U.s. Real Estate Debate

[SittingBull]

Hey fellow HPC'ers, I thought I'd point you to the debate raging on this U.S. blog:

Real Estate's Wall of Worry

The blogger, Barry Ritholtz, is a respected investment strategist who appears in the U.S. media regularly, and he'll even personally respond to your postings if they're reasonably good, and if you provide a real email address. He's basically of the school of thought (and I paraphrase): "it's not necessarily a bubble, but it's definitely a boom that is likely to fizzle".

Anyway, you'll notice a particularly feisty RE bull who seems like a regular bull until his last comment:

Do not blame me for the fact that we have a zero net savings rate in this country. People are spending like drunken sailors. They are the ones taking equity from their homes and consuming instead of investing. (I prefer that they do neither with their HELOCs). BTW, they are spending like their role models: The US Congress. And, as president, Mr Bush has yet to veto a single spending bill as president........

[Guest Charlie The Tramp]

Do not blame me for the fact that we have a zero net savings rate in this country. People are spending like drunken sailors. They are the ones taking equity from their homes and consuming instead of investing.

Sounds familiar, the indebted countries are now heading for financial meltdown. It will be a very long haul to return to stability. Now I understand Warren Buffett`s investment advice that the future three investments were cash, cash, and cash.

Could be you have now overtaken us in who will crash first.

Edited August 22, 2005 by Charlie The Tramp

[Guest Charlie The Tramp]

there's a "new savings paradigm"

and like all new era thinking, it is doomed too.

<{POST_SNAPBACK}>

So there is no hope for any of us Dr Bubb.

It really will be hard for the younger generation in the future.

[Guest Charlie The Tramp]

i have a feeling that they will not want to honor the pension obligations

of the now middle aged generation, and they will find a way to discount

those payments rather than pay them in full

I believe they have already warned your generation of that fact.

My generation entered into what turned out to be a legal contract with past governments, and a while back the courts upheld that contract when the government, I believe, tried to offload our pension rights to the private sector. I cannot remember the exact details but those under 55 are in a dodgy position unless they take action now for their future pension. IMHO this was another factor leading to the massive HPI and the amateur BTL brigade who will find they backed the wrong horse.

[fatfreddie]

Below is taken from an interview from Robert(Bob) Prechter.

Admittantly he is known as King of Doom and Gloom but he is quite an intelligent guy.

more info on this URL

http://www.bearmarketcentral.com/qtcinterviewp1.htm

First I want to make sure that everyone understands what deflation really is. A common misunderstanding is that inflation occurs when the prices for goods rise, and deflation occurs when they drop. That’s not exactly true. General price changes are merely effects of a change in value of the money itself – not the other way around.

So what causes changes in the value of money?

Changes in monetary valuation are caused by changes in mass psychology. The same is true for the stock market. A severe deflation like the one we are now facing has always required a certain economic pre-condition: A major buildup of credit, which is itself the result of a certain state of social psychology.

Our economy today rests upon masses of consumer and corporate credit. Today, the U.S. owes a collective $30 trillion in debt. That’s nearly 3 times our annual GDP. We’ve become entirely dependant on it.

The economic theory that has seen the U.S. economy grow progressively larger and more powerful since World War II is that a wide-spread facilitation of credit will stimulate production, which will in turn create jobs and generate more capital to be re-invested in the economy.

That’s a model that’s been successful for economies around the world thus far. Where do you see the problem with it?

It’s gotten way out of hand. The Federal Reserve Board allows our banks to lend out all of their deposits (and in some cases, even more than 100%). This money, once loaned, is allowed to be re-loaned many times over, multiplying the amount of debt.

What this means is that we’ve got great multiples more credit afloat in our economy than we have actual money. It’s terrifying, but true.

As strong as our economy may still seem to everyone, it’s actually rife with weakness. The only thing keeping it afloat right now is a mass societal consensus that it’s going to be O.K. How long can that hold?

As the stock market continues to decline, people will continue to lose their jobs and production will decrease. Knowing that there’s not enough money out there to cover all the endangered debt, banks will begin to panic. They will become desperate to retrieve their liquid assets. When the general ability to repay debt decreases, so will banks’ willingness to lend more.

This is what will finally trigger a massive deflation.

But wait. Won’t the Fed prevent this from happening?

That’s a huge misconception. The Fed will be powerless to stop it.

