Is the real estate bubble about to burst?
 

A while ago Robert Campbell warned us (further down the forum) that it looks like there could be a bubble in housing prices - and that bubble will burst. Here's his earlier post....

http://www.sowpub.com/cgi-bin/forum/webbbs_config.pl?read=13231

I just came across a recent article from The Economist magazine - saying the same thing. In the 2nd last paragraph of their article, The Economist says:

This survey will conclude that the latest housing boom has inflated bubbles in several countries, notably America, Australia, Britain, Ireland, the Netherlands and Spain. Within the next year or so those bubbles are likely to burst, leading to falls in average real house prices of 15-20% in America and 30% or more elsewhere over the next few years, in line with average price declines during past housing-market busts. This time, however, with inflation so low, house prices will fall more sharply in money terms than they did in the past. In Britain as a whole, for example, average nominal house prices are likely to drop by 20-25%, and in London by much more. Significant numbers of owners may be left with homes worth less than their mortgages—especially as the proportion of owner-occupiers with mortgages exceeding 80% of the value of their homes is higher now than it was in the previous bust in the early 1990s.

This could be something to be concerned about if you are a property investor....

I've linked to the full article below....

(There are also related articles on the links on the right of the article, under the heading "Related Items: In This Survey".)

- Dien


"House of cards" - from The Economist magazine

Real Estate Bubble Filled With Bucks Not Air
 

Dien,

In my opinion one should not be too worried about what the Economist has to say. I mean did the Economist actually predict the dot com burst or before that the dot com rise?

When I say predict I mean express an opinion long before there was any evidence of its truth.

The real estate rise is not comparative to the dot com rise. The dot com "bubble" was based on a addictive assumption of future profits that led to manic demand.

Real estate interest rates are greatly related to at least in the US to treasury bonds. Very stable.

People are not buying houses or refinancing based on future expectations of lower rates. People are buying and refinancing because rates are low right NOW. They receive an immediate benefit.

If rates rise then yes things might slow down but that is the normal ups and down of any normal market. A normal market is one based on real demand. Real demand is based on a benefit received at the moment of it's transaction. Economist call it Present Value theory.

A bubble and its subsequent burst are based on an artifical rise in demand then a huge correction back to reality.




Surefire Ways For The Baby Boomer To Make Money Using Only Pen And Paper

Even a stopped clock is right twice a day
 

> Dien,

> In my opinion one should not be too worried
> about what the Economist has to say. I mean
> did the Economist actually predict the dot
> com burst or before that the dot com rise?

> When I say predict I mean express an opinion
> long before there was any evidence of its
> truth.

The Economist may not have said anything about the DotCom bust before it happened without evidence. And that being the case, I would take this message from them a little more seriously. Because based on their past actions they don't write about stuff unless they have evidence of it. Thus, if they are writing about a busted real estate bubble, it is because they have evidence that suggests that.

> The real estate rise is not comparative to
> the dot com rise. The dot com
> "bubble" was based on a addictive
> assumption of future profits that led to
> manic demand.

That is what excesive real estate price rises are also based on.

> Real estate interest rates are greatly
> related to at least in the US to treasury
> bonds. Very stable.

> People are not buying houses or refinancing
> based on future expectations of lower rates.
> People are buying and refinancing because
> rates are low right NOW. They receive an
> immediate benefit.

They are also doing so because the value of their house has risen due to inflated demand. Together with a lower interest rate they can borrow more money for the same loan payments. But it also means IF rates rise a fraction their payments rise accordingly and they will be left with no income safety net.

> If rates rise then yes things might slow
> down but that is the normal ups and down of
> any normal market. A normal market is one
> based on real demand. Real demand is based
> on a benefit received at the moment of it's
> transaction. Economist call it Present Value
> theory.

> A bubble and its subsequent burst are based
> on an artifical rise in demand then a huge
> correction back to reality.

In Australia, the ratio of home-buyership to renting has, for the last thirty years, roughly been 75% buying and 25% renting. Even with the Government giving money to people who wanted to buy their first home. Even with rises and falls in the interest rate.

In my neck of the woods I personally know people whose house was valued at $200,000 a few years ago and it is now valued at $600,000. That is manic demand in action.

Interest rates are just one aspect. How about income? $600k for a three bedroom home? WHO can afford that for any length of time? The repayments are HUGE. One tiny glitch in the income and those buyers are sunk, real quick.

For about six months I've "reckoned" it was time to "get out" of real estate because of the downturn. I got Robert Campbell's book, "Timing The Real Estate Market" and am now doubley sure that NOW is the time to get out.

