Bill, if you admit it could take up to five years, what sense would it make for someone in Old Trader's position to go rushing for the exit right now? Wasn't that his main point? Old Trader, as for your comments that prices "never" collapse just after all time highs, were you referring only to real estate? Otherwise how would you describe what happened to the Nasdaq in 2000? (Or Gold in the early 80s, I think.) And if real estate is included, the numbers I have for real esate in Melbourne, Aus, show median prices falling 40-50% across the city (and state) from '89 to '90, just after hitting all time highs. About rising interest rates not necessarily spelling doom for real estate, wouldn't this depend on how leveraged home buyers are? Sure, I can understand someone not liking the idea of having to pay, say, an extra $400/month on his mortgage, but he cuts back on spending elsewhere and grins and bears it. But what about the situation where he's already stretched to the hilt; there's nowhere else he can cut back? Isn't America supposed to be on a credit binge at the moment? Wouldn't that make it more likely that interest rate rises in such situation would have more of an effect than they otherwise might? Thanks for those charts you posted, by the way. Any chart trader that just writes them off because they don't fit with his analysis isn't being entirely honest with himself, I would think.
spect8or, I think, I started answering this thread by saying RE doesn't die. It should always go up in the long run. Unless we have a population problem. Old Trader has explained he has no real reason to sell because he is in at a very low basis. He's got little to fear if the RE cycle dropped off the table tomorrow. As a Builder, I have to be very careful committing because the term is long. However, I did that 2-1/2 yrs ago. (And I didn't lose money getting out then, I made a nice sum and the folks I sold one parcel too are still sitting on unsold units finished 6 mos ago. Remember my timeframe to complete a project is long and sales prices based on conditions that age.) I sold everything then because I've been thru these cycles before and like to buy back in at the bottom. With all my money. This is the way I make my living, it's not a single home investment, so my perspective is not for everyone. I'm in no way in real estate like Old Trader or most people here. AND I'm not a stock trader and never said I was. I don't know the field well enough. I'd be gambling. I have put some longer term money in energy stocks of producers and excellent exploration sites. It sure isn't trading. I've learned to read charts and it is fun, but actual trading is another issue and it comes with experience I don't have. I'm on no trading threads. I know my field of expertise and stick to what I know. On 5 yrs.: I don't have a crystal ball. Darkhorse said the downside risk might be 20%. I think it is higher. I'd say 90% probability for a MAJOR RE correction in my timeframe. That will hurt a lot of leveraged people in RE. Why 5 yrs? Because we've had a RE correction in every decade that I've lived in, going back to the 40s. So I know it is very difficult (impossible) that I am wrong. But, I've learned it shouldn't be an alarmist view that would have people sell their homes. I tried explaining what a bad downturn looks like in person (go back a few posts) and it went over like a brick. Although I got a lot of private posts agreeing with me and the action these people have taken already. People want to be positive, none more than me. I'm the one who feels really hurt here cause I feel my preferred "job" is too dangerous now. I'm negative on RE cause of the huge triple deficits. Those have to be paid and will cause either hyperinflation or deflation. Neither is good for the average homeowner or builder. Fell like I have to explain everything cause no one understands building: I can't build in a short-term bull rally. I know these posts get old and are not read. So there it is again. In this RE sector I'm an "Old Trader". Too old. (Seen too many leveraged people hurt, like always being on max margin.) Good luck.
I was reading an article and realized I had the same thing in old RE notes on Probabilities. So I dug it out. This is from a physics book originally and transfered by the author I read into RE info. I copied it from that RE book. It speaks for itself. But in stocks, I don't follow its' logic, yet I do in RE. Funny!! And remember not to shoot the messenger. It's just something to consider that I thought would be helpful. I have reams of this stuff, but it becomes ingrained over time. I can forget that I actually had to learn it in school or from my own reading. QUOTE: When a given speculation or market is hot and everyone is talking about it, our tendency is to mentally extend it out into the future. We fall into the deadly trap of linear thinking, assuming the future will conform to only the most recent past. This behavior becomes most pronounced during popular manias, such as the Real Estate Market of the late â70s. While common in the markets since greed and fear blind so many, similar assumptions seem foolish in normal life. For example, if you saw a child blowing up a balloon that was getting larger and larger, what would you assume? Obviously, the more stretched the balloon grows, the more air it contains, the higher the probability it will suddenly pop. Yet, using typically flawed market logic, the average speculator sees a linear trend, like a balloon being inflated, and assumes it will run out into infinity. The trader wrongly assumes that the bigger the balloon grows, the lower the probability it will pop in the near future! This, to the speculators great loss. The longer the speculative entity has moved in one direction, the more the masses think betting with it is a sure thing. It is like betting the larger a balloon swells the larger it is likely to get. Instead, in reality, the longer a particular speculative action has been in force the higher the probability grows that it will reverse. Nothing moves in the same direction forever and periodic reversals are evident at every scale, from daily to centuries, even in strong trends. In speculating, probabilities are best defined by using a time scale at least an order of magnitude greater than the period of time over which you are interested in having your money at risk. In this case, we are interested in the probable behavior of housing prices over the next several months or year, so we should consider a time scale of 2x to 3x that. By considering the perpetual circle of the market on this time frame, which is a greater time scale than the one over which we seek to risk our money, we can gain a better understanding of when the odds are best.
