Category Archives: Real Estate

Helicopter Ben & Real Estate

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Will we be able to stay out of the financial dog house? Maybe, but only if 10 year yields can stay below 4.5%! Why 4.5%? If you look at the chart below, the RE market took off right around the time the yields dropped below 4.5% in late 2002. Subsequently, the RE market topped when yields broke over 4.5% and stayed there till now. I believe that recent rate cuts and market instability will have the indirect effect of easing pressure on the Real Estate market. As the flight to safety accelerates and the rate cuts work their way into the market, yields will probably continue to drop.

The reason I say this is that the rumor of another rate cut and a slow economy will make bonds more attractive and put pressure on yields to the downside.  In turn, this will lower borrowing costs for qualified buyers to refinance their mortgages, attract new buyers, burn off the inventory, and adversely raise inflation (this is bad).

Thanks to Helicopter Ben, we’re starting the party up again.

US Economy On The Mend? Part 2

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To build on yesterday’s post, I called a few more of my Civil Engineering buddies yesterday, one resides in California and other in NJ.  Both gave me conflicting reports on how active their phone has been ringing. My NJ buddy told me that his phone has been very active but its because owners want to finish up their work before their permits run out. According to him, many of them got their construction permits and waited to see if the Real Estate market would firm up. Well we know that RE market actually softened so now its a scramble to get the work done quickly. This was not good news and his outlook is neutral to negative for work.

My California buddy told me that his phone was ringing like crazy in October but hasn’t rung once in November. This is a mixed reading because he typically slows down in November and December and he couldn’t tell if it was due to the economy or just from the yearly cycle. His outlook is neutral and he’s hoping for more work in 2008.

I think its interesting to summarize these findings into a poll so I’m unveiling my new Economy and Engineering Work Poll. I hope to update it occasionally and as time permits.

  • NJ Engineer #1 – UP
  • NJ Engineer #2 – NEUTRAL
  • CA Engineer #1 – NEUTRAL
  • Me – UP

My New Mexico and Kansas buddies haven’t reported in yet and I’ll post that information as soon as I know!

US Economy On The Mend?

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I’ve been in the Civil Engineering business for over 13 years now and I work on large transportation related projects such as light rail, roads, subways, etc. I recently left my old job because they weren’t winning any work and I had nothing left to do. I thought this was strange because engineering related activity in NY/NJ/CT region recently sprung to life like never before.

This sudden surge of activity piqued my interest because its often said that Civil Engineers are the economic canary in the coal mine. If work dries up for them then 12 to 18 months later Contractors will be laying off people. When construction slows down you typically teeter on a recession! The opposite is true if the Engineer’s phone is ringing off the hook with work, Contractors will typically be hiring 12 to 18 months later.

Although I consider myself very perceptive in these observations, I still won’t come out and say that its definitive proof that the economy will get better. I still think we have a lot of pain to get through, especially in the housing and subprime markets.

Then something happened this weekend that made me ponder this new activity deeper. A friend, and fellow Engineer, made a surprise visit to our house this weekend. My buddy happens to be on the other end of the business, the commercial and residential site development sector. For the past 10 months he’s been miserably slow and struggling to keep his staff of four engineers busy. I expected him to tell me that he’s about to lay off but instead he told me that work was finally picking up.

Hmm.

Could this mean that the phones are ringing for us again? Is this the beginning of the a recovery in the US economy? Perhaps, but realistically its still too early to tell if we Engineers are seeing the beginning of a turnaround in work across the country or if this is a “blip”. Still though, I can’t help but see a small glimmer of hope out there and I’m happy to be busy again.

Foreclosure Frenzy

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I’ve been laying low for a while now with respect to buying and flipping foreclosure properties. You might think that I’m nuts because everywhere you turn now you see and hear about the parabolic rise of foreclosures in this country and the end of the RE world.

Although foreclosure activity has picked up and more houses are now being repossessed by banks, I still haven’t smelled enough blood and desperation out there yet. If you scan your local Real Estate Wanted section on Craigslist.org and search for either “short sale” or “foreclosure,” you’ll see Realtors hawking properties in foreclosure, pre-foreclosure, or subject to short sale approval. Then you look at the prices and notice that they’re not that much cheaper, they’re all at roughly current market value.

