Real Estate is dying? Investment-wise what is the next Asset Class Du Jour?

What about the Czechs? 12% in Cleveland also? I guess they mostly live in Michigan and Illinois(Chicago)

 

Silverware, very funny dialogue really.

An opinion:

Stubborn has nothing to do with it, unless it is free and clear. Cleveland will move less $ wise, I agree. And less spec yes. But RE is going down across the nation. The reason is macro not micro and has little, in the end, to do with interest rates. Japan's are near 0% and RE way down.

All the currencies (except maybe the Swiss) will tank. Euro or xxx where is the safety? Nada. It's a currency world tied together. Like I said, a bunch of drunks waiting to fall.

You have the same problem we all have. What is safe now? I've given this 3-1/2 yrs of thought now and read everything. You wanted opinions.

Unencumbered RE is a pretty poor safe haven in the near future. Naw, I'll be blunt, you'd have to be out of your mind to buy RE now. Why buy now??? You can buy later for much less. I don't get it. Would you buy your ZN things at the top so you could hold to the bottom? Would that seem wise? The only RE I'd buy now is something priced at wholesale replacement cost.

Stubborn...please. The stubborn bleed too. Mike805 has the very best stuff and he is at some risk (probably little).

Or here in CO you can buy a Ryland house with 0 down, 0 points, free landscape and sprinklers, great arm loan, free drapes, free fencing, and $40,000 cash. Ryland drives a tough deal. Buyers are falling all over themselves.

What I'd like to have an opinion on is: How can savvy market traders overlook the hype and fundamentals?

 

Overview
Several powerful forces have combined to drive US bond prices higher over the past few years. Chief among these forces has been the large-scale buying of US bonds by the Bank of Japan as part of its attempts to weaken the Yen, but other significant influences include yield-spread trades by banks and speculators, strength in Japanese Government Bonds, 'flight to safety' buying, and fear of deflation. What we want to do today, though, is not spend time analysing WHY the bonds have been so strong because we've covered this topic at length in other commentaries over the past year. Instead, we are going to look at the EFFECTS that this bond strength has had, and continues to have, on other markets.
One of the most important effects of the on-going strength in bonds is psychological because regardless of the fact that much of the strength can be attributed to government intervention (aggressive buying of US bonds by the Japanese central bank and the Fed's implied promise to hold the official short-term rate at a very low level until the employment situation improves), many analysts won't believe that an inflation problem exists until after bond prices move considerably lower. In other words, the consensus view is that if the US really was facing a serious inflation threat then bond prices would be much lower (long-term interest rates would be much higher); and this is despite the mountain of evidence that the on-going bond price strength has nothing to do with inflation/deflation.
Now, the knock-on effect of very few people perceiving an inflation problem is that the problem is able to grow because nobody in power, least of all the governors of the Federal Reserve, is interested in trying to solve a problem that supposedly doesn't exist. That is, persistent strength in bond prices prevents any obstacles from being placed in the way of additional inflation because the bond price strength places a smoke screen in front of the underlying inflation problem. This, in turn, means that the prices of those things that benefit from a burgeoning inflation problem are able to move much higher than would otherwise be possible. So, the longer that bonds can remain firm the higher the prices of commodities will eventually move. By the same token, there won't be any need for us to worry about commodities experiencing anything other than routine bull-market corrections until bond prices move sharply lower.
The problem or the solution?
Over the past few years it has often been necessary to think counter-intuitively in order, firstly, to understand what is happening in the markets and, secondly, to understand the likely future effects of these happenings. For example, during the weeks immediately following the devastating terrorist attacks of 11th September 2001 there was substantial strength in bonds and widespread fear of deflation. Our interpretation, though, was that the policy response to the situation was going to result in an even bigger inflation problem and rally in commodity prices than would otherwise have occurred. But this interpretation seemed so 'off the wall' at the time that several of our readers actually cancelled their subscriptions.
In the last two commentaries we've begun to once again discuss the 'deflation bogey' because there's a reasonable chance that financial-market and economic conditions during the second and third quarters of this year will once again cause deflation to become a hot topic; and we wanted to get in early with our rebuttal.
We think it is very likely, though, that the PERCEIVED deflation threat will once again be met by a very aggressive inflationary response on the part of policy-makers. Furthermore, given the Fed's enormous power in the field of money/credit creation there is a high probability that the inflation problem will be made much worse before we have to seriously consider the possibility of genuine deflation. And, if policy-makers are lucky (they will need to be extremely lucky) then their efforts to magnify the existing inflation problem will once again be masked by stability or strength in the bond market.
A point that deserves to be emphasised, though, is that when the Fed and other central banks facilitate the creation of additional money/credit in order to 'address' a perceived deflation threat all they are actually doing is pushing an even bigger problem into the future. This is because deflation isn't the problem; the problem is that way too much new money and new debt has been created over the years. That is, there is an inflation problem and deflation, in fact, is the only viable long-term SOLUTION to the problem.
Further to the above, at the root of the matter is the common misapprehension that deflation is the problem and that inflation might be a solution, or, at least, a 'bandaid' that can be applied in order to make the healing process less painful. In our opinion, though, inflation is the PROBLEM and deflation is the SOLUTION; and the problem will continue to get worse until the political will exists to fix it.
Commodities and Inflation
Rising commodity prices are a potential EFFECT of inflation, but it is generally possible to explain an increase in commodity prices without naming inflation (money supply growth) as one of the culprits. For example, right now an argument could be made that commodity prices are not strong as a result of inflation but are, instead, strong as a result of China's economic boom, weather-related problems, geopolitical issues and OPEC production cuts.
The ability to blame price rises on anything other than inflation is one of the main reasons that price indices such as the CPI have been aggressively promoted by governments over the decades as measures of inflation; the idea being that as long as most people believe that rising prices and inflation are one and the same then it will be possible to blame "inflation" on things over which the government has no control, such as the weather.

