From Fleck's reader:
Bill,
I just thought I'd share with you where my thinking is, if for no other reason than to communicate another interpretation, not unlike your own, of how things might "play out" in the next year. First, let me comment on the multi-residential real estate market. I'll sum it up in one word: Ridiculous. All sense of logic has been removed from the marketplace here in Southern California. I called a friend today who runs a major appraisal business to query him about any new comparison sales that have yet to hit the market but will be recording in the near future. In his own words, he offered the following summary, "It seems the market has ratcheted up another 5% and nobody even knows it yet."
To those of us who have lived through the Internet bubble, this should be no shock. At the peak of the market the greatest gains are made, and subsequently lost, of course. Interestingly, my appraiser friend, whose opinion I give a good weight of creditability to, seems to have discovered that the "dumb" money is now dominating the market. Though this is seemingly obvious to me--as part of the "smart" money I wouldn't dream of paying today's prices--I further prodded him, asking how he knew that we were witnessing the "dumb" money domination as he described.
He succinctly answered, "Well, when guys like you buy a building, you always show up for the appraisal. You want to make sure that everything goes smoothly because you are afraid of losing the "good" deal. But I haven't met a buyer on an appraisal call for over three months. The buyers
are nowhere to be found; instead only the agent shows up for the appraisal because he is the one making the decision for the buyer. In other words, the agent is the only one with the "vested" good deal -- he gets his commission when the deal closes. The owner-to-be isn't there because he probably has never even seen the deal; rather he's just relying on his agent's advice ." (You know, kinda like when everyone listened to their brokers' picks at the top of the stock market bubble).
Last year I wrote to you telling you that the single family inventory had spiked in the spring, and at the very least it marked a short-term top. Well that's not happening this year. Instead, we are seeing very few homes offered for sale, with very few transactions taking place. TLet me remind you, that I specialize in multi-residential investments, but I pay proper attention to the single family home universe as the multi-residential market's success has been historically correlated to that of housing prices . However, in this cycle homes price appreciation has far out-paced the multi-residential sector gains in most areas for a number of reasons -- including the tax code changes and liberal financing offered to single family homes. Indeed, the single family homes are much more over-valued and over-leveraged than multi-residential buildings, with many
new owners of homes having no capital invested at all! . They will not die a silent death. When the peak finally hits (which in my humble opinion is NOW), some areas will suffer an immediate 10-15% overnight hit on the first sign of weakness (which shall ensue in the next three to six months in my opinion). From there the death might be slow, but it will be steady, at least in "real" terms.
I always try to piece together what the investment markets are telling me with what I am seeing in the real world. Here's what I see: Clearly, the real estate bubble allowed wealth to build in the face of a fed determined to raise rates at a "measured rate". Unfortunately, by removing any risk of a rapid rise in rates, the fed eliminated the potential unknown that would have "capped" the real estate market. One thing all markets hate is uncertainty. Whether it be sporting events or financial markets, everybody is afraid of uncertainty in life. Nobody ever wants to fight Mike Tyson because they are afraid of him. He communicates uncertainty -- he might bite your ear off or slug you below the belt until you die. Financial markets are similar, they only "fear" uncertainty. By stating that it would slowly raise rates in a methodical fashion, the fed removed the "uncertainty" from the bond market and the market never panicked, knowing that in a leveraged economy the fed would be forced to quit before things dramatically weakened. Thus, the so called "conundrum" ensued--slowly rising short-term rates that were greeted by slowly falling long term rates. By locking the volatility out of the
bond market, the real estate bubble was poised to grow straight upwards in supply-constrained markets because all fear had been removed. And so it has. Upwards and onwards!
But all good things come to an end. The great experiment by our Fed of dropping helicopter money is nothing more than than a wealth transfer in disguise. Those who are able to scoop up the new dollars are the winners, and those holding only their "old" dollars are the losers.
Now here's my guess on what the next six to twelve months hold. At some point the real estate market peaks, but consumer spending doesn't fall immediately as it takes a while to "purge" the newly created wealth out of the system. So interest rates rise a little as people worry about the over-heating of the general economy which never comes to pass. Stock prices rise in one last short-induced squeeze, taking the S&P to well over 1300, maybe 1350. However, the "For Sale" signs will be starting to pile up in the housing sector, and this will be our indicator that the end is here. At this point, and only at this point, I will be selling my spiders (which I repurchased at 114-115 recently, and converting them into shorts on the home-builders). In fact, my guess is that I will short the home-builders PRIOR to selling my spiders.
Finally, I will probably match my home-builder shorts against an
increased position in gold and silver stocks, as I think the Fed will be forced to ease (good for the precious metals, bad for the dollar, but too late for the housing stocks, which will be starting a secular bear market of their own). Interest rates will fall simultaneously with the stock market as the consumer will finally be forced to retrench. Two years ago, I would have never guessed that interest rates would have stayed so low for so long. After next year when the last double-bottom is made in rates, my guess is that we will head higher for a long period of time. Regardless of whether or not this occurs, I know that my investment principles will definitely play out -- lower real housing prices, slower consumer spending, falling stock prices, and some great shorting opportunities. This will occur in either a high interest rate or low interest rate environment, so as long as my rates are "locked" or "capped", I > don't care which happens.
Now if I'm right, we are in the midst of the last short squeeze in the home builders which gives us the chance of a life-time to pair our shorts and our longs. My hunch is this will be the case.
I'll keep you apprised. |
