May 19, 2013

Emotion, Speculation, And Hopes For Increased Values

Readers suggested a topic on investing. “Can anyone suggest a good reason why gold drops by over 1% a day, ALMOST EVERY DAY? Apparently gold and the stock and housing markets have gone their separate ways. And gold is dangerously close to the 52-week low of $1,322/oz. If it breaches that, what is the next resistance level? Can bonds do terribly if everyone and his dog knows they are going to do terribly? And where would you put your money instead?”

“Good investments: Stocks, Houses, Dollars under the mattress. Bad investments: Bonds, Gold, Bitcoin. Does that about sum up the status quo investing environment?”

A reply, “REITS.”

One said, “They are buying dividend stocks and have run them up. Way up.”

The Toronto Star in Canada. “Adam Frank and his girlfriend MaryAnne, both 29, knew they wouldn’t become homeowners overnight. The two were realistic and grounded in their approach. The couple knew buying a house in Toronto could put them over the edge. When the time came to stop renting and finally buy their first home, the couple opted for a condo.”

“‘We knew what the costs were going to be and we were comfortable with them,’ says Frank. ‘We were renting for three years. We just both knew it was time to invest.’”

Investing in a condo is appealing as these properties generally come with a lower price tag. Royal LePage reports the price of the average condo in Toronto was $356,865. Jennifer Tomic from Toronto knows home ownership is for her. The thirty-seven-year-old is eager stop renting and get into the market. She’s been approved for a mortgage, but doesn’t want a condo. Because of high costs, she’s holding out.”

“‘Trying to find an affordable house on your own is really hard. I’ve tried to recruit my friends to go in on a mortgage with me,’ Tomic says. ‘It’s a business transaction, but trying to find someone willing to invest is hard. I just don’t feel like I have enough money.’”

The Signal in California. “One of my coworkers found himself working for KB Homes during the middle of the residential real estate boom, putting together the analyses or so-called ‘land packages’ for the acquisition of property for the building of tract homes. This amounted to a painstaking and complex process where the analysts would take the price of the land, gross it up for the estimated costs of grading, infrastructure and fees, factor in the costs of tract building based on design, and then add in KB’s desired profit margin to come up with a price for the eventual sale of the proposed homes.”

“The company hit some type of internal crisis in late 2003. Based upon its cost estimates, the analysts found that no family earning the mean income in Los Angeles County could afford one of their homes. So how did KB keep selling homes, in fact hitting a sales record in the first quarter of 2006? Everyone lucid knows the answer.”

“Investors, hungry for yield in an era of what seemed extremely low interest rates, gobbled up subprime, Alt A and other exotic mortgage products, putting families in homes they could not possibly afford when teaser interest rates reset, and leaving them with little choice when the values of these homes would not support conventional mortgages after the coming bust.”

“Add to this rampant speculation the scale of which no one probably captured and the nation cooked up a ticking time bomb. My favorite anecdote relates to a coworker who learned that the lady he hired from time to time to deep clean his second home in Palm Desert once personally owned (and lost) five residences in that area.”

“The subsequent bust and the required de-leveraging caused the Great Recession that began in 2007, and ‘ended’ about two years later.”

“Have we turned the proverbial corner? Recent headlines in the Mighty Signal quote real estate industry folks absolutely giddy and nearly giggly with the state of the market in Santa Clarita, with a dearth of homes available for sale and (again anecdotal) tales of hungry buyers consulting with real estate agents so that homes have multiple offers the minute they hit the MLS.”

“In about 2005 a community columnist/financial planner wrote that houses cost too much in the area, and, indeed, the nation. He based this on something called the ‘rental equilibrium’ rule, explained thusly: Like KB homes, an investor will pay a certain price for a residence if they can expect to collect rental income that covers the cost of carrying that home and allows a reasonable profit. Once the price of homes exceeds this equilibrium, the reasonable people abandon the market, leaving only those driven by emotion, speculation, and hopes for increased values.”

“Perhaps the recent signs of life show that people can finally make a rational economic decision buying rather than renting, and if one can maintain prices within a certain range more sustainable factors can drive the housing market forward, like people moving from rental to home ownership and younger people forming their own households, something also delayed by the Great Recession. After five long years of suffering, anything would seem like a boom!”

Bits Bucket for May 19, 2013

Post off-topic ideas, links, and Craigslist finds here.