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Market Tops

admin 0 comments 01.11.2015

So here we are. Halloween just gave us a fun scare, but should we be fearful of the future? In my last 3 newsletters, I have been warning that we were nearing a top. For those of you who read my features, you will recall that I predicted lower rates and slowing sales. To review, this had to do with the collapse of emerging market economies, continued slowing in Europe, and the simple fact that trees do not grow to the sky. Time for a breather. Alas, here we are. Home sales here and nationwide are in a transition for a sellers market to a balanced market. The price of a tear down (dirt value) even in Manhattan Beach has fallen in the last 30-60 days. This is a leading indicator, as developers begin to see slowing demand for their new homes, they become more frugal for what they will pay for dirt. While some will blame seasonality, I can say, this is the end of the manic bull run. I am never short on words, nor am I bashful about offering my opinion. When I managed a special situations portfolio for Jefferies & Co, I was able to capitalize on the plentiful data that pointed to a collapse in 2008. In short, there were millions of variable mortgage resets coming due in 2007. This data was available to anyone who dared pay attention. The collapse was inevitable. THIS IS NOT THE SAME THING. What we are experiencing is simply a supply/demand curve that is finding equalibrium. The shortage of supply is ending as there is always a price that will draw sellers out. Prices for sure have softened. This has much more to do with the "high water mark" being set by frothy panic buyers who had bid prices above intrinsic values. Let me make an analogy. Consider a cup of coffee with foam on top. As the cup is poured and the coffee is at its hottest point, the foam bubbles up and creats a high water, rather a high coffee mark. When the froth settles, the level of the coffee has not fallen, yet the high water mark has. This is where we are in the present market. There are some high comps that represent the bubbles, the froth. However, the core prices are holding farily steady. The takeaway is that sellers can no longer depend on the froth to get a premium over the fair market value from buyers panicked to "get in". This does not fortell a collpase as I mentioned before. It simply means that sellers will now have to negotiate with buyers and perhaps lower list prices to meet the level which buyers still await. Next year should see continued balance, with a small risk of moderate price declines should the world economy continue to falter. The good news is that equity markets have bounced back and confidence is returning. Sanity is also returning. A balanced market is good for everyone in the long run. As I mentioned in my last newsletter, amatuer flippers (analogous to day traders in the stock market) should be worried. There will be some casualties. Seasoned investors, long term holders and home owners with equity in their homes have nothing to worry about. 10 years from now, prices will be higher as they will even more so 20 years from now as the population continues to explode. All for now. Have a great holiday season!

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The Fed That Can’t

admin 0 comments 01.08.2015

As I mentioned last month, there would be no rate hike in September. While the imputed odds from the interest rate futures market were 1 in 4 as the meeting began, I gave it 1 in a million. No way should the fed tighten until emerging markets economies pick up. Why is the Fed holding steady as critics continue to argue (wrongfully) that they are behind the curve? The answer is not China. The answer is not Greece. The answer is.......Japan! Japan has been in a multi-decade depression brought on by a real estate and stock market bubble that popped in the 80s. Ever since, their interest rate policy has bobbed and weaved with every sign of strength and weakness in the economy. In 2001, Japan essentially invented quantitative easing. Simply put, this is bringing real rates below zero by buying mortgage backed securities. One crucial mistake they made along the way was raising rates on and off when signs of any strength appeared. The fed knows this is a recipe for disaster, which is why they have not raised rates in almost a decade. 2015: Just when our economy started to show signs of growth, the "emerging market" bubble popped. The world now finds itself in a DEFLATIONARY environment. While the USA is still hanging in there, there is no way the Fed can risk joining Europe and China and other emerging markets in a deflationary spiral. If this has been too technical, let me put it in plain english. The Fed can't and won't raise rates until the world economy is growing again. Despite all the talk, rates will stay low for a long time. What are the implications? For borrowers it is good news. If you have been unable to refinance , you still have plenty of time. For flippers and short term holders, your variable will suit you just fine. Even if the Fed is pressured into a 1/4 point rate increase at some point, rates will stay subdued for some time. For real estate prices this is good on the surface, if rates were the only factor in pricing. One leg of the stool is being pulled out as we speak. The foreign money that has added to demand here at home could quickly evaporate for several reasons. 1. Oil rich countries such as Russia who have been huge buyers of US real estate are hurting as oil has plummeted 75% from the highs. 2. The strength of the US dollar is making our goods and services more expensive hurting our exports. This could have a negative effect on our economy and our job growth. 3. The strength of the US dollar makes our real estate more expensive to holders of devalued currencies. The conclusion I draw is simply this. Trees do not grow to the sky. Most real estate booms end because of a spike in rates. Low rates should continue to support present prices. However, as the stool has lost a leg or two, don't be surprised to see a slowing of the mania that has fueled this recent real estate bull market. I am not talking 2008 or even 1993, both brought on by massive leverage. I will stick my neck and say a combination of less foreign money and a slower world economy will at the very least bring supply and demand into balance. 2016 will likely be a flat year, which after all isn't a bad thing. We do not need another bubble like 2006 to end as badly as 2008. A soft landing for the recent real estate mania seems to be the most likely scenario. Real estate and stocks remain the path to wealth building for the long term thinker. That is unless you think your .00001 return on your bank deposit will support a comfortable retirement. It has been an amazing run, time to stop and take a little time to breathe.

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August-2015

admin 0 comments 01.08.2015

No doubt you have heard much about world economic events. ANOTHER Greek bailout. The China miracle becoming a bit less miraculous to say the least. Europe as whole, fighting to fend off their recession from reaching depression status. The US dollar soaring to multi-year highs.

So, who cares? How does this affect me? First, the good news. The deflationary pressures on the world economy have helped to keep interest rates at or near historic lows. While the fed has indicated that it will soon bump rates by a quarter, it is unlikely that there will be a pronounced rapid increase in rates. Now, the bad news. As the dollar soars, US goods become less attractive to foreign nations. Not just goods. Think REAL ESTATE. One of the hallmarks of the recent surge in real estate prices has been "cash buyers'. Many of these cash buyers were foreigners smart enough to hedge their portfolios with assets backed by a strong currency.

But now the currency has become so strong, it is massively more expensive for foreign nationals to convert their falling currency to dollars to purchase real estate. For these reasons, Florida has seen an abrupt slowdown in activity. Latin American buyers are drying up as are Russian and Eastern European buyers. While that is far from here, Asian money is drying up as well. That does not bode well for US exports, which could very much affect our economy.

How about South Bay real estate? Is it driven by foreign money? For the most part, no. However there is a trickle down effect. Just 13 miles north, Santa Monica income real estate has been dominated by Russian money. Don't expect that to continue. All of this has a spill over effect. I cannot say when. I would be disingenuous if I said I could. But the bullet train will need to make a stop to let a few passengers off.

Locally, we have seen less cash buyers, less multiple offers in the last 3-4 weeks. There are more properties listed. The "shortage" of inventory is beginning to balance out. That is good news for buyers. By no means, are prices declining. To the contrary, prices are still rising, albeit at a seemingly slower rate. As I have mentioned before, we are not approaching another 2007, which was caused by massively loose lending standards and sub, sub sub prime borrowers. However, we are due for a cooling off, and there are beginning to be signs that it may come sooner than later.

Nothing will work unless you do.
Maya Angelou.
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