 

First, I know you all want to know what the #2 group on the NYSE was today. Right? See link.

http://www.ttrader.com/mycharts/display.php?p=29273&u=oldtrader&a=OldTrader's Charts&id=1300

By the way, this index is comprised of most of the major builders. They seem to be doing very well. Which brings me to my next point. This thread was started back on 7/21. Real estate "dying'. What is the "next" asset class du jour. So I went back to our old friend Toll Brothers, one of the major home builders in the US to see what price it was trading at on 7/21. The close that day was $37.97. Today TOL closed at $66.02. That's a gain of $$28.05 per share or 73.9% in approximately 5 months. See the link for TOL here:

http://www.ttrader.com/mycharts/display.php?p=29274&u=oldtrader&a=OldTrader's Charts&id=1300

Finally, an update on the 10 Year T-Note rates for those who are expecting higher rates.

http://www.ttrader.com/mycharts/display.php?p=29275&u=oldtrader&a=OldTrader's Charts&id=1300

OldTrader

 

The ghost of crashes past
Dec 14th 2004
From The Economist Global Agenda

Your columnist signs off, wishing one and all a merry Christmas, but forecasting a not-so-happy 2005 for the financial markets

IT HAS been an emotional time for the family Buttonwood these two weeks past. Your columnist’s two daughters were in a car accident, though luckily escaped unscathed. To such trauma has been added the sort of pride that brings a tear to the eye of any parent with an ounce of feeling: daughter number two played Mary in the school nativity play.
As Christmas is fast approaching and this is the final Buttonwood of the year (and the last by this columnist), readers will perhaps forgive the sentimental segue into the rather less Christmassy topic of financial markets, where the questions on Buttonwood’s mind are: how can risky assets the world over be as expensive as they are? And are they likely to stay that way?
For reasons that will probably remain mysterious, financial markets turned on a sixpence a little over two years ago, on October 9th 2002. Having had their confidence shattered by a bear market—caused in large part by the popping of the technology bubble, a rash of corporate scandals, worries that many firms’ debts were much greater than they had admitted to, and the threat of terrorist attacks—confidence (and its handmaiden, greed) started to replace fear as the motivating force in financial markets. The world, it became clear, would not fall apart after all.
Moreover, many assets were historically cheap. Yields on emerging-market bonds, junk bonds and even some investment-grade corporate bonds climbed, and their prices correspondingly fell. Though still pricey by historical measures, shares, especially those connected in some way with technology, were certainly cheaper than they had been in March 2000.
They aren’t any more. In a successful attempt to stimulate risk, central banks around the world slashed interest rates. At the forefront of these efforts was the Federal Reserve, which cut rates 13 times between January 2001 and June 2003, to a niggardly 1%. At 3.8 percentage points, the spread of both emerging-market and American high-yield bonds over Treasuries is now less than the extra yield offered by American investment-grade bonds in the autumn of 2002. To the question of how much compensation investors should receive for investing in risky assets, Buttonwood has no pat answer. In 2002, it is clear, they were generously compensated. In December 2004, equally clearly, the rewards are too meagre.
But just how meagre? To be sure, the world has proved remarkably resilient in the face of war in the Middle East, the threat of terror, a high oil price, recently rising interest rates in America and a shaky dollar. Growth has been robust; indeed, according to the International Monetary Fund, this latest recovery in the world economy has been the strongest in 40 years. Corporate profits have been growing at record levels in most rich countries. So, it should perhaps come as little surprise that corporate default rates have dropped precipitously and equities have been putting in a decent performance (though they have struggled a bit this year compared with last).
And yet it does come as a bit of a surprise to this columnist. Financial markets, after all, are meant to be forward-looking, and, barring a miracle—admittedly a possibility not to be dismissed lightly at this time of year—the prospects for the world economy look decidedly gloomy.
