Saturday, February 13, 2010

It Caught Me By Surprise

I have spent a lot of time analysing the housing market over the past 5 years. Probably too much time, but I enjoy it. It was very surreal back in 2005. I had only charted half of the real estate bubble. I would try to show my family, friends and clients my graphs but since it was only half of a bubble nobody could see it. I would try to explain that houses were overvalued but nobody would listen. Everyone and I mean everyone felt house prices would never go down.

I tracked the housing bubble until 2008 then I got bored. It was at that time when I started to see a lot of websites popping up with bearish housing predictions. It seemed like a good time to slow down on charting the real estate market and to let other people do the work. I follow the real estate market generally now by just crunching a little data. I don't do any charting. All of my charting now is focused on the stock market.

I have written recently in my blog about how the Antioch housing market is forming a price bottom. I used number crunching but no charting. I extrapolated that Antioch housing was priced at 1998 price per square foot. I also determined that prices were solidly in line with historical trend in rents and household income. My call was actually more of a hunch. Using my hunch on the Antioch real estate market I made the assumption that most low end housing markets had bottomed and were starting to trend upward.

Well I went on today for the first time in 4 months and got a big surprise. Almost every real estate market that they track is still trending downward. Perfect downward slopes touching median bubble lows last week. This is very odd. It seems like most of the media reports say that the real estate market is trending upward. Well that's not what the charts tell me.

Looking at the Housing Tracker charts gives me pause. Here is why:

  • Most lower end markets have definitely not hit bottom yet. This is important because;

  • The medium end housing market will not hit bottom until at least 2 years after the low end hits bottom. This would be Walnut Creek.

  • The upper end housing market will not hit bottom until at least 3 years after the medium end hits bottom. This would be Alamo and Lafayette.

Of course I knew that Lafayette had a way to go to form a price bottom. But I kind of felt that Walnut Creek had only a year to go. The charts were a wake up call. It proves to me once again that charting the trends is the only way to follow a market. Presently I am having too much fun tracking the stock market to follow the real estate market. But I am going to make it a point to follow Housing Tracker more closely. I want to know when the low end markets hit bottom. Only then can I determine when the medium end and the high end will bottom.

I don't want to beat a dead horse here but there is absolutely no positive economic events that will happen in the next 5 years that can possibly stimulate housing. Housing will bottom at affordable prices in line with historical trend. But what must happen first is the sequence of events that I have described above. Every burst housing bubble has collapsed in tiers in the past. Low End, then Medium End then High End.

One could argue that our present housing bubble is the one in a thousand chance event that is different. One could argue that point but it would be much, much more appropriate to argue that point on Tiffany's Fantastic Fantasy Real Estate Blog than on my blog. Most of my analysis comes from number crunching and historical trends.

Unrealistic expectations are the root cause of the massive bubbles that our government, Wall Street and our nation of speculators have fermented. Our country is trying to use asset bubbles to drive economic prosperity. Historically production and saving are the only ways to increase a nation's standard of living.

Is it a problem for our government to use debt to create asset bubbles to attempt of create a higher standard of living for a favored portion of our society? Other than it being very entertaining for me to watch I don't have a strong opinion. I don't buy assets above their historical fair value so I do not participate in the bubbles.

But most of our population has been trained by Wall Street and the government to borrow money to purchase assets at prices over fair value. People were wildly throwing money at ridiculously valued tech stocks in 1999. Families were climbing over each other to place themselves into a lifetime of debt servitude to the banks during the housing bubble.

I chose not to participate:

  • I somewhat overlevedged myself to buy a house in 1996 because they were below historical value.
  • I sold most of my DOW and tech stocks in 1998 because they were far above historical value.
  • I was pitchforking money into the stock market in 2002 when stocks were a value.
  • I was net short in 2007 in the stock market and I also sold my primary residence.
  • I bought into the stock market at extreme value in March of 2009.
  • Now I am trending toward stock market neutral after the biggest stock market gain in 3 generations.

I have said many times that I have not lost an hours sleep on any of my investments. It is not rocket science. When an asset is at historical fair value I might tend to buy it. If it is overpriced I will not. If it is cheap....well I hope you can understand. I know my kids can but from what I observe it appears no one else can understand. When I say no one I mean no one.

Here is a test:

Have you lost an hour of sleep worrying about your investments?

If you said yes then you are not a value investor. If you let someone else manage your account then you are not a value investor in the same way that if your maid shops at the grocery for you then you are not a value shopper.

There has never been a time in history when buying a house below historical value would lose you money in 10 years. The same is true for the stock market. But, in 2005 everyone was purchasing homes far, far above historical value with the intention of flipping them. This kind of behaviour will lose you money almost all of the time. But that is when everyone frantically wanted to buy. The markets more than ever are run by Herd behaviour.

As an accountant with a degree in economics it is very entertaining to watch from a distance the wild vacillations in our economy as it is manipulated by the financial elite and the government.

But as a parent I take exception with our government and the financial elite impoverishing our children in debt servitude to foreign nations. There is absolutely no reason for this to happen. The fact that we are doing it to reward Wall Street and make government bigger makes it that much more distasteful to me.

Here is one more test:

Do you think the government should do anything else to help the economy other than giving benefits to the unemployed?

If you said yes then by definition you are attempting to borrow money from our children to artificially prop up our economy and hopefully create a new asset bubble.

There is only one expense above the normal that our country needs now. To help all of the unemployment that was caused by the housing bubble. One could also say that borrowing for a war is necessary. But every other bit of pork, bailout, graft, gift and largess that is borrowed by our government is only robbing our children to pay for our mistakes. It will probably lead to a new asset bubble in the future. Then what?

I have put Housing Tracker in my links on the right hand side of this page.

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