I wouldn’t speculate,” he said. “I really hope folks will stay away from that. You can lose a lot of money speculating. Leave that to the pros.” END QUOTE
April 17, 2006 at 11:05 AM in reply to: UT Sunday Home Section article “Is there a buble? Do the math” #24287ParticipantHey Bugs, you’re a brainiac! If you took the time for the Professor Challenge, you could send it to newspapers, etc. In studies like this, the assumptions are crucial. You’ve outlined why their study is so flawed. I personally would have assumed a 10% annual decline. My conclusion would be to rent. This again goes to show that economists cannot be trusted just because of their title. I started a topic about economists we can trust: I figure anyone who didn’t warn about a housing bubble is not worthy of my reading. If these folks can’t see we’re in the biggest asset bubble in history, why should we read anything else they might say?
Of course, for the doubters, we must take the time to show the weakness in the paper. Bugs nailed it.
ParticipantEven if that cash is losing 3% annually due to inflation?
What about stock in Berkshire Hathaway, publicly traded payday lenders and pawn shops (will do well in a recession), commodity index funds (supply-demand imbalances favor commodities going nowhere but up), euros/yuan/swiss francs (as dollar loses value)?
What do you all think about these alternatives?
ParticipantGreat question. The Fed doesn’t care if homeowners lose equity or end up in foreclosure. The links are in one of my other posts. The Fed is concerned with the economy as a whole, with the national numbers. They’ll only intervene if the calamity causes risk to the financial system. The Fed has wiped their hands clean of any involvement in asset bubbles, by claiming they cannot predict them anyway.
The questions is: don’t they know that when the housing bubble collapses, it can take the economy down with it?
I’m still trying to figure out where to put my money. So much is unknown. Will China stop buying our debt? How long will the consumer stay strong? How will the Fed react to the data they use for their monetary decisions? How will the economy react to the Fed’s policies? Nobody knows how any of this will play out. Guessing is all we can do.
Diversification is the least risky bet. You won’t lose all your money at least. Bet all your money on one thing, like gold, and you’ll lose it all when gold goes down. Put it all in a CD, and you lose value if inflation picks up.
It makes sense that commodities (think lumber, cement, lead, sugar, coffee, metals, oil) which have a great supply lag due to lag of popularity in recent years, are poised for their bull market. Each asset has a cycle, and the commodity boom which began 8 years ago still has some life left?
It makes sense to diversity into different currencies (yuan, euro, swiss francs), as Warren Buffett did. What I really like about him, besides his intelligence and wisdom, is that he is a straight shooter. He bet billions of dollars against the USD by hedging against it. Last year this caused him to lose a billion $s, or so, as he was early in his bet. It makes sense to hold some equity in Berkshire Hathaway (the B shares are under $3K each), and let the oracle of Omaha do the investing for you.
I believe the Fed is flooding the system with dollars, as well as defending the dollar, but not for the reasons you suggest. The Fed doesn’t care if Susie Q loses her home, only that she might stop shopping to stimulate the economy.
The Fed is flooding the system with dollars, because the government needs more money to pay for the entitlements, military spending (we’re in 100 countries!), the interest on our national debt, and the trade deficit. The only way to pay for it all is to keep injecting money into the system. If one of the big banks does fail, or Fannie Mae needs a taxpayer bailout, there will be another huge injection of money. I believe it’s done electronically now, so there is no real printing of money to increase the money supply.
The Fed needs to keep the dollar’s value high, to keep foreigners buying the dollar. By setting short-term rates high, they hope that long-term rates follow along (which they haven’t always done lately). Imagine if the Fed lowered the interest rate back to 1%. Now that Japan and Europe have raised their rates (somewhere above 2%?), China could just go buy euros or yen, and if they stop buying our 10-yr and 30-yr bonds. Then who will finance our debt? The Fed may also be concerned about the recent interest in gold. Gold buying is higher than can just be accounted for by jewelry and industrial demand. Investors are fleeing to precious metals because they feel insecure about the dollar. The Fed must stop that rush to the exits.
The Fed is also concerned about inflation, or so they say. Assuming that real inflation is 8%, and not the 2% they claim, they have more reason to be concerned than they let on. Commodity prices, esp. oil have really inched up, and will just keep going higher. Oil production is at peak capacity, oil field production is waning every year, and demand from China is growing rapidly. This supply-demand imbalance will keep growing, and oil has nowhere to go but way up. Again, this will cause inflationary pressures, because oil is essential in making products, running industrial machinery, in farming (fertilizers, operating tractors), transporting goods across the country, for the health of the airline and auto industry. As commodity prices rise, eventually the cost is passed on in goods and services, increasing inflation. (Of course, rising oil prices are not reflected in the CPI, so it doesn’t matter to the Feds that Americans are squeezed by high heating costs and gas bills.) So to reduce inflation, they must keep raising interest rates.
Is there a reason to think that interest rates could go to 6%, 7%, 8%? Why not? I think the important indicators, such as commodity prices, and FCB purchases of our bonds, will determine how high they must go.
