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If This is a Recovery, What Does a Downtrend Look Like?
Tue, 13 Mar 2012 17:45:00by Bob Stokes
This past weekend I was driving on a well-manicured highway that's heavily traveled and jam-packed with businesses.
It's a stretch in a part of greater Atlanta that's really grown in the past ten to fifteen years. Many of the store fronts still look fairly new.
Well, I did a double-take when I saw a "vacancy" sign at the entrance of a pretty big shopping complex that said "First Six Months Free."
Mind you, this was no lonely strip mall surrounded by a neighborhood of abandoned McMansions.
A well-known department store anchored this outdoor shopping complex, which included several other stores and a couple of restaurants.
Yet the property's owner/leasing agent has seen fit to offer a substantial inducement to fill the vacant store space.
This suggests that even aspiring entrepreneurs are cautious (or can't get business loans), and that commercial property owners do not have leasing pricing power:
...a “growing number of economists and money managers are starting to worry about the opposite of inflation: deflation, a period of falling prices and declining incomes.” In various articles, speculator George Soros warns that the global economy is entering a “vicious circle” of deflation. Soros is joined by the International Monetary Fund and the World Bank; both commented recently on the growing deflation risk that will hamper countries “where debt burdens remain high.”
Financial Forecast, February 2012
People who might have started a business pre-2007-2009 now shun the risk. Commercial property "owners" themselves are neck-high in debt. And some are drowning in it.
Here's a recent reminder of that:
[An] Atlanta real estate debacle illustrates just how sick the market remains. On February 7, the Bank of America Building, which is named for and occupied by the nation’s largest provider of mortgages, was auctioned on the steps of the county courthouse in Atlanta. The Southeast’s largest skyscraper sold for 50% of its 2006 price...This is still just the beginning of this process.
Financial Forecast, March 2012
One has to ask: If commercial real estate goes begging during a supposed economic recovery, what will the sector look like if the economy lapses back into a major contraction?
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The New Hot Trend in Real Estate: Should You Jump Aboard?
Tue, 06 Mar 2012 17:45:00by Bob Stokes
A few years ago, the housing market had its own version of day traders: they went by the nickname "flippers."
They'd buy a run-down house in a hot market, fix it up and "flip" it for a profit in a few months or less. The flippers showed up in markets all over the country because prices everywhere were rising so quickly.
But the sub-prime mortgage crisis brought this to a screeching halt. Anyone who bought near the housing mania peak was left holding the bag -- and in the bag was a mortgage that today exceeds the value of the property.
Lesson learned? Apparently not. Flipping has simply morphed into something else -- namely, bulk buying.
As the greatest real-estate fire sale in the history of the United States rages on, the bulk buy is the dead hot deal of the moment. In some of the most foreclosure-ravaged parts of the country, it is almost as if the housing market has become the new big box store, with investors wiping out whole shelves at a time.
Reuters, March 1
An Illinois realtor says, "They aren't just buying one rental property...This is a frenzy. They are loading up."
This new breed of real estate speculators is counting on steady or higher rental income.
But read the reminiscences of renowned stock trader Gerald M. Loeb. He became vice-chairman of E.F. Hutton, and late in his life authored the classic book The Battle for Stock Market Profits (1971). Here's an excerpt.
I lived in New York City in 1929. Hotels of all kinds were then going up on every side. They were in deep financial trouble almost overnight. I paid $12,000 a year rental for my two-bedroom-and-living-room suite in the Savoy Plaza. A year later I paid $4,000 a year, and this rate prevailed for about ten years.
During the 30s, occupancy rates in many cases dropped to under 50 percent. Hotel equities were wiped out . . . Commercial rentals also dropped severely. I know of cases where landlords practically waived the rent entirely just to keep the space occupied. The hope was that when times improved the building owner would have a rent-paying tenant again.
If the rent dropped by two-thirds during the Great Depression -- at the Savoy Plaza in Manhattan, no less -- imagine the dramatic decline in rental costs elsewhere. As people lost their jobs in the early '30s, they couldn't afford the rent they used to pay.
Someone might reply "That was then, and this is now. The economy is improving. More people have been getting jobs. Housing prices are bottoming."
It's true that the latest jobless number (8.3 percent) is better than the previous month.
But is the economy and real estate market in a sustained uptrend?
In a Special Section titled An Impermanently High Plateau, the just-published March Financial Forecast says:
The downturn from 2008 is critically important, as it shows that after an almost unbroken 60-year climb, the contraction is underway. It surely has much further to go...
See WHY our latest Financial Forecast offers this analysis, by reading the Special Section for yourself, risk-free. In that section you'll find a chart which is nothing less than stunning in its naked truth!