Realize that the Fed doesn’t actually lend money to consumers. It merely sets the interest rates at which banks lend each other money. The hope is that banks will take these lower rates as a cue to pass the lower rates down to the consumers, thus facilitating more credit – but it can’t guarantee that this will happen.

In 2001, the Fed lowered its discount rate from 6 percent to 1.25 percent. That’s the heaviest cut in such a short time ever. But what if this strategy fails, as it did in Japan? It certainly hasn’t ”saved the economy” so far. What will they do if the economy continues to contract? Lower the rates to zero?

Then what?

When people are losing jobs and the purchasing power of the dollar is rising, consumers won’t want to borrow money that they will have to pay back with much more valuable dollars later on. Also, having been burned by bankruptcy and loan defaults, banks will be considerably less willing lend this money in the first place.

This will have disastrous effects on our credit-based economy.

Scary. So what should we do to protect ourselves from this possibility?

Depending on your circumstances, there are a number of ways that you can first protect yourself from a deflationary crash, and then actually profit from it.

Most important, get out of debt. Because the value of the dollar will be rising, one of the best investments you can make now will be to hold cash.

[flatfee]

not muchto debate- all US markets are showing quick inventory build and discounting

[Gwailo]

Below is taken from an  interview from Robert(Bob) Prechter.

Admittantly he is known as King of Doom and Gloom but he is quite an intelligent guy.

more info on this URL

http://www.bearmarketcentral.com/qtcinterviewp1.htm

First I want to make sure that everyone understands what deflation really is. A common misunderstanding is that inflation occurs when the prices for goods rise, and deflation occurs when they drop. That’s not exactly true. General price changes are merely effects of a change in value of the money itself – not the other way around.

So what causes changes in the value of money?

Changes in monetary valuation are caused by changes in mass psychology. The same is true for the stock market. A severe deflation like the one we are now facing has always required a certain economic pre-condition: A major buildup of credit, which is itself the result of a certain state of social psychology.

Our economy today rests upon masses of consumer and corporate credit. Today, the U.S. owes a collective $30 trillion in debt. That’s nearly 3 times our annual GDP. We’ve become entirely dependant on it.

The economic theory that has seen the U.S. economy grow progressively larger and more powerful since World War II is that a wide-spread facilitation of credit will stimulate production, which will in turn create jobs and generate more capital to be re-invested in the economy.

That’s a model that’s been successful for economies around the world thus far. Where do you see the problem with it?

It’s gotten way out of hand. The Federal Reserve Board allows our banks to lend out all of their deposits (and in some cases, even more than 100%). This money, once loaned, is allowed to be re-loaned many times over, multiplying the amount of debt.

What this means is that we’ve got great multiples more credit afloat in our economy than we have actual money. It’s terrifying, but true.

As strong as our economy may still seem to everyone, it’s actually rife with weakness. The only thing keeping it afloat right now is a mass societal consensus that it’s going to be O.K. How long can that hold?

As the stock market continues to decline, people will continue to lose their jobs and production will decrease. Knowing that there’s not enough money out there to cover all the endangered debt, banks will begin to panic. They will become desperate to retrieve their liquid assets. When the general ability to repay debt decreases, so will banks’ willingness to lend more.

This is what will finally trigger a massive deflation.

But wait. Won’t the Fed prevent this from happening?

That’s a huge misconception. The Fed will be powerless to stop it.

Realize that the Fed doesn’t actually lend money to consumers. It merely sets the interest rates at which banks lend each other money. The hope is that banks will take these lower rates as a cue to pass the  lower rates down to the consumers, thus facilitating more credit – but it can’t guarantee that this will happen.

In 2001, the Fed lowered its discount rate from 6 percent to 1.25 percent. That’s the heaviest cut in such a short time ever. But what if this strategy fails, as it did in Japan? It certainly hasn’t ”saved the economy” so far. What will they do if the economy continues to contract? Lower the rates to zero?

Then what?

When people are losing jobs and the purchasing power of the dollar is rising, consumers won’t want to borrow money that they will have to pay back with much more valuable dollars later on. Also, having been burned by bankruptcy and loan defaults, banks will be considerably less willing lend this money in the first place.

This will have disastrous effects on our credit-based economy.

Scary. So what should we do to protect ourselves from this possibility?

Depending on your circumstances, there are a number of ways that you can first protect yourself from a deflationary crash, and then actually profit from it.

Most important, get out of debt. Because the value of the dollar will be rising, one of the best investments you can make now will be to hold cash.