In a few months here we will have a dozen or so "developments" all completed. Instant over-supply. Rents have ceased going up by 20% and 25% and are now back to the usual $5 or $10 a week rise. Real estate agents don't have waiting lists any more. And more and more articles are appearing which say or hint at the end of the real estate bubble.

The appearance of articles should be enough to scare most people because of the reality the media creates. Even if nothing was wrong, the media saying it is all tumbling down is enough to begin the collapse. The fact we have crazy-high prices makes it worse. My observations - while not scientific - coupled with the analysed data (thanks to Robert Campbell's book) tell me the articles are right, but slow. That is, the bubble has already burst it's just that most people do not realize it just yet.

Frankly I would rather believe what my eyes tell me. The data doesn't fib. It just reports what's happening. And what's happening is not good right now.

But hey. Don't take my word for it. Get Robert's book and go through the data. And if you don't believe what those numbers tell you, pay close attention to rent increases and the like. We've now started getting stories about how hard it is for people to buy at these inflated prices; how hard it is to even move because the inflated prices suck most of your money out of you; how hard it is to pay the taxes in these inflated prices. In other words... how tough it is for people financially. Again, not scientific, just observation. More fuel to the fire.

I guess in a year or so we will know who is right when it becomes obvious to everyone.

Michael Ross

Re: Is the real estate bubble about to burst?
 

Hi Dien,

Thank you for sharing the most current real estate story from the Economist.

An important thing to keep in mind about real estate - or any market for that matter - is that it is always most dangerous when it looks the easiest.

Tom Watson, Sr., the brilliant founder of IBM, recognized this same danger in business. Watson warned that during good economic times, there is a tendency to get blindsided by prosperity and ignore any signs of trouble.

There was (or is) a flipside to Watson's advice: Just like booms are a time for caution, recessions are a time for boldness.

Clearly, the same principles that Tom Watson would apply to running a good business can also be directly applied to wise real estate investment: sell when it's hot and buy when it's not.

And to Michael Ross, I am very pleased to know that you were impressed with my book and that you now have a way to more scientifically analyze real estate markets and trends. As we both know, objective analysis will always trump casual judgement.

Robert Campbell

I said the same thing
 

Hi,

You wrote:
> A while ago Robert Campbell warned us
> (further down the forum) that it looks like
> there could be a bubble in housing prices -
> and that bubble will burst.

I've said the same thing several times, on several forums. Back in March I posted:

http://www.sowpub.com/cgi-bin/forum/webbbs_config.pl?read=12375

On September 18, 2002 I posted:

http://www.sowpub.com/cgi-bin/forum/webbbs_config.pl?read=10038

FWIW, I stay immersed in news and current events.

Best,

- Boyd

Real Estate Bubble Filled With Debt Not Bucks
 

Hi,

Due to shortages it is possible to have prices on those items purchased with cash rising, while, due to debt saturation, prices of those items purchased with debt are dropping...

Best,

- Boyd

Please explain ...
 

Hi Boyd,

It's not clear to me what you are saying.

Robert Campbell

Six-course Hungarian dinner
 

Hi,

I read a lot, and some of what I read is contradictory, some is wrong, and some I don't know enough to understand.

But it's a lot of pages a day. It feels like eating a six-course Hungarian dinner. After eating a large dinner I always 'burp' (pardon me) at some point. If I'm polite I'll camouflage it with a napkin. If I'm impolite I'll let 'er rip in front of G-d and everyone.

My previous message is an example of one that I let loose in public.

Best,

- Boyd

Boyd, sorry didn't mean not to give you credit! Consider yourself credited... :) (DNO)
 

There isn't "ONE" real estate market...
 

Real estate is not like the stock market. There is not "One" market.

The market in Austin is very different than the market in San Antonio. Which is very different from the market in L.A., vs. the market in central-inland California.

True, there are factors (like interest rates) that can have an affect on multiple markets. But overall, it's much more linked to the local economy, in my experience.

Re: There isn't "ONE" real estate market...
 

Adam,

Who ever said there is "ONE" stock market?

Robert Campbell

Hungarian dinner or wise words?
 

Investment Items bought with cash go up.
Investment Items bought with debt go down.

Gold Coins vs Real Estate.

Or.

Some other "investment" to hold or increase the value of your money while R.E. drops in value.

Hmmm.... interesting, Boyd.

Michael Ross

Re: Hungarian dinner or wise words?
 

--------------------
Disclaimer: I am not a licensed investment advisor or broker. Nothing contained in any communication from me shall be construed as investment or any other advice.
--------------------

Hi,

Thank you for your message.

You wrote:
> Investment Items bought with cash go up.

