PEOPLE JUST HAVE TO BE RIGHT ON THE HOUSING BUBBLE!

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Millionaire Now! by Larry Nusbaum

This blog is based on the organizational principles found in my new book, "Millionaire Now! - A Financial Toolbox with Seven Steps to Wealth".

PEOPLE JUST HAVE TO BE RIGHT ON THE HOUSING BUBBLE!

Posted on 09/19/2006 01:24 AM | Link | Post Comment

I have been investing, financing and brokering in real estate for almost 20 years. From practical hands-on experience in every aspect of real estate my goal here is to be the “Calm in the Eye of the Storm”. Remember that “they” said Warren Buffet was a genius before the Internet Stock craze and after, but apparently not during it.

I have written about all aspects of real estate, not as a cheerleader, but as a calm voice . To me, owning an income/investment property is like owning a business, for profit, in which we face cycles in the economy of strength and of weakness. We don't dump properties in the face of trouble anymore than closing a business after 5 years because we live in fear. They both produce income and both have real intrinsic value.

In the film, “The Godfather”, Don Corleone, played by Marlon Brando, calls a meeting of the heads of the 5 families in an effort to bring Michael home from Italy and asks, “How did things ever get so far? I don’t know. So unfortunate. So unnecessary”. And, so I ask, with all the doom and gloom streaming from the media and from those who must be right (this time) about the oncoming crash of housing, how did things ever get so far?

Everything that is happening today with sales, inventories, prices, incentives, credit and media coverage is normal and expected by me. It matters not to a seasoned professional such as me. Why? Because, I know and want you to know that it is very easy to make a bad purchase in a great market and a great purchase in a bad market. And, when we look a long-term chart (back to 1930) of the housing’s price movement it reveals a pattern that looks like a stair-step pattern that repeats about every 7 years: up for 4-5 years and then flat for 2. This is the normal 7 year cycle for real estate. This cycle ended in about December of 2005 and has been quite flat in 2006, despite what the dire predictions have been saying for 3-4 years. However, when other (tops) bubbles occur, the Tech (internet) stock bubble in particular, there weren't a lot of dire warnings in advance like we have seen in housing. All of Wall St. missed the greatest bear market in history and they were embarrassed! Is it possible that analysts and investors want to get it so right that they have been preparing and calling for it and didn't all rush in at once at the end? I don't know. I don’t care.

Look at the incredible rise in Housing values since about 1997. Of course, it was back in May of that year when Clinton's tax laws favoring the treatment of capital gains on one's primary residence took hold. Three years later the stock market bubble of 2000-2002 took another 7 trillion dollars of value out of an economy that had dipped into a short recession; all the while real estate values continued their historic climb. As I have said, the housing cycle peaked in late 2005 (many say July 2005) and now you are faced with four choices: Sell, don't buy (more), buy, or rent and make your landlord a bundle of cash.

Now, things are changing, as they always do. A recent article, Builders regroup in Valley, from the Arizona Republic, reports that a year after they set records for revenue and income and their stocks lit up Wall Street, homebuilders are scrambling to recover from a downturn that has sent their share prices plunging and forced them to reassess their strategies to increase sales. Some builders are slashing prices on existing inventory. Builders are circling back to their subdivisions, running demographic profiles and realizing that their customer can no longer afford the houses that were within financial reach before last year's boom, said local housing analyst RL Brown. The median sales price of a new home in the Valley sits at $297,000 in May, up more than $76,000, or 35 percent, from the same month last year.

MY TAKE: Suddenly, there is a change happening right in front of us that have left Home Builders unprepared (as well as their stockholders and analysts): Here in Phoenix, where we build more houses than anywhere in the country, there is a shift in buyer's interest away from new builds and towards older, more established neighborhoods. Why? They no longer want to live in construction zones, in new areas, where no (retail) services are available close to where they live. No wonder downtown urban vertical living is experiencing a new boom.What we know is that financial analysts, economists, media people, and technicians like to look back on the patterns of past history to predict future price movement. It can be seasonal or trends can last a long time. So why is it that they are predicting housing's implosion when there is simply no history to fall back on? The history of this stair step pattern couldn't possibly be of any help in predicting a pop in the bubble, could it? So why are they doing it now? High prices are not a good answer, since they have always been higher than in 5 year preceding periods.

You have always heard about the contrarian investor. They buy that which everyone hates and sells when everyone discovers it and falls in love with it. EVERYONE HATES HOUSING STOCKS AND HOUSING! So, on that basis, could housing stocks be done going down? I say yes. And, did everyone sell their houses or refinance their “exotic mortgages" who wanted to? The bubble has been talked about long enough...........

I was recently asked my exit strategy on real estate. I answered: DEATH

WHY DO WE TORTURE OURSELVES by constantly asking, Stocks or Real Estate, Real Estate or Stocks?

· It’s not one OR the other. A Wealth accumulation plan contains both asset classes. Wealthy individuals invest in both.

· Most financial planning experts would agree that you would be ill advised to buy stocks on margin (borrowed funds for leverage).

· Most would also say, and I am one, that buying real estate without leverage (borrowed funds) makes little sense. Read A CALL TO A.R.M.s

· So, when comparing absolute returns of the S&P 500 vs. the returns of an 80% leveraged real estate portfolio, then you can decide which has the better long term record of wealth creation.

· Please keep another point in mind when analyzing returns over time: According to the Frank Russell and Co, the “manager of managers”, the S&P 500 (10.2%) and the average fund manager (12.2%) has outperformed the average investor (2.7%) over the past 30 years. Why? Because, individuals who handle their own accounts tend to make too many moves and at the wrong time greatly retarding long-term performance. The point being that unless you own managed funds or index funds, you will not achieve any where close to the returns used in research reports comparing stocks to real estate.

MY CONCLUSION: THERE IS ONLY ONE WAY TO INFLATION-PROOF YOUR RETIREMENT: Real Estate Ownership. So, seek advice to make good purchases in a weak market and remember that private and publicly traded REITS are not investments in Real Estate! They are investments in securities, despite what brokers and planners may tell you.

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