<{POST_SNAPBACK}>

I'm no economist, but I would have thought we would be heading for serious Inflation rather than the Deflation this guy is talking about?

Surely with rising oil prices wouldn't we expect prices in general to rise?

To be honest, I would prefer Deflation, because I presume that my cash savings will go a lomger way in a deflationary environment than during an inflationary environment........but I could be wrong?

What do other people think......is it going to be deflation or Inflation for the future?

Cheers.

[lowrentyieldmakessense(honest!)]

copied from a different board as we are talking about the USA.

ALL BOOMS BUST!

Words of Caution from Robert Kiyosaki

Lately, I have been asked if we are in a real estate bubble. My answer is, "Duh!" In my opinion, this is the biggest real estate bubble I have ever lived through. Next, I am asked, "Will the bubble burst?" Again, my answer is, "Duh!"

It was only a few years ago we were in a real estate depression, which proves how quickly people forget. In 1987, the stock market crashed and the Savings and Loans went out of business. That led to one of the biggest real estate fire sales in history.

By 1991, the real estate market was depressed and it remained depressed until around 1998. In Hawaii, the real estate market remained depressed until 2001. Today, the Hawaii real estate market is on fire and people have already forgotten how bad the market was.

So the answer to the question, "Will the real estate bubble bust?" is an emphatic, "Yes. All bubbles bust." The reason I write this alert is because this time, when the bubble bursts, I think it will be a monster. Never in my life have I seen so much money being made on such weak fundamentals. If you think the last recession caused by the bubble bust was bad, the coming recession will be at least twice as bad. It might lead to a depression.

The reason I put forth this alert is not to frighten anyone. The reason I put forth this alert is to say get prepared for the coming economic changes. Presently, although Kim and I are still buying real estate, we are also selling our "junk" real estate. Eight months ago, Kim put on the market a small apartment house valued at $1 million, for $1.4 million. People complained and no one bought it. So four weeks ago, she raised the price to $2.0 million and it sold in one day for full price. To me, this is more than a bubble... it is a mania.

As many of you know, the best time to get rich is after a crash. My suggestion is: if you are new to real estate investing, this is not the time to jump in. If you are holding "junk" properties that are costing you money, you may want to consider unloading them.

How long will the bubble last and keep expanding? I do not know. I just wanted you to know that I am currently preparing for a crash, an economic recession, and possible global depression. Why? Because this is a very big worldwide bubble... the biggest I have ever seen.

SAVERS ARE LOSERS

Also, I am getting rid of my U.S. dollars. As you may know, the U.S. dollar has lost nearly 40% of its value against other currencies in the last four years. That means if you have $10,000 in savings in the year 2000, it is worth about $6,000 in purchasing power. Rather than holding cash in the bank, Kim and I have been holding our excess cash in gold and silver bars. Why? Because you will know that the dollar is falling because the price of gold and especially silver will begin to rise. When silver goes higher than $8.50 an ounce and gold reaches $500 an ounce, you will know the end is near. When the crash comes, the currency of many countries will go down in purchasing power as the price of these two precious metals rise in value.

A GREAT BOOK

This past weekend, I held a class for about 150 people on the book entitled "The Dollar Crisis," authored by Richard Duncan. If you want to better understand why the real estate bubble bust and the crash of the dollar will probably lead to a prolonged recession, you may want to read this book sooner rather than later. In a nutshell, we really do not have a real estate bubble... the world is in a currency bubble. In other words, the governments of the world have printed too much "funny" money and cash will soon turn to trash.

Even if you are not in real estate or are saving dollars, you may want to read this book to find out what you need to invest in now, before the bubble bursts. If you are in stocks and mutual funds, you definitely want to read this book.

HISTORY IN THE MAKING

A Follow-Up to "All Booms Bust" by Robert Kiyosaki

Thank you for your response to my Financial News Alert "All Booms Bust." The number of people that responded surprised me. Since the response was substantial, I thought I would continue on with my thoughts on the subject of the probability of a bust coming. Also, I thought I would add what I am doing to profit from the bust. So thank you for your interest in the subject regardless if you agreed or disagreed with my message.

About a week after my message on the coming bust, the June 18th 2005 issue of The Economist ran two different articles supporting my concerns about the real estate market. The following are some comments I think are noteworthy. They are:

Measured by the increase in asset values over the past five years, the global housing boom is the biggest financial bubble in history.”

Prices are already sliding in Australia and Britain. America’s housing market may be a year or so behind.”