I've been trying to understand whether deflation or inflation is coming, so I can figure out how to position myself. Some people are predicting deflation while others are predicting inflation. On another forum recently someone posted an article by The Mogambo Guru in which he said, essentially, "here's why hyperinflation is coming," and in a followup message someone else said "he must be a gold bug: the reasons he gave actually prove that deflation is coming." Frankly, it makes my head hurt. Economics is incredibly confusing, and apparently even the high-paid big brains with degrees from Ivy League schools don't really have a tight grip on it. One thing I recently read predicted simultaneous deflation and inflation (with inflation being used in the Joe Sixpack sense of rising prices); hence my message. In my message where I mentioned the possibility of rising prices for items purchased with cash, BTW, I wasn't talking about investment items but rather about normal commodities.

Best,

- Boyd

I fear my need for approbation will be my undoing
 

Hi,

Question:

How can someone who seems to have a need to be praised a lot channel that need into making a lot of money?

Thanks in advance for any replies,

- Boyd

Re: I fear my need for approbation will be my undoing
 

Become an actor...

> Hi,

> Question:

> How can someone who seems to have a need to
> be praised a lot channel that need into
> making a lot of money?

> Thanks in advance for any replies,

> - Boyd

It's the economy dude
 

Inflation. Deflation. HyperInflation. HyperDeflation. French-Onion Double Dip Recession Inflation Stagnation. Alien Nation. Arrrrrgggggggg. Someone let me out of this cartoon.

We're not in Kansas anymore Toto. Ruff.

Okay. Assume Inflation. What is your Plan Of Attack?

Now. Assume Deflation. What is your Plan of Attack?

Which one, in your mind, is the worst case scenario?

If you go with that plan and it turns out different, will you be worse off? Can you adapt to the other plan quickly?

I like to keep things simple. Creating a million different names for a million different stages of an economic cycle is,

silly.

Economy. Is it "good" or "bad" in YOUR eyes? What evidence do YOU see? Now what are other people saying... what do you SEE? What does what you see mean?

CPI and all that has always been a bunch of mumbo-jumbo in my opinion. The man on the street is informed of those rising or falling CPI figures as if that means something to him. When all he realy knows is that the price of his steak has risen while a can of baked beans has gone down. Gas prices are anyone's guess - and there is no collaberation between gas companies even though they all seem to raise and lower their prices by the exact same amount in the same hour on the same day.

Are there more or fewer people at the flea markets? Is the Second Hand furniture business picking up or dropping off?

Are the shopping trolleys filled more with brand products or no-brand products?

Approach any cleaners you know and ask them if toilet paper theft has risen or fallen? Ask them if business is picking up or dropping off? Hired Cleaning Contractors are the first thing to be discarded by a struggling business.

McDonald's has a negative quarter/year. Was it because of a price war with Burger King or are there other factors involved - more and more people becoming health-aware, etc.?

Stores closing down in your area? Are they the ones that appear only to disappear a few months later. And the same thing happens with whoever opens a store in that "doomed" store front? Or are they stores which have been there for years and years? Why did they close?

I don't care what the so-called experts say. They can't even agree anyway. BUT... I do pay attention to the man on the street. I listen to the joys and pains they express. I see their spending habits. I listen to business owners - who only ever seem to complain with only the degree changing.

These non-scientific indicators give me a better "take" than some $200,000+ a year analyst on the 37th floor of downtown Manhattan, who plays golf three times a week at the $10,000 a year membership golf club.

The man on the street might be a sheep - even without realising it. And so it's good to watch him. Hey, the analyst is also a sheep - following whatever the other analysts say, like lemmings.

So, Boyd... forgetting about what the "experts" say... what do your eyes and ears tell you?

Michael Ross

Re: It's the economy dude
 

Hi,

You wrote:
> Okay. Assume Inflation. What is your Plan Of
> Attack?

I'd better discuss this with you via email if you'd like.

One interesting thing is I recently saw a list of items that are said to be "objects of permanent value." Things like gold, stamps, rare books, silver, non-gold U.S. coins, masterpiece paintings, diamonds, farmland, etc. I said to myself "Hey, that's the kind of stuff richies buy!" Then I did a Homer Simpson-like 'D'oh!' See, I'd always felt that richies bought Rembrandt paintings just to get an ego-stroke when they say them hanging on their rainforest-mahogany walls. It occured to me that maybe the Rembrandt wasn't an expression of vanity but rather an exchange of paper money for an "object of permanent value."

You wrote:
> Now. Assume Deflation. What is your Plan of
> Attack?

Buying cool stuff when the price gets low enough.

You wrote:
> Which one, in your mind, is the worst case
> scenario?

