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For the last two weeks, I’ve written about the economic comings and goings (mainly goings) of the Montana economy, and while I received a small mountain of positive comments about those two articles, too much of anything is not good thing.
It is about this time each year that the Montana winters get to me, and my body starts to crave some sunshine. My solution was to jump on an airplane and head to Jupiter, Florida, to meet with Martin Weiss and the rest of his global research team … and get some sunshine.
What Martin and I talked about is an exciting subject for a future issue, but what I wanted to write to you about today was one of the most dangerous liars that I had the misfortune of sitting next to during my three-connection flight from Montana to Florida.
The Perpetually Optimistic
Real Estate Agent
I generally try to keep to myself when I fly because I usually have work to do, and it seems like I always end up sitting next to a either a born-again life insurance salesman or a grandmother who never stops talking.
This time, I sat next to a Montana real estate agent who tried to tell anyone that would listen that now was the time to buy real estate. His pitch was pretty sophomoric: Mortgage rates are low … Obama’s trillion-dollar stimulus plan will save the day … home prices have dropped too far … and today is the best buying opportunity of our lifetime.
As you know, real estate agents don’t get paid if they don’t sell, so I’m sure that same gotta-buy-today story is being repeated by thousands of commission-hungry real estate agents all around the country.
I’m not cutting this eternally optimistic real estate agent any slack either because being in the business doesn’t give him an excuse for being stupid.
In fact, his familiarity should help him see how ugly things really are, for example:
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| The March 31 expiration of the Freddie Mac/Fannie Mae foreclosure moratorium is the beginning of the next foreclosure wave. |
- A foreclosure wave is about to surge. Any realtor with a brain knows that the Freddie Mac and Fannie Mae moratorium on foreclosure-evictions established in November expired on March 31. You’re going to see five months of pent up foreclosures hit the market in the next few months.
- Home prices continue to plummet. And every real estate agent must know that the S&P Case-Shiller 20-city housing price index has dropped for 30 months in a row and the most recent numbers showed the largest drop in history by falling 2.8 percent in just the last 30 days on top of a 19 percent drop in the last 12 months.
Not everybody in the real estate business is that clueless. For example, a bank analyst at Caylon Securities issued a loud warning earlier this week when he predicted that the percentage of loans that American banks will need to write off in the next few years will exceed levels during the Great Depression.
Here is how he described what’s coming:
“The seven deadly sins of banking include greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators.”
To Everything There Is A Season
And Now Is The Season To Sell
Okay, maybe my real estate seat mate wasn’t a liar, but he couldn’t be more wrong. This is the time to be selling — not buying — real estate. I have put my real estate money exactly where my big mouth is, too. I started selling my real estate holdings in November 2006 and got rid of my last piece last August.
I am positive that each property I dumped is worth SUBSTANTIALLY less today than it was when I liquidated it. But I expect all of them to get even cheaper. Montana real estate, by the way, has been one of the least hammered markets in the country.
Maybe you won’t or can’t sell your real estate. But there are other ways to protect against falling real estate prices. Here are three to consider.
Real Estate Hedge #1: A new exchange-traded fund or ETF is scheduled for launch in a few weeks; the MacroShares’ Major Metro Housing ETF (UMM).
This ETF will be tied to the Standard & Poor’s Case-Shiller Composite 10 Home Price index (Boston, Chicago, Denver, Los Vegas, Los Angeles, Miami, New York, San Diego, San Francisco, Washington D.C.) and comes in both ‘up’ and ‘down’ shares.
Real Estate Hedge #2: If the idea of betting against real estate doesn’t appeal to you, another option would be to invest in real estate markets with stronger fundamentals. The one market that I would expect to rebound the fastest is China. Why? While the United States is mired in a recession that should last for years, the Chinese economy is still growing at a very healthy 6.5 percent pace.
Two Chinese real estate stocks are traded on the NYSE: E-House (EJ) the Century 21 of China and Claymore/Alphashares China Real Estate (TAO) exchange traded fund.
Real Estate Hedge #3: If you really believe that real estate prices are headed lower and are willing to take a lot of risk, you might consider the ProShares UltraShort Real Estate ETF (SRS). This ETF is designed to move twice (200 percent) the inverse direction of the Dow Jones U.S. Real Estate Index. This ETF isn’t for the faint of heart because it has traded from $37 to $295 in the last twelve months.
But hey, maybe you agree with the real estate agent and think this is the time to buy, buy, buy. You won’t have any problem finding a real estate agent to tell you how smart you are and jump for joy at the prospects of something he hasn’t seen for a long, long time — a real estate commission check.
Best Wishes,
Tony
About Uncommon Wisdom
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Uncommon Wisdom (UWD) is published by Weiss Research, Inc. and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in UWD, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in UWD are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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{ 1 comment… read it below or add one }
Tony,
This is the best statement of truth about real estate that I have read in a long time. As a former 20-year real estate broker/owner I recognize the long-term systemic flaw in the real estate industry, actually TWO flaws: (a) almost all brokers represent the seller, and (b) as you stated, virtually all brokers work on commission only.
The combination of these two facts (conveniently not discussed by the National Association of Realtors, although in their radio ads on NPR they do state something to the effect that they work for sellers!) is deadly for the market and for buyers, most of whom haven’t a clue about how the real estate “system” works. Most brokers pale at the thought of a falling market like this for the simple reason that their paychecks – if they can find a sucker (er…buyer) are shrinking faster than the polar ice cap.
I also live in Western Montana, and did you know that there is only ONE EBB (Exclusive Buyer Broker) in the entire state of Montana?
Elsewhere, EBB’s act as a reality check for some buyers of real estate in a declining market. But not in Montana! The Cheerleaders are out in full force – that is, those who are still in business. The old saying that everything starts in California also applies. There is no immunity to falling prices guaranteed by Montana waterfront property any more than Florida waterfront! Californians were at the forefront of the Montana price boom, and they are leading the way back down.
You were smart to sell when you did. The only way to revive the market is to get prices down to realistic levels; in places where prices have fallen substantially, there is a market. Buyers are buying. But otherwise, it’s going to be a very long summer and beyond for most Sellers and their hungry Brokers.