What I believe is happening is that Realtors are pulling out a new set of sales tactics aimed at the CNN home buyer reader. Mr. and Mrs. Homebuyer is probably thinking they’d get a killer deal in this market if they 1) find a foreclosure property that 2) happens to be their dream house. Throw in words like “Short Sale” or “Subject to bank approval of Short Sale” and you have the makings of sizzle and financial drool.

Based on experience, you won’t be getting a “deal” if you buy from those Realtors. The right and hard way to invest in/buy foreclosures is to hit the streets, do your own due diligence, mail out postcards, knock on doors, etc. It’s through that hard work that you can find those 60% off market value properties in questionable parts of town.

If a Realtor says he/she’s got a foreclosure property, chances are the owners listed it with them so the bank would give them a break to try and sell it first.

Buyer Beware!

S&P500 Volatility Timing Report

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SP500 Volatility Indicator 102607Well nothing too exciting happened last week, my volatility market indicator remained elevated though but overall the volatility clusters seem to be on a downtrend. Now that October is almost over we can “assume” that a Santa Rally will begin. I’m still net long and will continue to be that way.

SP500 Volatility Chart 102607Although I’m pretty Bullish right now, we shouldn’t assume that the Santa Rally will materialize. Who knows how much more of the subprime mess is hidden on balance sheets. Oh we have to remember that most of those subprime mortgages are starting to reset next year. I think my initial guess that we’ll see a housing bottom at the end of 2008 might’ve been too premature. I think 2010-2011 might be more realistic.

Real Estate Mean Reversion?

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Case Shiller Index NYC 100207 I’ve been following the Case Shiller Home (should be House) Price Index for a while and decided to graph the latest New York City data. What you find when you graph the data is that house prices in the NYC area made a greater than 2 standard deviation move at its peak. Since its peak, everyone starting talking of a “mean reversion” in housing prices. What the heck does that mean?

The theory of mean reversion means that over time large swings of price tend to move back to their mean, unless underlying fundamentals of that market have changed!

That theory begs to ask ‘have fundamentals changed in the housing market?” The likelihood is no, the purchase of houses by people who can’t afford them was a result of bad lending practices by mortgage companies and don’t constitute, in my opinion, a fundamental change in the market. A house is something you live in, raise your family in, and sell either when you move, retire, or die (typically). Unless we had an influx of millions of rich immigrants looking to buy the American Dream, then the entire price appreciation of housing was based on demand fueled by cheap money created by Alan Greenspan and company.

What can we expect to happen to housing now? If the index “reverts” toward the mean, say down to 1 standard deviation, the loss from the peak of 215.83 to 156.48 would be a depreciation of 27.5%! If it continues back down to the mean at 110.72, then we’d have a depreciation of 48.7%. This is only for the New York City area, other places in the country are worse! This magnitude of loss would be catastrophic and in my opinion, create a global depression! Expect more foreclosures, further depreciation of house prices, and the creation of “Green-o-villes!”

Thanks Alan, you jerk!

Real Estate & Trading

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I own a rental property and I was over there all day today making some emergency repairs. I got into RE investing a few years ago and still look for deals but not as actively as I have before. The reason is that I’ve transitioned back to trading, this time Forex, because of two main reasons.

One, I don’t have tenants to deal with when trading Forex and two, I can be out of a position in a second flat. With trading I don’t have to chase deadbeat tenants down for their monthly rent or deal with Sunday afternoon calls for emergencies. With Real Estate you have to deal with rising property taxes, insurance, and mortgages.

Would I ever buy another rental property? Yes, I would but I would stick it into a property management company and be a hands off landlord. My time is too valuable, I could spend it trading and making more money.

BTW, I posted my S&P500 volatility report in the members section. Can you guess why it was late? :)

Stability In The Real Estate Market?

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Jeff, a long time reader, emailed me at my old dbreakfast account a few weeks ago. I rarely check that account anymore so I almost deleted all the spam and his email along with it when I saw it. Jeff wanted to know what my take was on Gold and Real Estate market. I gave my forecast for Gold this week in my members section so I won’t go into details here but I will comment on the RE market.