Living in crude huts made of hundred dollar bills wouldn't be very fun.

You wrote:
> If you go with that plan and it turns out
> different, will you be worse off? Can you
> adapt to the other plan quickly?

This might be another email topic if you'd like.

You wrote:
> Economy. Is it "good" or
> "bad" in YOUR eyes? What evidence
> do YOU see? Now what are other people
> saying... what do you SEE? What does what
> you see mean?

That's a very good point! As are your observations of taking readings on the economy by observing what's actually going on around you.

You wrote:
> CPI and all that has always been a bunch of
> mumbo-jumbo in my opinion. The man on the
> street is informed of those rising or
> falling CPI figures as if that means
> something to him. When all he realy knows is
> that the price of his steak has risen while
> a can of baked beans has gone down. Gas
> prices are anyone's guess - and there is no
> collaberation between gas companies even
> though they all seem to raise and lower
> their prices by the exact same amount in the
> same hour on the same day.

The man on the street has been hit with so much strange stuff (weird diseases, terror alerts, the possibility of being attacked at any moment, all the stuff they show on the TV news) that he's adopted a weary "Whatever..." attitude. He's shell-shocked.

You wrote:
> These non-scientific indicators give me a
> better "take" than some $200,000+
> a year analyst on the 37th floor of downtown
> Manhattan, who plays golf three times a week
> at the $10,000 a year membership golf club.

Good point.

You wrote:
> So, Boyd... forgetting about what the
> "experts" say... what do your eyes
> and ears tell you?

I'm an internet recluse, I barely set foot outside my room, all I know is what I see on these three computer screens in front of me.

Thank you very much for your astute observations. You have tons of common sense, which is misnamed since it's getting so uncommon these days.

Best,

- Boyd

"Objects of permanent value...."
 

Hi Boyd,

> One interesting thing is I recently saw a
> list of items that are said to be
> "objects of permanent value."
> Things like gold, stamps, rare books,
> silver, non-gold U.S. coins, masterpiece
> paintings, diamonds, farmland, etc. I said
> to myself "Hey, that's the kind of
> stuff richies buy!" Then I did a Homer
> Simpson-like 'D'oh!' See, I'd always felt
> that richies bought Rembrandt paintings just
> to get an ego-stroke when they say them
> hanging on their rainforest-mahogany walls.
> It occured to me that maybe the Rembrandt
> wasn't an expression of vanity but rather an
> exchange of paper money for an "object
> of permanent value."

I think this is a great observation!

I remember reading that while J. Paul Getty made his first fortune in oil - he also made a second fortune, this time in art. (At one time, J. Paul Getty was the richest man in America.)

I don't remember the reason - maybe it was the depression? - but art had gone down in value by quite a bit. He paid someone to teach him how to recognize a good piece of art, then bought art all over the place at their low values. When the prices went up again (as he knew they would), J. Paul Getty had made a second fortune.

I'll have to re-look up the details one day - I have a feeling I read it in his book "How to be Rich" (which I have sitting on my shelves).

- Dien Rice

eBay might be a good way to buy art and rare books
 

Hi,

Thanks for your message and kind words.

Man, the coming hard times are going to open up some kickass opportunities for those with a little knowledge or who are in the right spot at the right time.

I'm a fan of a particular set of rare pulp spy novels from the 1960s and now I've got a reason to tell my wife why collecting them is a good thing to do, despite their high cost per copy:

"But dear, they're objects of permanent value!"

Best,

- Boyd

Careful
 

> I'm a fan of a particular set of rare pulp
> spy novels from the 1960s and now I've got a
> reason to tell my wife why collecting them
> is a good thing to do, despite their high
> cost per copy:

> "But dear, they're objects of permanent
> value!"

Art is really a greater fool item. Better to create art and sell to a list of obtained clients and buyers. How you get this list and get them interested in your art is not the point of this discussion.

Alan Bond now knows the truth about art. Bye bye $56 mil

As for your novels. I would class that as memorabilia. And according to Gary Henrickson - if my memory serves me correctly - memorabilia has a high price life between 25 and 45 years. That is... 25 to 45 years after it was made, in fashion, in vogue, etc.

The logic is... at this time period those who grew up with it now have the disposable income to buy back pieces of their "childhood."

After this time period, all the childhood buying back is done and the price falls - those who did not grow up with those items have no interest (or only little interest) in the items.

Assuming this logic is true... items which were made around 1978 should soon begin to fetch higher prices. And should continue to do so for another twenty years. After which time, demand will decline - and so will "value."

