Your Goal In 2011: As Ridiculous As It Sounds, Buy A Property
Does anyone really care about the housing market anymore? The banks and developers that got stuck care. But the public doesn’t and that’s something I like.
Figures released Wednesday by the U.S. Commerce Department show that sales of new homes fell 8.1% in October to an annualized rate of 283,000—close to a 47-year low. Existing home sales did just as bad. According to the National Association of Realtors, sales of existing homes in the U.S. fell 26% in October 2010 from October 2009.
What’s going on?
It’s very simple, and it is called the “herd mentality.” Buying houses is totally out of vogue. Rates for mortgages are near record lows, the government had an $8,000 first-time homebuyer tax credit (that has since expired), and banks stopped foreclosing for a while (because of state attorney investigations), reducing the supply of foreclosures coming onto the market—and homebuyers are still few and far between.
I remember quite well 1999 when everyone was buying tech-stocks. The market for tech-stocks collapsed in 2000. But the decade which followed brought some of the biggest gains from tech stocks in history.
In 2002, at under $300.00 U.S. an ounce, no one was interested in gold. Today, you’d have to pay $1,000 more to own an ounce of gold. Gold mining companies, which couldn’t raise a dime in the early 2000s, are the stock market darlings of today. Companies with no gold mine production, just reports saying they have found gold, are raising millions of dollars from investors again.
In March of 2009, the financial world was falling apart. Investors dumped their stocks in groves. Today, stocks are about 70% higher than they were in March of 2009. And retail investors, because of the herd mentality, have missed the boat again.
I’ve been a real estate man for almost 25 years. I’ve seen real estate booms and busts. But I’ve never lived through a bust like we have today. Housing prices in Florida are down about 47% from their peak, according to various published reports. Properties are being sold for well below replacement cost.
In my life, I’ve always made money betting against the herd mentality. While housing could have another 10% to 20% to fall, we are getting close to the bottom. Hopefully, you do not take this too generally, but the greatest fortunes in history have been made by buying when the masses are selling and selling when the masses are buying.
There is no doubt that 2011 will be a very challenging year for the economy. But it will also present an unprecedented opportunity for smart real estate investors who have the guts to go against the trend and buy. As ridiculous as it may sound today, 2011 will be a great time to buy property in the U.S.
Michael’s Personal Notes:
My co-editor Robert Appel recently had these wise words to say about the market and the economy, and I thought they were important to share with all my PROFIT CONFIDENTIAL readers:
“If this were an investment report written in Biblical Times, we would simply say ‘the market struggle-eth.’ After taking a mighty haircut from key resistance, as predicted, the stock market has a chance to base here. The Dow Jones Industrials may even (shockingly) retest 11,500 (or thereabouts) at some time.
“But our job is to be frank, and in 2011 we see more bad news than good. Especially in the bond pits.
“Because Bernanke seems to believe that the endless ability of the Mint to print money will enable him to stop yields from rising by the sheer force of his will. Just like King Canute tried to stop the tide from coming in.
“As impressed as we are by the amount of dollars the U.S. is minting—in the last four years, they took on more debt in the country’s entire history prior to that period—we think it is only a matter of time before reality intrudes.”
Where the Market Stands; Where it’s Headed:
Traders went into the U.S. Thanksgiving with fat stock portfolios. On Wednesday, instead of the market selling off, as traders often close their positions before a long weekend, the stock market rallied.
Let’s face the facts: if it were not for the pathetic housing market, the Dow Jones Industrial Average would be at a new all-time high. Corporate profits are strong, retail and big-ticket (car) sales are strong, interest rates are low and the money supply is easy. What else could a stock market ask for?
The bear market rally in stocks that started in March 2009 continues.
What He Said:
“Any way you look at it, the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. “As for the stock market, it continues along its merry way oblivious to what is happening to homebuyers’ wealth. (Since 2005 I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in PROFIT CONFIDENTIAL, November 21, 2007. Dire predictions that came true.
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Broker Reviews
For a “real estate man”, you either have a lot to learn about real estate, or you have forgotten what you’ve learned. You neglected to say that pre-Great Depression real estate prices did not recover until 1954. Taking your 1927 RE crash date as the Gospel, that means that RE prices took 27 years to recover. Since RE most recently peaked in 2006, if history repeats, RE prices might recover by 3033. In other words, buying RE in 2011 might be a little premature.
Conditions are even worse today than they were during the Great Depression. During the Great Depression, the US was the largest creditor nation in the world. Today it is the greatest debtor nation in the world. During the GD, the USD was probably the strongest currency in the industrial world. Today, it is turning into toilet paper. During the GD, the US was the strongest manufacturing nation in the world. Today, the US manufacturing sector amounts to only about 10% of the country’s economy. If it weren’t for a central bank creating money out of thin air, those one out of eight people on food stamps would be in bread lines.
Then there’s the problem of mortgages. The bankrupt USG is the lender of last resort. How many investors out there do you think would want to own MBS at full face value? And, let’s take you Florida quote to the next level. since 2007, Miami condo prices have fallen almost 78%. There will be many more Miamis, and many of tomorrow’s Miamis could become today’s Detroits. The time to buy RE in the US is when it is cheaper to own than to rent. That won’t happen in 2011.
You are spot on. Anyone trying to convince you to buy real estate is trying to make $ off of you in some way or another. There is absolutely no reason to buy real estate right now… and the hidden dark side is that anyone who does own real estate is in danger of some very steep real estate taxes in the near future. Municipalities have only a few levers to pull to raise funds and real estate taxes are squarely in their sites. Renting is a far better option for the time being.
I too have made a lot of money betting against the herdsters but still do attempt to buy while prices are still falling.
What is wrong with waiting a little longer to start buying up RE? Better to let the market drop it’s expected 10% to 20% and wait for charts and fundamentals to show signs of a turnaround then you should have a lower cost base.
Your theory of buying RE now when you know there is a good chance that it will fall further is more like the behaviour of a day trader betting on Leveraged Index ETF’s.
Unfortunately, I believe we have not yet come close to the bottom. The bubble was a completely false economy – a house of cards. No relationship to reality. It will take a long time to get back to reality. Look around at all the empty retail shopping center space. Empty subdivisions. zfacts.com and Robert Reich, “Aftershock”, unfortunately, have it pegged. Republicans now moving into control – just hope we do not have another Great Depression.
Wow, this convinces me it is the time to buy real estate.
Stay away from real estate for the next 25 years. Property taxes are going to skyrocket. HOA fees are going to go through the roof. This will kill condo values and prices will come crashing down even more.
Don’t get burnt twice.
For owners of real estate, the big question is whether to dump now at big losses to get out of the line of fire, in order to reinvest in something positive. Five years, for example, in gold or the right stocks, is a better bet to make you whole than waiting for R/E recovery. Most R/E investors today would be grateful just to break even over the next several years — and moving sideways to better investments, even taking big losses selling off R/E, might be the better gamble, not to mention letting you sleep at night for a change.