My take on the RE market is that we’ll see some stability by Spring 2008 only if the Fed cuts another 25 bps. My models indicate that the magic yield threshold on the 10 Year is 4.5%, anything higher than that and we’ll risk further RE market deterioration and recession. Anything below that yield and we should see stability. Of course the Fed doesn’t want to repeat the “bubble years” again so any future rate cut will be the equivalent of a drawn out root canal for the Fed. I’m expecting a RE bottom by the end of next year only if the economic stars align just right! :)

TNX 092407

Yields! Yields! Scotty I Need Yields!

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If Captain Kirk was a hedge fund manager, Scotty would’ve been a neural net/quant guy. For all the budding financial neural net modelers out there, always consider using a 10 or 30 year t-note yield as part of your model input (unless you prove that they don’t drive the output), because 8 times out of 10 they affect your output.

TNX 090707

All eyes are on the 10 year t-note yields these days, including mine.

The Leverage of Subprime

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Sherry posted an excerpt from an article she read in my “Real Estate Will Get Worse” post. The author of the article, Jackie Corr, points out an interesting leveraged strategy that is very plausible why hedge funds have been posting out of control losses recently.

If you buy a stock for $36 and sell it for $72 four months later, you’ve made 100% on your money. If you add $30 of borrowed money to $6 of your own to buy the stock at $36 and sell the shares at $72, your profit is $36, but you’ve made 600% on your $6 of which the hedge fund takes a percentage, roughly 2 percent or 72 cents, so your profit is now $35.24 on the $6 which is 587% and you can live with that.

Multiply that transaction times billions and you are talking not billions but a trillion or more in profits and which is why offshore tax havens like the Cayman Islands and the Bahamas are booming.

But the worm turned as we have been reading.

So now, let’s say you put up $6 and borrow an additional $30 to buy a stock at $36. The stock falls to $18. You have lost $18 on the stock but still have have a stock worth $12 after subtracting your $6. But all of a sudden, because of the panic that came with this crisis, you have to pay back $30 and quickly for that $2 stock. Your loss is now 300%.

Multiply that little transaction times billions and you understand why Wall Street is close to a nervous breakdown..

Makes sense to me and I agree 100% with Bernanke when he was quoted this past Friday at Jackson Hole as saying, “It is not the responsibility of the Federal Reserve — nor would it be appropriate — to protect lenders and investors from the consequences of their financial decisions.”

In other words Mr. and Mrs. Hedge Fund, take your medicine like the rest of us.

Real Estate Will Get Worse

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I used to flip foreclosure properties leading up to the height of the RE bubble. It was tough work finding these properties, marketing to them, and then screening the potential sellers. Since I didn’t have the capital to buy the properties myself, for cash, I had to get an investor involved and made a few bucks at it. I learned a lot but realized that it was too time consuming so I stopped.

Once I found a property, I would go to my real estate investment group and search for a buyer. Right before the top in the market, the message board would be filled with 100′s of daily posts. People looking for this, selling these deals, investors with cash, flipping, etc. Then about 3 months before the peak, the post frequency started to lessen. I thought to myself, hmm this is something to watch. Little did I know that the top was about to be made and since then the RE activity in the group has been a quarter of what it was.

I know a lot of the people on that board, either I met them in person or have corresponded with them. They’re shrewd business people and they have their ears to the ground. The word on the street is that bottom is NOT in yet and their waiting to swoop in on the carnage when banks and lenders are saturated with foreclosed houses. Why bother dealing with crazy homeowners when you can just go to the bank and make a deal?

My wife and I are estimating late 2008 for a possible bottom but it remains to be seen. Probably September of next year we’ll be going to our local banks and asking for their REO lists (Real Estate Owned). These are the properties the bank owns and typically tries to unload fast. Sometimes they get Realtors to sell them for them but since no one is likely to be buying, you can go in there and negotiate rock bottom prices. When I mean rock bottom prices, I mean really rock bottom prices. Our goal is to pick up a nice little Jersey Shore house. :)

Bill Gross On The Warpath!

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Mr. Gross makes a good point, will the Bush Administration bail out the ailing homeowner or will they tell them to “go eat cake?”

Why is it possible to rescue corrupt S&L buccaneers in the early 1990s and provide guidance to levered Wall Street investment bankers during the 1998 LTCM crisis, yet throw 2,000,000 homeowners to the wolves in 2007? If we can bail out Chrysler, why can’t we support the American homeowner? [PIMCO Bonds - Investment Outlook- September 2007 "Where’s Waldo?"]