On a side note... I am amazed how people will pay $100 - $200 for a modern clock (or spend nearly that much on wood and clock works and then make their own) when for the same money they can get hold of a nice looking art deco clock. The art deco clock will hold its value more. And is usually not made of cheap MDF or other throw away materials.

Anyway. The 25 to 45 year age thing is something you might want to consider before you buy "modern" old things. It means you can get rid of old stuff you have before it declines in value. And buy stuff before it goes up in value.

Michael Ross


$35,550 a week. That's what the woman we just wrote about makes. Subscribe and you get to read how

Memorabilia vs. Art
 

I tend to agree with Michael that there is a difference between "Memorabilia" vs. "Art"....

However, I do think that certain pieces of art have cultural significance, and will retain and increase their value due to that. But - I ain't no expert!

I did re-read J. Paul Getty's essay on buying fine art (and using art as an investment) in his book, "How to Be Rich". My memory was right - he essentially bought many pieces of priceless art - often for lower than their owners paid for it - during the depression. These subsequently went up in value, many times what he paid for them.... Many of these art pieces he later donated to museums.

The main drawback of art as an investment, it seems to me, is that you have to be willing to wait. It can take time for the value of art to appreciate. Also, it helps to be rich already to even be "in the market" for many pieces of fine art.

- Dien Rice

Interesting! Thanks Michael and Dien [DNO]
 

dno
> I tend to agree with Michael that there is a
> difference between "Memorabilia"
> vs. "Art"....

> However, I do think that certain pieces of
> art have cultural significance, and will
> retain and increase their value due to that.
> But - I ain't no expert!

> I did re-read J. Paul Getty's essay on
> buying fine art (and using art as an
> investment) in his book, "How to Be
> Rich". My memory was right - he
> essentially bought many pieces of priceless
> art - often for lower than their owners paid
> for it - during the depression. These
> subsequently went up in value, many times
> what he paid for them.... Many of these art
> pieces he later donated to museums.

> The main drawback of art as an investment,
> it seems to me, is that you have to be
> willing to wait. It can take time for the
> value of art to appreciate. Also, it helps
> to be rich already to even be "in the
> market" for many pieces of fine art.

> - Dien Rice

Re: Memorabilia vs. Art
 

> The main drawback of art as an investment,
> it seems to me, is that you have to be
> willing to wait. It can take time for the
> value of art to appreciate. Also, it helps
> to be rich already to even be "in the
> market" for many pieces of fine art.

When I think about valuation and an item's worth, I think about two main types of valuation an investment can have:

1. Value in Use
2. Value in Exchange

Value in Use is essentially the value derived from an investment from its ongoing use. From a purely financial viewpoint (that is, ignoring any personal or psychological benefits of owning an investment, such as the pleasure of looking at fine art if you're an art lover), the value in use is simply the present value of all of the future cash flows a particular investment will generate.

So if you're looking at an investment property, the Value in Use would be the present value of all of the expected future cash flows from the property -- so essentially your rent received minus costs forever.

When looking at listed companies, fundamental analysis and valuation is basically all about looking at their intrinsic Value in Use.

Value in Exchange, on the other hand, ignores any "inherent" value in the item due to future cash flows and simply looks at what other people are willing to pay for it.

When looking at listed companies, technical analysis and trading is more about Value in Exchange, in that it focuses on what others may pay for it in the near future, rather than any underlying fundamentals.

In other words, Value in Exchange is -- as Michael puts it -- a value based on the greater fool theory. And art definately does fall into this category.

And thus the main drawback of art as I see it is that you're really relying on others to pay more for it later, rather than counting on any cash flows arising from the art itself.

Items of this nature, in my view, are what I'd call speculative investments. :)

Re: It's the economy dude
 

> I don't care what the so-called experts say.
> They can't even agree anyway. BUT... I do
> pay attention to the man on the street. I
> listen to the joys and pains they express. I
> see their spending habits. I listen to
> business owners - who only ever seem to
> complain with only the degree changing.

> These non-scientific indicators give me a
> better "take" than some $200,000+
> a year analyst on the 37th floor of downtown
> Manhattan, who plays golf three times a week
> at the $10,000 a year membership golf club.

> The man on the street might be a sheep -
> even without realising it. And so it's good
> to watch him. Hey, the analyst is also a
> sheep - following whatever the other
> analysts say, like lemmings.

I couldn't agree more.

Your own groundwork research is very important. :)

All this talk of profitability and postive cash flow ...
 

Hi,

All this talk of profitability and positive cash flow makes me mad. I want to start a company with a catchy idea, sell a bazillion dollars worth of stock and buy an island. Generating cash flow is too much frikkin' work! /satire

Best,

- Boyd

Thank you [DNO]
 

dno
> Become an actor...