The biggest problem is debt, specifically the debts run up by Americans and their government. Though China has accounted for much of world growth in recent years, America and its spendthrift consumers are still the bedrock of the world economy. But they spend borrowed money. At 0.2%, their savings as a percentage of household income have been falling remorsely for years and are now lower than at any time since the Great Depression. The government deficit is headed for the stars. The dearth of domestic savings means that America has to rely on foreigners: some four-fifths of the world’s float of available savings is consumed by America.
One consequence of this is an American current-account deficit that is now about 6% of GDP—and is starting to give investors the jitters. America has been lucky so far because it is able to borrow in its domestic currency. But the foreign-exchange markets are becoming decidedly nervous about the dollar. What would happen to domestic interest rates were there to be a run on the currency?
Presumably, inflationary fears would mount. Presumably, too, short-term interest rates would have to rise more sharply than the Fed would like—or markets now expect—to reward investors better for parking their money in dollars. Neither would make long-term Treasury bonds an especially alluring investment, at least not in the short term. Rapidly rising interest rates would not exactly be a boon for consumption either. How could they be when consumers are so indebted? The amount that Americans spend on servicing their debts is almost at record levels, despite low interest rates. It used to be that American consumers borrowed long term and at a fixed rate. In recent years, they have increased the proportion of short-term debt, thereby making themselves more vulnerable. Nowhere does this apply more than in the housing market, which, like housing markets in many other parts of the world, looks suspiciously frothy.
Expect, in that case, a sharp increase in bad loans, which would knock some of the wind out of America’s banks. Expect, too, an increase in corporate defaults and a fall in corporate profitability—not least because perhaps half of all corporate profits in America come from the financial sector, which has spewed out money in recent years thanks to benign economic conditions and the huge difference between short-term and long-term rates.
None of this is likely to cause many smiles on Wall Street. American investors have had to buy apparently turbo-charged assets because they save so little. Shares are admittedly not as expensive as they were—the average S&P 500 stock currently sells for about 18 times its per-share earnings, not that far above its historic average. But this is a time when you would expect that number to be lower and falling, because only a fool would expect the record profits of recent times to continue. With a rash of defaults looming, corporate bonds look even worse value.
What all of this means for markets other than America’s will depend in part on the speed with which it happens. If Wall Street falls with a thud, other markets are likely to follow suit. If, on the other hand, it deflates slowly, they may not suffer too badly. Emerging-market debt looks ridiculously expensive either way, though equities, especially in Asia, look better value. Indeed, many Asian markets are sufficiently cheap that they will be cushioned from the worst. They might—whisper it—even prosper.
That is about all the seasonal good cheer that Buttonwood has to offer, except to say thank you to those many readers who have written, even to those who have disagreed with every word. The column will return in January under new authorship. In the meantime, have a happy Christmas.

 

If your going to post the Economist, post their housing bubble articles during the summer of 2003. I laughed pretty hard. Its a rag with numbers.

 

Interesting that the Economist and the Financial Times (very different perspectives) are both owned by the Rothschilds.

Forever the clever family.

I guess we should fear them, but I admire how they rose from rags to become King of Kings. They started the FED in 1913 (think that is the right date). They also moved the first Jews back to Palestine in about 1900 and paid for the whole construction process. All checks signed "anonymous donor". Although they were anti-Zionist. England presented the Balfour Document to them and the English didn't know that the Roths didn't care.

Roths bought the Suez Canal and gave it to England for a 3% lease rate. What a deal for England. They also financed the English Battle at Waterloo.