Your risk-free read also includes a review of the sub-section "The Great Real Estate Debacle: Round II."
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Is This the Right Time to Invest in a House?
Fri, 17 Feb 2012 17:45:00by Bob Stokes
Are houses good investments?
As any homeowner knows, one unexpected repair can run into the thousands of dollars. Then there's the maintenance (and other costs) you do expect, which add up to a pretty penny by the end of a given year.
On the other hand, homeowners do get tax breaks. But even considering that, is a house or condominium a good investment?
A wealth manager and finance professor recently spoke to that question, and his conclusion may surprise you:
Examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it...an adjunct professor in personal finance at the University of California at Berkeley, found that, "100 percent of the time it was better to rent, rather than own.
...The reason is simple. While a home is the main repository of wealth for many Americans, it comes with numerous hefty expenses. The carrying costs — what's needed to hold and maintain the asset — range from property taxes and home insurance to emergency repairs and renovations.
Reuters, Feb. 16
This study supports what Robert Prechter has long said to subscribers. The November 2008 Elliott Wave Theorist put it in a nutshell:
...a home is a consumption item, not an investment item. Government laws goosing home purchasing through many privileged lending agencies and homeownership through tax breaks created the temporary, though prolonged, illusion that a home is an investment.
In fact, real home prices (factoring out inflation) stayed within a range for over a century until breaking out of that range in 1997. That's when the government and commercial lenders alike started lowering borrowing standards, and when potential buyers started thinking of homes as an investment. Please see the chart below:
In the January 2012 Theorist, Prechter cites another revealing study:
...real home prices don’t rise over the long term. Dr. Piet M.A. Eichholtz of the Limburg Institute of Financial Economics studied over 300 years of real home prices on the Herengracht, one of the earliest canals in the medieval city center of Amsterdam. Eichholtz’s data showed that real prices in the early 2000s were much the same as they were as early as 1740, over 2½ centuries earlier. Houses are just houses...They deteriorate with age and use. The idea that houses were an investment was absurd...
House prices today, in real terms, are right back in the range they inhabited for 200 years prior to 1997. No big deal net-net, right? Yet home buyers who got caught up in the mania have been ruined.
Even so, optimism appears to be returning on some fronts.
Bloomberg reports (2/16) that "Consumer confidence in the U.S. increased for a fourth straight week to reach the highest level in a year as more households believe the economy is improving" and that "Builders began work on more houses in January..." Moreover, CNNMoney reports (2/16) that "Buying a home is now more affordable than it has been in the last twenty years." As a result, whiffs of the old mania are back.
Mom and pop investors...are snapping up homes and condominiums to rent out all over the country...A typical plan? Buy cheap. Collect rents to cover costs. Cash out — one day — when home prices recover.
USAToday, Feb. 15
So is now the time to buy a house? Is the economy headed for a sustained upswing?
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Expensive Free Lunch in Real Estate: Two More Shoes to Drop
Tue, 31 Jan 2012 17:45:00by Bob Stokes
Mortgage rates are historically low; builders have cut the prices of new homes. Yet...
"Fewer people bought new homes in December. The decline made 2011 the worst year for new-homes sales on records dating back nearly half a century."
Washington Post, (1/26)
New home sales haven't been this slow since 1963.
It's tough for builders to compete with lower-priced resale homes. The Associated Press reports (1/26) that "foreclosures...represented 20 percent of all homes sold in the July-September period. Of course, that doesn't count resale homes that are not foreclosures.
On top of the poor sales, housing starts are historically low. Here's an excerpt from the latest Elliott Wave Theorist:
...housing starts have fallen so hard that they are back to the level of 1922. But wait. Three times as many people live in the U.S. today than lived here in 1922. So housing starts per capita are at nineteenth-century levels. You might ask how this happened.
Time and again, small cadres of bankers met with small cadres of Congressmen and made deals that resulted in the formation of the Federal Home Loan Banks (1932), the Federal Deposit Insurance Corporation (1933), Fannie Mae (1938), Ginnie Mae (1968) and Freddie Mac (1970). These government-sponsored companies were designed to make protected lenders rich and generate campaign contributions and highly paid 'consulting' jobs for politicians. How could they sell such blatant self-interest to the voters?
Easy: promise people a free lunch.
That "free lunch" has become very expensive -- costing many "The American Dream." Please take a look at the chart below:
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Even so, Marketwatch reports (1/17): "A measure of builder confidence in the market for newly built single-family homes rose in January to the highest point since June 2007..."
Homebuilders are more optimistic mainly because of the improved jobless numbers and rising consumer sentiment.