What I was referring to in terms of prices not "collapsing" right after new all time highs, is the idea that typically a "crash" occurs AFTER some type of top is made, after the the market then declines for a while. Normally markets don't turn on a dime. That said, the gold market back in the early 80's did turn on a dime. So there are exceptions. Even there though after the initial drop there was a pretty good rally that took back half or so of the prior decline. My inclination though is to believe there would be some type of evidence visible in some of these real estate related charts that they were discounting something negative in the future. Right now, all you can say is that they are all going up. I cannot comment on the Aussie real estate market since I know nothing about it. But one thing I do believe is that when a decline does begin the bids just evaporate...it's not a smooth drop like we normally see in the stock market. That was the type of drop that took place in S. California around 1990. The scenario you paint in terms of interest rates would obviously only apply to those who have adjustable mortgages. And then too, most of the adjustables have an annual cap, so it takes a while to make a major move. Nonetheless, rising rates will impact new buyers. The example I gave was intended to illustrate the impact on a guy who bought right at the top, saw rates rise to the degree I mentioned, and how long it would take to break even in terms of his situation....11 years or so. This situation is not really clear in several respects. For instance, rates would probably rise because of the underlying strength of the economy, a discounting perhaps of future inflation. And by the way, inflation in the past has been a good thing for real estate prices, notwithstanding the possible impact on rates. Meanwhile, we are led to believe that rising rates will send real estate prices spiraling, the opposite of inflation. Home prices are more apt to respond to employment trends than interest rates in my opinion. That said, I would point out that mortgage rates are not rising for the time being. To further clarify, I'm not saying that real estate prices can't drop. I'm saying that when and if it occurs, it probably won't be the calamity that some believe. OldTrader
I have never understood EXACTLY what Billbuild does. Please explain the type of real estate, location. time frame, etc. I see you mention 1960 in Calif.??? That is over 40 years ago!! The securization of the mortgage market has evened the highs and lows tremendously. Most new home loans today are on FIXED rate loans. They will not be affected in any meaningful way by an increase, or decrease, of current interest rates. Some high leveraged speculators will get burned. But, the vast majority of people buy a home for a place to live. There is the normal turnover due to divorce, transfer, death etc. There will always be ups and downs depending on location and market conditions at that time. Home ownership was never meant to be an investment!!! In the 40's/50's/60's people were happy if house worth what they paid for it when mortgage paid off. Starting in early to middle 70's inflation took off with vast number of baby boomer's coming into home ownership. Suddenly, there was a nice equity profit in just a few years. Bingo!! Time to move up! Get larger house. In my market, Houston, (one of most active in nation) higher interest rates would be good thing for existing home sellers. Residential brokers tell me hard to sell older homes because new home builders are so competitive with all types of incentives, plus you get a nice new home with all bells and whistles. And cheap prices. We have an enormous amount of buildable land for development. Commercial real estate is another matter. That depends on what type, location, etc. This segment is best left to the professionals. Do not try this at home. I am working with a REIT that needs to make 4% on their investment averaged over the next 10 years. They are trying to buy a piece of land to build an apartment. They only need to make 4% to cover their cost of funds!!! Very aggressive. World economy: No country is going to shoot themselves in the foot by bailing out of dollar. If US goes into bad recession, the rest of world goes in to a depression. We are the one country they cannot prosper without. Think about Toyota. Reduce sales in US by 75%. What happens to Japanese economy??? People been running around with their hair on fire for last 30 years about dollar vs. world, etc. We only safe vault in world. Just my two cents worth, steved
Why would American's go bankrupt if housing prices decline by a third? Any movement in home prices would equate with one's net worth. Even RE agents still collect their commission if prices declined. What would cause a Japan style of housing price decline in the US? Inflation? No, with the flurry of refinancing the past few years, many have locked at a lower rate. With $50 barrel oil, we didn't get squat in terms of rising inflation. Deflation? How would this come about? Boomers saving more instead of spending? Terrorist attack? No one knows. Hard to see a crash.
