I have often read that the way to know if a bear market in stocks
is coming to an end is by checking the headlines of major magazines
like Time, U.S. World News, etc.
When you see a headline such as, "Is this the death of stocks?", that's the time to call your broker and bet the farm on a new bull market.
A walk through Google reveals that there were many financial web sites (and even the folks at major media sources such as CNBC), calling for Dow 5,000, and in some cases even Dow 4,000 throughout February and early March, of 2009.
Surprise!
The Dow subsequently reached a low of 6,547 on March 9, 2009, and has risen about 67% since that time.
So given this, I am truly heartened at some of the recent apocalyptic predictions that I have seen about the future of the real estate market.
For example:
Tuesday, April 6th, The New York Times, "Why Your House Value (Probably) Won't Rise"
First of all, what is this "probably" stuff? (note to editor, thanks for censoring my original adjective)
Look, NY Times, if you are going to make a prediction, at least have the guts to stick your neck out and make it without hedging right there in the headline. If you don't believe home values will rise any time soon, then say so.
Second, the article was written by Edward L. Glaeser, an economics professor at Harvard. Now I am sure that Mr. Glaeser has a long and distinguished career as an economist and professor, but economists and professors are not exactly known for being the most accurate predictors of financial markets.
"Stocks have reached what looks like a permanently high plateau" -- Irving Fisher, Professor, Yale University, 1929.
Philip Tetlock, a psychologist and professor at the University of California, studied the accuracy of experts on their predictions, from the 1980's to 2006. His surprising conclusion was that the experts did no better with predictions in their own field of study than experts in other fields who were just drawing on general knowledge.
Said Tetlock, "The moderately attentive reader of good newspapers can do as well as someone who devotes many years of study to predicting whether, say, Chinese growth rates will continue or Japan's Nikkei index is going up".
And yet, the public continues to take the views of these experts as the Gospel!
One of Glaeser's points in the Times article is that the construction industry has experienced technological improvements and increased efficiency in recent years, so this means that declining construction costs could make new homes more affordable year after year, thus contributing to a decline in values among pre-existing homes.
Then Glaeser points out that land availability and permits are not scarce, and this will keep values down as well. He states that "high prices occur when rising demand collides with restricted supply of land and housing permits."
He then goes on to say that:
"America is filled with empty land. We have a remarkable transportation network that enables people to commute vast distances."
Indeed, these two article points are ridiculous. Building material costs and government building regulations exert a far greater effect over construction costs than builder efficiency.
And both material costs and regulations can be expected to increase within the next few years. America has become "green" crazy, and the costs to builders for making energy improvements could add thousands of dollars to new homes. Plus commodity prices are rising, and will continue to do so, especially if we have any sort of improvement in our economy.
Remember: As new home construction prices increase, they pull the cost of existing home sales up with them.
As for all of that empty land out there, as gasoline begins creeping up towards $3 per gallon, and perhaps higher, that tends to deter most home buyers from wanting to commute long distances.
Sorry, Mr. Glaeser, not all areas of the U.S. have "remarkable transportation networks", and many people still prefer the convenience and comfort of driving to taking trains, buses, and subways.
While the chances for appreciation in the housing market this year are less than the odds for flat prices or further declines, if Mr. Glaeser wants to buck the 50 year historical trend of 4%- 5% annual price appreciation over the next 5-10 years, that's his business.
However, I beg to differ!
But even more than the NY Times article, what really made my contrarian heart flutter this week was an article about ProShares launching a new single inverse ETF on the real estate market.
The new ETF is called the "Short Real Estate" fund (Symbol: REK), and according to proshares.com, the fund "seeks daily investment results, before fees and expenses, that correspond to the inverse (opposite) of the daily performance of the Dow Jones U.S. Real Estate Index."
The Dow Jones U.S. Real Estate Index consists of Real Estate Investment Trusts (REITs) and other companies that invest directly or indirectly in real estate. Most of the investment is in commercial properties, such as hotels, offices, industrial sites, and shopping centers.
But there are also some REITs that invest in apartment complexes, senior citizen facilities, and other residential developments.
I really like the idea of REK being introduced right now, for two possible reasons:
1) It's either a contrarian development for real estate values that this ETF is being brought to market after three years of decline in both commercial and residential markets.
2) OR, it's not a contrarian development, and the values still have further to fall, in which case this ETF could become another hedge that real estate investors can use to offset losses against their home value or investment portfolio.
In last week's article, I wrote about two ProShares ETFs that investors can use to protect themselves against rising interest rates. With REK, that gives investors another tool to hedge against the scenario in which real estate values, both commercial and residential, continue to fall.
Just as Tycoon writers Chris Rowe and Costas Bocelli often use options to hedge their stock investments, it is now possible to do the same with one's real estate holdings. Plus the ETFs are a lot easier to employ than trying to figure out which builder or financial stocks to short.
Incidentally, REK, which began trading on March 18, 2010 at $49.44, closed on Tuesday about 5% lower at $46.94. So far, it seems that contrarian winds are gusting for the real estate market.
As I have noted in past articles, I have recently been buying residential homes again for rentals. In my Master Real Estate Investor course, I also demonstrate how you can still make incredible profits, whether prices go up, down, or sideways!
The national picture is quite mixed right now. The most recent estimates are for another 6% decline before the bottom is reached, with a few areas of the U.S. doing worse, but other areas actually showing appreciation for the remainder of this year.
Remember, nobody has a crystal ball, and as Tetlock's research demonstrated, the so called experts, such as economists, and academia pundits often call it wrong.
But historical trends favors a rebound in the real estate markets at some point in the not too distant future.
So each time I see another "doom and gloom" article about real estate, I am reminded of March, 2009, and the 67% increase in the Dow Jones over the next year.