Even so, massive debt from the housing mania requires more deflating.
Will the wide swaths of vacant homes now visible in Detroit, Cleveland, Las Vegas and Florida become common elsewhere?
Robert Prechter "tells it like it is" in the January Elliott Wave Theorist. He lists 8 results of the housing bubble bursting, and 2 have yet to pass.
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Can The Fed Rebuild The US Housing Market?
Mon, 23 Jan 2012 17:30:00by Nico Isaac
As the leading US economists look ahead to the future, they see one glaring obstacle standing in the way to lasting recovery: the still, defunct real estate market.
And, according to many mainstream experts, there is one surefire way to turn the housing sector around: government stimulus, stimulus, and more stimulus. Here, we have the following January 19 Bloomberg headline:
The article goes on to write:
"Three Federal Reserve policy makers said the US government should try new ways to spur the housing market. Additional housing policy interventions can help boost growth."
There's just one problem: The comatose housing market and the U.S. economy as a whole have undergone more life-saving procedures -- organ transplants, cash transfusions, and countless rounds of Credit Pulmonary Resuscitation -- than ashen rock star Keith Richards. Here's a laundry list of said procedures between 2008 and 2011:
- President Barack Obama's initial $825 billion Economic Stimulus Package passed in January 2009
- The untold billions of dollars shelled out by central banks in their purchase of defaulted mortgage-backed securities
- A 2008-9 $8,000 to $15,000 tax credit for first-time home buyers -- deadline extended
- A slew of outrageous homebuilder incentives such as free pools, Caribbean vacations packages, and total coverage of closing costs
- The cheapest mortgage rates in decades
- And TEN reductions of the Federal Reserve's interest rate to a record low of .25% to 0%
Still the housing market remains unresponsive. A January 19 report revealed that starts of single-family homes just plunged to a new, all-time record low.
In the brand-new January 2012 Elliott Wave Theorist, EWI president Bob Prechter addresses the futility of the Fed's efforts to re-invigorate the housing market. Here, Bob presents the following chart of the S&P Case-Shiller Composite home price index and writes:
"The debt burden overhanging the housing market -- 87% of which was underwritten by government enterprises -- is keeping prices down. Even the Fed's massive inflationary policies; the huge increase in government debt, the 100% gain in the S&P stock index, and two-and-a-half years of economic recovery since 2009 have been unable to budge home prices."
In the new, January Elliott Wave Theorist, Bob Prechter goes on to show you the "more interesting, long-term picture" of REAL home prices (versus nominal ones) since the 1800's. Here, Bob shows you how "home prices in real terms are right back in the range they inhabited for 200 years prior to 1997" -- when the housing mania took off.
Prechter's January 2012 Theorist then shows you whether or not real estate is, once again, positioned for another spectacular take-off. You can have it on your sceeen in minutes via the special offer below.
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The Real Estate Crash: How to Survive and Prosper
Tue, 10 Jan 2012 17:15:00by Bob Stokes
Atlanta's tallest skyscraper appears to be a symbol of wealth.
Completed in 1992 at a reported cost of $150 million, the Bank of America Plaza stands 1040 feet tall and the top glows orange at night.
At the very peak of the real estate market in 2006, the Los Angeles firm BentleyForbes bought the Atlanta skyscraper for a reported $436 million.
The firm's owners probably had not read the New York Times bestseller Conquer the Crash (first published in 2002). This quote is from the book's second edition (p. 157):
"At the bottom, buy the...office building or business facility of your dreams for ten cents or less per dollar of its peak value."
It's fair to say that "peak value" is precisely what BentleyForbes created. Now it looks like the firm faces an outcome it did not expect:
"Bank of America Plaza, the tallest building in metro Atlanta, is a step closer to going back to its lender.
"A company that specializes in troubled loans is making preparations for a possible foreclosure..."
Atlanta Journal-Constitution (1/6)
When Conquer the Crash first published, real estate was red hot. The sentiment of some was "Get out of real estate? You've got to be kidding."
"We have caught some flak...for not piling on to [the real estate] mania and for warning that disaster was around the corner...Manias always look good on the left side; it's the right side that causes the problems, and, generally speaking, people who don't get out early don't get out at all."
The Elliott Wave Theorist, December 2005
Other office buildings in other cities now face low occupancy rates or foreclosure. Reuters reports that the U.S. office space vacancy rate hit its highest level in 16 years in the first quarter of 2010.
Yet, some economic analysts believe that the worst is behind us and better days are just ahead for the economy...
Our analysis draws a different conclusion. The facts and evidence we see suggests the economic downturn has more to go -- much more.
It's time to learn specific steps on how to financially protect yourself before the economy sinks even deeper into a deflationary depression.