ParticipantGood point on the profits. I asked my landlord about this as well, when he told he has 2 benefits of owning rentals: cash flow and depreciation. “But you’ll have to pay back the depreciation in taxes when you sell”, I countered. “Yes, but we worry about that later,” he laughed. So, there you have it. Count the millions in paper profits, someday they evaporate, and you are stuck with paying taxes on the little that’s left. He’s a really nice guy, and I hope he figures out how to make money in the declining market. He’s been doing this since the 90’s in SD, so he knows RE can go down, foreclosures happen…
ParticipantDocteur, how can I negotiate the discount? When we rented while building our house, I offered to pay my landlord for one year of rent in advance, about $30K, for a discount which we would determine together (at that time, CDs were paying less than 3%). She said she wasn’t interested. Is there another way to do this, that the landlord would want? I’m also asking him to install A/C. I can’t believe I missed that one…I thought everyone had it! So he’ll raise my rent by some mutually agreed amount, depending on the estimate for the A/C. I figure if I pay him half the cost of the A/C over the 4 years I’m here, it’s a fair deal for both of us. He pays half for his A/C, but gets the increased value for his house. And I won’t have to move (no way will I live on Poway without A/C).
ParticipantMy landlord is expecting 6% annual appreciation for SD SFR, and I agree that his land entitlement deal remains risky until the papers are signed and the money is transferred. I asked him what kind of risk he has to take on that deal, to get a 30% return in 6 months. He said it was a high risk, but one he thought was worthwhile. He told me he made millions in RE. I responded, “But they are paper profits?” “Yes”, he replied, “but profits noentheless”.
Having heard all that, I was wondering how long he could afford carrying my rental house. I mean, the whole house of cards can topple, right? I have no idea how leveraged he is. So I asked if I could change from month-to-month to signing a year lease. I believe if he sells the house, the new owner would have to honor the lease. If he loses to foreclosure, what happens? That is the pitfall to renting a house, as I mentioned before.
I agree that docteur, as well as the other investors and bankers ought to write to their hearts’ content. I was also glad to see some newcomers in the forums this week.
ParticipantThanks, docteur, I liked you from your first post. My landlord said the approval is practically in the back pocket, since it is 99% done. The zoning (?) approval is just a formality. He’s part of an group in this project, where he put up the money, and the other guys are pros in entitlements. The guy from whom they bought in November, had held it himself only a short time. He didn’t get into the whole story. I didn’t want to ask, but was curious if the buyer could back out of escrow, if he sees land values falling between now and June.
Regarding the Baton Rouge property, I told him to be careful; ARMs are leading to foreclosures, and that could lower the value of his properties. As I finished the sentence, he must have become very nervous, because he broke the piece he was trying to fix, right then, and ended up having to leave without completing the job.
Overall, he told me you can still make money in RE, but you must work with pros who know what they are doing. At this point, he just puts up the money, and lets the RE pros do the leg work.
He has been in the RE business over 20 years, starting with foreclosures. He won’t deal with those anymore, since you don’t know what you’re getting (no inspections).
I perused the John Reed links, and it’s great! Thanks so much. And thanks again for the compliments. And now I must end my web surfing for the evening…
ParticipantThanks for your insights.
ParticipantYes, the landlord’s joint venture in Riverside had 80% of the entitlements completed. He and his group completed the remainder, and are waiting for the next city meeting to get the final approval. This is expected at the May, latest the June, meeting. I hope the buyer has a contingency for this all going through.
My landlord also told me that buying raw land and getting entitlements on it is the best way to make money in RE. He no longer buys houses to flip and rent in SD.
As far as my time, I spend too much time on reading. I spend several hours every day reading. But I don’t work, my kids are in school all day, so I basically have the mornings to clean the house, do my errands, work out, and read. Yes, I am one of the few women I know who actually cleans her own house. I am surprised at women who expect their husbands to work, and then just want to hang out, go to the gym, and call out for pizza. I think the husbands would get resentful. I don’t watch TV or shop too much, so reading is my vice. If you wish to call it a vice.
My internet reading consists mainly of piggington.com, and then I browse the links (but not the comments) on TheHousingBubbleBlog, and check out The Big Picture, BubbleInfo.com, RealEstateDecline.com, Patrick’s Blog, Bob Casagrand’s monthly report, and EuroPacificCapital. Some days I look at RealtyTrac’s foreclosure list. Most of this goes very quick, because I either browse the content, or select only the content dealing with the broader economy. I skip over repetitive stories. I really got into this topic late last year, when I researched whether we should sell our house, and am excited about all I’m learning. As long as I stay excited, I’ll continue reading on this topic. Last year at this time, I was practicing piano one hour per day, and I played at my kids’ piano recital (Fur Elise). So I’m not completely one-dimensional. If I were working, I would not have the time for this, that’s for sure. I’m reading Hot Commodities and Sell Now. My bookshelf is full of books on parenting (#1 priority for me), cookbooks, and the economy/investing/finance. Our whole family loves reading, so my husband and my 3 kids each have a National Geographic, newspaper, or book on their nightstands at all times. I spend too much time on this site, and I am sure my participation will decrease somewhat as time elapses from the sale of my home, the catalyst that brought me here.
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