So my message to both the New York Times and to Proshares:
Bring it on, baby!
See you next week!
When you see a headline such as, "Is this the death of stocks?", that's the time to call your broker and bet the farm on a new bull market.
A walk through Google reveals that there were many financial web sites (and even the folks at major media sources such as CNBC), calling for Dow 5,000, and in some cases even Dow 4,000 throughout February and early March, of 2009.
Surprise!
The Dow subsequently reached a low of 6,547 on March 9, 2009, and has risen about 67% since that time.
So given this, I am truly heartened at some of the recent apocalyptic predictions that I have seen about the future of the real estate market.
For example:
Tuesday, April 6th, The New York Times, "Why Your House Value (Probably) Won't Rise"
First of all, what is this "probably" stuff? (note to editor, thanks for censoring my original adjective)
Look, NY Times, if you are going to make a prediction, at least have the guts to stick your neck out and make it without hedging right there in the headline. If you don't believe home values will rise any time soon, then say so.
Second, the article was written by Edward L. Glaeser, an economics professor at Harvard. Now I am sure that Mr. Glaeser has a long and distinguished career as an economist and professor, but economists and professors are not exactly known for being the most accurate predictors of financial markets.
"Stocks have reached what looks like a permanently high plateau" -- Irving Fisher, Professor, Yale University, 1929.
Philip Tetlock, a psychologist and professor at the University of California, studied the accuracy of experts on their predictions, from the 1980's to 2006. His surprising conclusion was that the experts did no better with predictions in their own field of study than experts in other fields who were just drawing on general knowledge.
Said Tetlock, "The moderately attentive reader of good newspapers can do as well as someone who devotes many years of study to predicting whether, say, Chinese growth rates will continue or Japan's Nikkei index is going up".
And yet, the public continues to take the views of these experts as the Gospel!
One of Glaeser's points in the Times article is that the construction industry has experienced technological improvements and increased efficiency in recent years, so this means that declining construction costs could make new homes more affordable year after year, thus contributing to a decline in values among pre-existing homes.
Then Glaeser points out that land availability and permits are not scarce, and this will keep values down as well. He states that "high prices occur when rising demand collides with restricted supply of land and housing permits."
He then goes on to say that:
"America is filled with empty land. We have a remarkable transportation network that enables people to commute vast distances."
Indeed, these two article points are ridiculous. Building material costs and government building regulations exert a far greater effect over construction costs than builder efficiency.
And both material costs and regulations can be expected to increase within the next few years. America has become "green" crazy, and the costs to builders for making energy improvements could add thousands of dollars to new homes. Plus commodity prices are rising, and will continue to do so, especially if we have any sort of improvement in our economy.
Remember: As new home construction prices increase, they pull the cost of existing home sales up with them.
As for all of that empty land out there, as gasoline begins creeping up towards $3 per gallon, and perhaps higher, that tends to deter most home buyers from wanting to commute long distances.
Sorry, Mr. Glaeser, not all areas of the U.S. have "remarkable transportation networks", and many people still prefer the convenience and comfort of driving to taking trains, buses, and subways.
While the chances for appreciation in the housing market this year are less than the odds for flat prices or further declines, if Mr. Glaeser wants to buck the 50 year historical trend of 4%- 5% annual price appreciation over the next 5-10 years, that's his business.
However, I beg to differ!
But even more than the NY Times article, what really made my contrarian heart flutter this week was an article about ProShares launching a new single inverse ETF on the real estate market.
The new ETF is called the "Short Real Estate" fund (Symbol: REK), and according to proshares.com, the fund "seeks daily investment results, before fees and expenses, that correspond to the inverse (opposite) of the daily performance of the Dow Jones U.S. Real Estate Index."
The Dow Jones U.S. Real Estate Index consists of Real Estate Investment Trusts (REITs) and other companies that invest directly or indirectly in real estate. Most of the investment is in commercial properties, such as hotels, offices, industrial sites, and shopping centers.
But there are also some REITs that invest in apartment complexes, senior citizen facilities, and other residential developments.
I really like the idea of REK being introduced right now, for two possible reasons:
1) It's either a contrarian development for real estate values that this ETF is being brought to market after three years of decline in both commercial and residential markets.
2) OR, it's not a contrarian development, and the values still have further to fall, in which case this ETF could become another hedge that real estate investors can use to offset losses against their home value or investment portfolio.
In last week's article, I wrote about two ProShares ETFs that investors can use to protect themselves against rising interest rates. With REK, that gives investors another tool to hedge against the scenario in which real estate values, both commercial and residential, continue to fall.
Just as Tycoon writers Chris Rowe and Costas Bocelli often use options to hedge their stock investments, it is now possible to do the same with one's real estate holdings. Plus the ETFs are a lot easier to employ than trying to figure out which builder or financial stocks to short.
Incidentally, REK, which began trading on March 18, 2010 at $49.44, closed on Tuesday about 5% lower at $46.94. So far, it seems that contrarian winds are gusting for the real estate market.
As I have noted in past articles, I have recently been buying residential homes again for rentals. In my Master Real Estate Investor course, I also demonstrate how you can still make incredible profits, whether prices go up, down, or sideways!
The national picture is quite mixed right now. The most recent estimates are for another 6% decline before the bottom is reached, with a few areas of the U.S. doing worse, but other areas actually showing appreciation for the remainder of this year.
Remember, nobody has a crystal ball, and as Tetlock's research demonstrated, the so called experts, such as economists, and academia pundits often call it wrong.
But historical trends favors a rebound in the real estate markets at some point in the not too distant future.
So each time I see another "doom and gloom" article about real estate, I am reminded of March, 2009, and the 67% increase in the Dow Jones over the next year.
So my message to both the New York Times and to Proshares:
Bring it on, baby!
See you next week!
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