Indeed, you can even position yourself to prosper in the months ahead. How?
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You can have instant access to the 8-Lesson free report by joining Club EWI. Membership is free and you'll be under no obligation after you join.Are Even Lower Prices Ahead for Single-Family Homes?
Fri, 11 Nov 2011 17:30:00by Bob Stokes
A long-time friend just finished making cosmetic improvement to his mother's home because she's selling it.
He proudly showed me each room, and I was impressed with his handy-man skills.
Then my friend told me the price his mother would be happy to get for the place. But then he said that her real estate agent wants to price it 25% above that amount for "wiggle room"!
I told him that "wiggling" too high means some potential buyers might not make an offer at all, and that an asking price closer to what his mother wants may be the best way to go. He nodded his head "yes," but said the agent wants to try selling at the higher price for three months. He told me he'd let me know when the house sells, so we'll see.
I couldn't help but wonder if that real estate agent is still living in the days before the housing bubble burst.
My newspaper recently ran an article about a local high-profile person who lost his job. They quoted him saying he plans to start over as a real estate agent.
This brought to mind some other people I knew, who left their first profession a few years ago to pursue real estate. The fellow quoted in the paper apparently still had those days in mind.
In real estate -- as in stocks -- the psychology of big money outlasts the opportunity. In the case of real estate, it's been five long years since prices topped.
And no doubt, I'm sure there are many sellers who wait hopefully for the real estate market to bounce back. But they may be waiting longer than they anticipate:
"According to Fiserv...a financial analytics company, home values are expected to fall another 3.6% by next June, pushing them to a new low of 35% below the peak reached in early 2006 and marking a triple dip in prices."
CNNMoney, October 31
The same article goes on to say that more foreclosures and sustained high unemployment will work against the housing market.
And real estate website Zillow just reported third quarter numbers: 28.6% of single family homes have negative equity. That's up from the second quarter.
Will more home owners slip into negative equity in the months and years ahead? Well, here's what the second edition of Conquer the Crash stated (p. 157):
"At the bottom, buy the home...of your dreams for ten cents or less per dollar of its peak value."
As you know, real estate values have already taken a major tumble in many locales; that decline is part of a larger deflationary trend.
You can read our latest analysis in the "Economy and Deflation" section of our recently published November Financial Forecast. Moreover, get our latest thinking on stocks, gold and silver, bonds, the U.S. dollar and more.
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Vultures Circle the US Housing Market, Again
Tue, 27 Sep 2011 16:00:00by Nico Isaac
On site of the gruesome real estate crash, financial paramedics have tried every resuscitating trick in the book to revive their dying patient: Trillions of dollars in government bailouts; repeated first-time buyer tax breaks; and record low mortgage rates.
Yet, the US housing market is showing no gain activity. To wit: A September 26 Commerce Department report revealed that new home sales are on pace for their worst year ever -- since the government began keeping records a half century ago. What's more, writes one business blogger:
"The vast majority of [economists] completely missed the $8 Trillion housing bubble in the United States." (Truthdig)
In the small minority, however, Elliott Wave International president Bob Prechter saw the dry ice patches ahead on the road of the racing housing market long before they were visible to the masses. In his 2002 New York Times business bestseller “Conquer the Crash,” Bob wrote:
“What screams ‘bubble,’ giant historic bubble, in real estate is the system-wide extension of massive amounts of credit to finance property purchases… When prices begin to fall, lenders will experience a rising number of defaults on the mortgages they hold.”
Three years later, the animal spirits surrounding the U.S. housing bull had become stronger than the animal itself. Our analysts saw the potential for a serious breakdown, and the July 2005 Elliott Wave Financial Forecast issued this unbelievable -- at the time -- warning:
"There's no mistaking it now. The extreme psychology has taken up residence in real estate. Now is the most dangerous time to be on board the home bandwagon. There’s no mistaking who the Enrons of the bust phase will be. They will be the firms now peddling adjustable-rate, no interest/nothing down and assorted other types of subprime mortgages.”
In 2010-2011, after enduring five agonizing years of a subprime mortgage implosion and real estate deflation, the bullish mainstream chorus rebanded and declared an end to the recession and start of a US housing recovery.
Yet the April 2011 Elliott Wave Financial Forecast our analysts revealed that despite the economic rebound, US Median Home Prices showed a strong "reawakening" of downside pressure:
"The move back through the low of late 2008 reveals that another dramatic price deflation is already unfolding."
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Now in its expanded 2nd edition, Bob Prechter's "Conquer the Crash" has an entire chapter devoted to whether real estate will be a safe investment in coming years.
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