Real Estate is on the lips of all these days!
"If the elevator operator recommends buying, you should have sold long ago." Henry Ford, 1929.
The dynamics of real estate are complicated. Unlike the stock, commodity, and bond markets, objective market
data is hard to find in the real estate market!
Is that an offer? No, it’s an appraisal!
Consequently, hyperbole and deception are rampant in the real estate arena. A good example of the lack of
objective data in the real estate sector was revealed in this recent article.
WASHINGTON (MarketWatch) -- The U.S. housing market has gone from boom to bust to boom again, if you believe the recent data.
"Just a day after the National Association of Realtors declared that home sales had peaked, the U.S. government
reported record new-home sales for October."
"The contradictory data have investors and economists scratching their heads."
"Has the housing bubble has popped? Or is it still growing?"
You don’t have to be a Phi Beta Kappa from the College of William and Mary to see that this is a script right out of a lunatic asylum.
One can spend one’s time speculating on the cause of this contradictory gibberish, or one can just ignore
the effluents emanating from these mental aberrants. I opt to ignore all of their ilk.
There is one certifiable fact at this time. A large number of consumers are currently deep in debt (much of
this debt in VaR mortgages). Should interest rates continue to rise, the rubber is going to hit the road for these householders!
Mr. And Mrs. Main Street have bought their ticket (price unknown), and they will get their ride (to destination
unknown)! What motivated them to buy tickets on the real estate ride? Perhaps they were too busy to go to Disneyland that
weekend! However, the folks in California and Florida have bought a lot of the most expensive seats on the real estate choo-
choo train! Hmmmm!
When mass phenomenon occur, there must be an underlying cause. Let’s see if we can identify that cause!
Dick Stoken did an extensive study on the nature of cycles. One of his conclusions involved the propensity of people to repeat past behavior.
Stoken’s research found that the younger generation will try to repeat behavior that had a positive
outcome for their parents. This conditioning is mother’s milk. Therefore, this premise will never be checked by the
younger generation. Worked for Ma and Pa, and it’ll work for me! This sounds reasonable enough on the surface!
A quick review of the older generation’s experience is order!
A slow but relentless devaluation of the dollar.
A slow but continuous increase in Social Security Benefits
The creation of Medicare/Medicaid
A continual rise in corporate pensions
A massive rise in government pensions
A general rise in real estate prices
What, Us Worry!
Naturally, the younger generation has been conditioned to extrapolate this historical experience into the
future! No Worries, Mate! Just go with the flow!
Now we must add an old truism No group ever believes that there will be a major change in their lifetime.
Now we’ll put all the ingredients into our cauldron, and bring it to a slow boil. Carefully add eye
of newt, toe of frog, wool of bat, tongue of dog, and season to taste with hemlock!
Serve when cold, adding interest only VaR mortgages for garnish!
As they connect their seat belts and shoulder harnesses, let’s conjure up a view of their coming ride
on the choo- choo train to the Brave New World!
Looking through our looking glass, we see Alice, the real estate agent, hurriedly throwing her toiletries,
stacks of cash, and a passport into a suitcase. Camouflaged in her saffron robes, and equipped with her suitcase, her copy
of the Kabbalah, and her worry beads, she tells the limousine driver to go to the airport quickly!
Quasimodo, a former mortgage banker, is heading for the nearest cathedral, bellowing sanctuary, sanctuary.
Morey, the former real estate appraiser, has just put an ad on EBAY "My Kingdom for a Passport"
The former General Manager of the Queen’s Banks main office in Washington DC (the FED) has been seen
standing on the top of Bellvue Hospital in N. Y. C. screaming "I love the smell of mortgage defaults in the morning!"
The major supermarkets are running their usual special, a free Condominium with every $25.00 purchase (liquor
and tobacco products excluded)
A number of former elected representatives have moved to their reserved prisons cells. Warm, fed, and safe
from the angry mobs on the streets, they are brainstorming to create the latest Multilevel Marketing (MLM) program.
Ford and General Motors have merged, and have converted their unsold inventory of trucks into mobile pawnshops
and check cashing services. The large trucks have been converted into mobile video poker salons.
The now property less debtors (see the new bankruptcy laws) have not yet grasped the simple concept that they have been reduced to their historical status as serfs and
slaves. As long as they are all reduced to serfs and slaves, they will be content.
Some readers will feel that I am developing an overly pessimistic, and very implausible, forecast. However,
the brokerage industry has started releasing their real estate forecasts, and these forecasts are a real wake up call.
In her article "Housing bubble's burst dreaded", Ellen Simon of AP, revealed the following:
"The demographic story behind the housing market boom, as we always thought, was a giant hoax," wrote Merrill
Lynch & Co.'s North American Economist, David Rosenberg, in a recent report.
"A downturn in housing could mean more than 1.3 million lost jobs, Goldman Sachs Group Inc. predicts,
bumping up the national unemployment rate by 1 percent and the unemployment rate in house-mad California by 2 percent. Those
numbers don't include likely job cuts in housing-dependent businesses, such as banking, furniture and building materials."
"The Center for Economic and Policy Research predicts worse, saying a bubble burst would mean the loss of
5 million to 6.3 million jobs."
"Another indicator, unsold homes sitting on the market, also points down. The ratio of inventories to sales
has been rising rapidly in recent months and now stands at its highest level since 1996, according to Wachovia Corp."
"Rents provide more evidence of an imbalance between supply and demand. Since World War II ended, sale prices
for homes have generally kept pace with the overall rate of inflation, and rents moved at the same pace. That hasn't been
the case for the last eight years, according to the Center for Economic and Policy Research."
"There has been no significant
increase in rents, which would be expected if the run-up in house prices were explained by the fundamentals of the housing
market," wrote Dean Baker, the center's co-director.
Then, there's the problem of affordability. Affordability for
first-time home buyers is the worst it has been in 20 years, which brings to mind an old parable about the stock market. A
woman buys up a company's stock, driving up the price as she goes. Eventually, she tells her broker to sell.
"House prices are at the mountain top," Zandi said. "All roads lead down. It's just a question of how steeply."
"A final nightmare scenario: A federal bailout of the mortgage market is likely if housing crashes, the
center predicts. So, if corporate pension funds continue to falter and this dire prediction does come true, the Feds could
conceivably be holding your mortgage and your pension."
All of this having been said, we still don’t have a confirmed bear market in housing stocks. A rational
investor would wait until the herd’s fuel tank is empty prior to commencing short selling operations. "It Ain’t Over Till It’s Over." It’s understood that you have already minimized your market exposure. Keep your powder dry, and watch
the wildebeest herd carefully, selecting only the weakest targets.
In closing, we should always remember that brokerage houses are notorious for painting the rosiest picture
possible. If this principle applies to the opinions that were given to Ellen Simon, it's going to be very ugly!
NEW YORK (Fortune) - Tom Barrack, arguably the world's greatest real estate investor, is methodically selling off his U.S. real estate holdings
as prices drive the market to nosebleed levels. Perhaps Tom Barrack knows better than to listen to real estate brokers,
and local newspapers!
We need to remind you that the new credit card payment rules go into effect in January. This will be a shock to the budgets of many people.
Last, but not least, are the coming changes in the tax law. There is a chance that homeowner deductions for
interest expense and property taxes are history. The new US tax laws are just being written, so it’s a little early to state with certainty about the coming changes. It appears
that tax subsidies for real estate may be over.
"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover
their senses slowly, and one by one." Charles Mackay
Wayne N. Krautkramer firstname.lastname@example.org http://onlypill.tripod.com/generaleconomics