Not only are new buyers taking out bigger mortgages, but existing owners have increased their mortgages to turn capital gains into cash which they spend. As a result of such borrowing, housing booms tend to be more dangerous than stock market bubbles and are often followed by periods of prolonged economic weakness.”

A study by the IMF found that output losses after house-price busts in rich countries have, on average, been twice as large as those after stock market crashes, and usually result in a recession.”

Two-fifths of all American jobs created since 2001 have been in housing-related sectors.”

The housing boom was fun while it lasted, but the biggest increase in wealth in history was largely an illusion.”

The day of reckoning is closer at hand. It is not going to be pretty. How the current housing boom ends could decide the course of the entire world economy over the next few years.”

You may want to obtain a copy of this issue of The Economist and read the entire two articles and then decide for yourself if there is another real estate boom ahead, or a bust.

RECESSION OR DEPRESSION

On Friday, June 23rd 2005, I was on Your World with Neil Cavuto on the Fox Network. He asked me what I recommended when it came to investing in real estate. I replied, “If you’re new to real estate investing, this is not the time to get into the game.” Unfortunately, many people are in the market late and not only have paid too much for their homes, they are over-leveraged.

The Economist article went on to say, “42% of all first time buyers and 25% of all buyers made no down-payment on their home purchase last year.” That is what I call over-leveraged. They bought late in the cycle, probably paid too much, and have signed their lives away on the dotted line. I am concerned for these people.

In 1929, the stock market crash led to The Great Depression. Some of the causes of the Depression were excess credit and too many people buying stocks on margin... i.e. leverage. In 2005, once again there is too much credit and instead of stocks, individuals are purchasing real estate with leverage. So is it “Deja-vu all over again?” History shows that there is a depression approximately every 75 years. The last depression occurred 75 years ago. Is it time for a really big bust or will the boom continue on? Only time will tell.

HOW I AM INVESTING TODAY

As many of you know, I have been in gold and oil for several years now, beginning in 1996. While Kim and I have continued to invest in real estate, I have been more active in taking my Chinese gold company public on the Toronto Venture Exchange. I have also invested in several oil and gas wells.

When it comes to real estate, Kim and I have let go of non-performing properties and made several million dollars. Does this mean we are selling real estate? The answer is “No.” Although selling we are still buying property, we are being very selective. Although we have “flipped” properties, our primary objective is good properties in good locations with a positive cash flow. Currently, Kim and I are buying properties in Oregon as well as in Arizona. We bought them because we believe they will do well regardless if the real estate market booms or busts.

PROBABILITY VS PREDICTION

Although I have made predictions, I don’t like to. Instead of predicting the future, I choose to evaluate probabilities. A friend offered Kim and I the opportunity to buy a piece of land for $1 million. He said, “In two years the property will be worth $2.5 million.” If this were year 2002, I would have jumped all over the deal. But it is year 2005. The question I ask myself is, “What is the probability that the boom will go on for two to three more years?” What is the probability that the property will more than double in two to three years?” My answer is “slim to none.” Your answer may be different. Can I be wrong? The answer is, “Yes I can be wrong. The boom may go on for ten more years and that $1 million dollar piece of land could be worth $10 million maybe $15 million.” Yet at this late stage of the market, I will only invest in properties that return a cash-on-cash return on a monthly basis. That is why I like my Oregon and Arizona deals. In the short term, I may not make as much money as the land deal, but they should return a positive cash flow regardless if the market goes up or down. After the crash, I may change my strategy.

WARREN BUFFET

Even Warren Buffet is seeking safer investments. Recently he announced he was investing in utility companies... not for capital gains but for capital safety. Buffet's two most important rules for investing are:

Rule #1. Don’t lose money.

Rule #2. Don’t forget rule number one.

THE GREATER FOOL

In the world of investing, there is what is known as The Greater Fool Strategy of Investing. When someone buys a property to flip, or a share of stock to sell at a higher price, that is the Greater Fool Strategy in Action. In simpler terms, a person buys a property or a share of stock not to own but in the hopes that there is a fool greater than them. The problem is, when the bust comes, and it will come, many people who were buying for a fool greater than them, may find out that they were the last fool in line.

A FINAL WORD FROM THE ECONOMIST

Another interesting comment from The Economist went, “Another sobering warning is that after British house prices fell in the early 1990s, it took at least a decade before they returned to their previous peak.” I’ve made a lot of money in the last few years in real estate, but I believe it is time to move on and invest in other assets. And that is why I am moving more of my money to gold, silver, oil, and gas. While I love real estate as an investment, and will continue to always invest in real estate, this is not the time to let love blind me to reality, the reality that all booms eventually bust.