If only it were that simple. An interest rate shock would affect everyone, and I do mean everyone. Once again, there is a bigger picture than simple supply and demand, and larger ramifications than a few guys having to make bigger mortgage payments. The global real estate bubble is a largely macroeconomic event tied in to the fed's efforts to avoid the pain of the late great stock bubble. In essence, the stock bubble was inflated by a perfect storm confluence of hot story (the new internet paradigm) , hot money (capital flows dislocated by the asian crisis looking for a new home) and fed fuel (major liquidity injection as just-in-case buffer for y2k). And oh yeah, a blissfully benign inflation environment. After the stock bubble burst and the enron and worldcom skeletons came out of the closet, the fed was anxious to avoid a crash and burn, so the easy money kept coming to beat back the deflationary monster. And with interest rates at 40 year lows, where did this easy money go? Into the real estate market. Demand coming out of the woodwork. Banks making money hand over fist. Consumer spending through the roof. Everyone feeling flush. And that easy money is still coming. The spigot is only being turned off a little at a time. You would typically expect a multi-year cycle of easy money to create inflation, especially if Friedman is right about inflation being an entirely monetary phenomenon. But we've enjoyed a (mostly) goldilocks scenario because all that free flowing cash got mopped up by the stock market... and then the baton was handed over to real estate. Hence the problem and the danger of interest rates today... Greenspan has seemingly done us a favor, but he's also done a great disservice- because the unsustainable debt levels associated with the bubble haven't worked themselves out. In fact, they've gotten worse. While the bottom of a bear market is usually quite painful, it also has a purpose- a cleansing effect. Companies and consumers with excess debt are forced to take their medicine. Sacred cows are taken out and shot. Balance sheets are cleaned up, the garbage is taken out, and the process of saving begins again. Once consumers and companies have trimmed down and saved up (and the herd has been culled), the next positive cycle can begin again- with new net savings and favorable (low) valuations as the foundation. We never saw the cleansing effect of the bear because Alan never let it happen. Companies and consumers alike are still loaded with debt. In fact, not only are we not in a position to build a new foundation with our savings, we've essentially doubled down on the debt load we were carrying from last time around. American consumers and companies are like the fat guy at thanksgiving dinner who ate five times too much - we are still gorged on debt, and we have yet to work it off. An interest rate shock will be the equivalent of sticking a finger down our throat... we'll be forced to puke it all up. Not pretty. See more here if you find the topic interesting (interest rates, not throwing up): http://hussmanfunds.com/html/debtswap.htm When rates go up, Joe Blow not only has to make a higher mortgage payment... he has to start worrying about his job, because the corporation just saw their liabilities increase and their cash flow take a hit. He has to worry about his access to credit, because the banks are freaked out and they've started getting really tough for some reason. And he has to start worrying about his neighbors' spending habits, because if his business is related to consumer spending, a change in sentiment could cause a chunk of his biz to dry up fast. Everything affects everything, and we are setting ourselves up for a vicious circle... a potential chain reaction with very ugly consequences. A sharp rise in interest rates would hurt consumers and companies alike, a downturn in consumer sentiment would hit company profits even harder, and layoffs would hit consumers yet again. Down we go. The real nasty kicker is that we are highly dependent on low interest rates, and yet we are essentially buying those low rates on credit (by buying Asia's goods with borrowed money, our half of the deal). The more stuff we buy on credit, the more we need to buy on top of that- to compensate our bagholder as the bag gets bigger. Not sustainable arrangement. Must be unwound. Unwinding must be done verrrrry carefully. Obviously this scenario is not good for home valuations. In fact it's pretty much in line with the pending disaster school of thought. Not a foregone conclusion... Asia still has good reason to play along, and the Maestro may be able to pull one last rabbit out of a hat... but it's no time to be complacent. (The Maestro had better be ambidextrous too, because he'll have to manage the dollar with one hand and stave off the potential threat of inflation with the other. Is it any wonder he tried to pass the buck -no pun intended- in a recent speech?) The other scary factor is that so much of the wealth effect enjoyed by these higher values is a complete illusion. Why is a house that was worth 300K four years ago at a million today? Because people say it is, and the bank confirms it by giving you an equity loan on it or a mortgage to buy it for that much. But when the bids dry up, much of that supposed "wealth" will actually just disappear - poof. Just like when Pulte or whoever those builders are down in Vegas decided to shave 100K or so off their suggested asking price because foot traffic dried up. A handful of leveraged speculators found themselves six figures in the hole - instantly (you can buy a half million dollar house on 4% margin don't you know). Doh! No warnings there. When the bids dry up because the credit got crunched and the sentiment turned sour, we could see hundreds of billions in wealth effect just... disappear. Bye bye. Air pocket city. Just hope we get to come down slow. (Victor Sperandeo has a great story about two cajun farmers trading a horse back and forth. They keep bidding the price up on each other, making different deals -a cart here, a bridle there etc.- until finally they are trading at multiples of ten from where they started (and on credit from the bank of course). One day a Wharton MBA drives up, does a few quick calculations on the appreciation, and buys the nag for $147,000. The second farmer says 'Pierre, you eediot! Why did you sell? We were making a great living on zat 'orse!")
You just need one cent to prove that there is no safe currency over time. And no safe economy. At some point every great culture declines. Every currency and economy declines. History teaches us this. If you don't believe this is so, take one penny, compound it at1% per year from the time Christ was supposedly born, and ask yourself why not one person has anything close to that amount of wealth today. Take microsoft excel, type".01" in cell A1. In cell B1 type "=A1*1.01". In cell B2, type "=B1*1.01". Auto fill B2 down to cell 2004. Thanks to Ed.
Maybe it would be prudent to start a lineage of long term currency trading and pass it down to your next of kin.