Created the first European Clearing House for Money that became the current Central Bank. I think they still own the Bank of London.

They used to be public. Now they are ultra private. Biggest private gold horde in the world, it is said.

Their history is a must read if one wants to know today's banking.

Famous for being the center of "Our Crowd".

I'm not Jewish, but some Christians get real uptight about them. Not me.

Never been a family like them. Giants

 

>Hello,

So, I am not looking to park this money in the financial markets. I would like to move to a townhouse or condo and pay for nearly all of it in cash. The problem - I perceive this market to be overpriced (yes, even here). Perhaps 2005 or early 2006 would be better? Is this strategy sensible?


**** Depends on what your goal is. If you are going to pay all cash, with the idea of flipping it, you could get caught holding the bag.

If you are looking for cash flow from a long-term investment, consider a strategy such as taking your money, and dividing it equally into three downpayments on three townhouses. Then finance the rest of each of them. As an example, if I was to buy a $100,000 townhouse with cash, it would give me back about $720 a month in rent, or $8600 a month in rent, which works out to an 8.6% return from rents. Not bad.

But if I put $30,000 into three $100,000 townhouses, plus $3333 in each for closing costs on 30-year fixed mortgages, then I would collect $8600 a year on each townhouse or $25,800 in rents combined. At the same time, my payments, all combined, would be about $1400 a month, or $16,800 a year. So, my net return be $9000, so thats a 9% return from rents, which is comparable to buying it outright. The difference is that I could write off about $9000 worth of depreciation a year, and about $9000 in interest paid toward the notes. The kick in the pants is that since I would have 3 townhouses appreciating at about 4% a year (average), the value of my portfolio would climb three times faster, at a rate of $12,000 a year. (thats another 12% return to tack on to the 9%). So I'd be getting a 21% return overall. Yes 21% return. Its done with leverage that is almost 3 to 1 in this example.

Now, you ask...is it safe? Well, there isn't as much risk if you're locked into fixed mortages and looking for cash flow since rents probably won't fall even if prices collapse. Also, since your payments are $1400 a month, but your rents are $720 per unit, that means that you could always have one vacancy and still service the debt. Realistically, the average tenant stays for 2 years, so you'd be dealing with one occupancy every 8 months on average. You'd almost never have two occupancies at the same time, and you could easily build up a cushion to handle it.

Now, I make it sound easy. My calculations assumed full occupancy. It also assumes that you are buying good property in good condition that hardly ever needs repair, and that you're doing your own repairs, painting, cleaning, etc.. It also assumes that you screen your tenants tenaciously and that you never have eviction problems. These are all big "ifs", but if you're not willing to work hard and still deal with occasional set backs when you're a landlord, then the landlord game is not for you.

SM

 

Assume you didn't have enough money to buy a car outright and you wanted to buy one. If you were offered a car now, with the total cost of $25,000 and payments of $500 a month financed at x% interest (fixed), or you could buy it tomorrow, at a higher interest rate (x+y%) (again fixed), for a total cost of $20,000 but the payments would be $600 a month over 5 years because the interest rate was higher, which payment plan would you adopt?

Yes, if you're going to have to sell the car soon after purchasing it, buying it tomorrow would make sense. But if you intend to keep the car for a long time, buying it today, at a higher purchase price but lower payments makes sense.

It would especially make sense if you were buying a taxicab, with the idea that you'd collect at least $2000 in revenues. Wouldn't it make more sense to take on the $500 payments so your profit is more? So it is with rental properties on fixed mortgages.

And the thing is...if the rates jumped, even if prices dropped like you guys are saying, the car owners with the $500 payments, and the taxicab owners with the $500 payment will have no incentive to put their cars on the market, effectively causing a change in the supply side of the supply-demand equilibrium. This will soften the blow.

God help the soul who is buying his car on a variable note.

 

When Silverware posted his question, I realized I'm in a circle right on this site.

It's been...something.?

I can't believe the number of private posts. I wish you all well. I was struck that my new company's summary study of Peak Oil and the 20 page economic uranium piece I bought were the most popular items to PPs on a RE thread. I was glad to share.

Hope you all stay on high ground.

I'm tired. Putting up a commodity site with new partners and building Another company is all I can handle. I'm the geology "expert" so I have no time.

Sorry if I got grouchy. I think I'm mad my Homebuilding biz got swiped by the USG.

Bye