Thank you,

Robert Kiyosaki

[Guest Charlie The Tramp]

Just a thought, but if 9/11 had never happened would things be different today in the Global Economies?

Maybe the pre bust which was avoided then would have been smoother than the mega bust which will happen now.

[mhifoe]

i have a feeling that they will not want to honor the pension obligations

of the now middle aged generation, and they will find a way to discount

those payments rather than pay them in full

<{POST_SNAPBACK}>

I have the same feeling.

Did you know that the government is changing the rules on final salary pensions?

http://www.thepensionservice.gov.uk/atoz/a...etailed/fs1.asp

This part is of particular interest:

"indexation of pensions in payment on rights built up from April 1997 in line with RPI capped at 2.5%"

This means when things get difficult, they can whip up a few years of 10% inflation and the pensions bill will magically reduce.

[Guest]

Below is taken from an  interview from Robert(Bob) Prechter.

(snip)

Depending on your circumstances, there are a number of ways that you can first protect yourself from a deflationary crash, and then actually profit from it.

Most important, get out of debt. Because the value of the dollar will be rising, one of the best investments you can make now will be to hold cash.

<{POST_SNAPBACK}>

copied from a different board as we are talking about the USA.

ALL BOOMS BUST!

Words of Caution from Robert Kiyosaki

(snip)

SAVERS ARE LOSERS

Also, I am getting rid of my U.S. dollars. As you may know, the U.S. dollar has lost nearly 40% of its value against other currencies in the last four years. That means if you have $10,000 in savings in the year 2000, it is worth about $6,000 in purchasing power. Rather than holding cash in the bank, Kim and I have been holding our excess cash in gold and silver bars. Why? Because you will know that the dollar is falling because the price of gold and especially silver will begin to rise. When silver goes higher than $8.50 an ounce and gold reaches $500 an ounce, you will know the end is near. When the crash comes, the currency of many countries will go down in purchasing power as the price of these two precious metals rise in value.

<{POST_SNAPBACK}>

Spot the difference, people. What's going on?

Any answers?

[GCS15]

IMHO - and I am no economist - the US $ is going to tank

Why? The qoute about those who fail to learn from history are doomed to repeat springs to mind

Fiat currency has always collapsed from the dawn of currency. Allways is a sure bet in my books. Once the Pound and the US$ stopped being backed by gold it was game over. To qoute that spooky kid off the sixth sense "I see crashed currency. They just don't know it"

Edited August 23, 2005 by GCS15

[fdk]

Spot the difference, people. What's going on? 

Any answers? 

<{POST_SNAPBACK}>

I saw that and thought the exact same thing.

I also read somewhere that Buffett is sitting on $40M of cash.

Cash is my long term choice too, by default, because I'm just too scared to buy gold.

[fdk]

So are investors actually buying real blocks of gold ?

Is there even enough to go around what with all the talk of it being the only safe haven.

Or are people buying a piece of paper which says you own some gold, or some sort of commodity thing.

[GCS15]

I've got London good delivery bars in an allocated account in a vault in Zurich.  Cost 1.75% to get in (and out) and about 1/3% a year to store and insure - but I've got quite a bit.  Better and cheaper ways might be to buy digital 100% gold back private currencies.

I think the best is http://www.pecunix.com, but the biggest is certainly http://www.e-gold.com.  Others include goldmoney.  Do research to understand them, but in my opinion they are pretty safe.

<{POST_SNAPBACK}>

Not that I have much but for what it's worth I am in the "hold physical gold/silver" camp.

I tell no-one that I have it - In fact when some so&so robbed my flat and took EVERYTHING I owned they missed it. Mu ha ha. Take me telly ($300) and me furniture (St Vinnies grade) but don't take the $10k in gold.

[Guest Charlie The Tramp]

The economy is good, jobs are being created, interest rates are still at historic lows, demographics are overwhelming, which should drive demand,'' said James Gillespie, chief executive officer at Coldwell Banker Real Estate, in an interview.

Where have I heard that before, was it somebody here in the UK?

A total of 2.75 million homes were for sale last month, the most since May 1988``That is a better-balanced marketplace for housing,'' said said David Lereah, chief economist at the Realtors' group. ``The job gains are there, the economy is growing, and it's giving the housing market a favorable backdrop.''

.

Yes true if you manage to sell them.