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EScroogeJr (< 20)

housing to outperform in 2008

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January 22, 2008 – Comments (10)

I'm still processing information for the last two weeks, but one thing is already clear to me: 2008 will be the year of buyer capitulation. When the interest on a 15-year mortgage falls below the official rate of inflation, even the most stubborn permabear will run to the bank and fill out the application. And on the supply side, the inventory will simply vanish to be relisted later at new asking prices: with the ARMs resetting to mere 5%-5.5% - below the current fixed rates, and that not counting the future Fed cuts, the Casey Serins of this world will have the last laugh.

10 Comments – Post Your Own

#1) On January 22, 2008 at 5:11 PM, floridabuilder2 (99.24) wrote:

housing to outperform the spy?  considering since 1/1 most builder stocks in the top tier are easily outperforming the SPY, you already have about a 20 percentage point buffer

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#2) On January 22, 2008 at 5:23 PM, abitare (38.04) wrote:

Your vision is not clear to me. The discount to rent is 40-50% and real estate prices have irrationally doubled in the last five years.

What is clear is: the dollar is in free fall, oil, gold, silver have doubled, the US is in a long war, most homes are going down in value, 210 mortgage banks have gone bankrupt and Helicopter Ben is in a panic. 

Also you have -1500 points for a reason: your predictions

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#3) On January 22, 2008 at 6:17 PM, EScroogeJr (< 20) wrote:

floridabuilder,

A good point, I'm still writing as if today was Jan 1 :)

I have a practical question, though. While I agree with your top-tier analysis and have my real dollars in the top 5 builders, I suspect that the best short-term (6-12 months) value should come from builders in the middle tier, the ones that are perceived as being sufficiently close to bancruptcy and yet are sufficiently solid to have 80% chance of survival. Do you agree with that statement, and if yes, which builders would in your opinion strike the right balance? For example, should we say that LEN is too far from bancruptcy, HOV too close, and MTH right in the middle? 

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#4) On January 22, 2008 at 6:48 PM, EScroogeJr (< 20) wrote:

abitarecatania,

while I don't have a crystal ball, I think I can easily refute all of your points. Dollar in free fall? Only relative to the Euro and other such currencies which stand on their last legs. Oil has doubled? Look at the solar trends, extrapolate for 10 years, and what do you get in 2018? Gold and silver? How is that relevant? A long war? Yes, it's a drag on the economy, but it's very temporary. The new president will run away from Irak right after being inaugurated, currently, Bush's ego is the only thing keeping us there. Homes going down? So they did last year when ARMs were resetting at 7%.  This year, the same ARMs will be resetting at 5.25%. Don't you see the difference? 210 folded banks? So what? We have many others waiting to get their business. The Helicopter panicking? Maybe, but its missions are still brutally efficient. Thus, today's mission has effectively removed at least 200000 foreclosed homes from the market. Another such fit of panic on the Helicopter's part, and it will be the buyers' turn to panic.

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#5) On January 22, 2008 at 6:53 PM, dwot (55.00) wrote:

No way...

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#6) On January 22, 2008 at 7:21 PM, abitare (38.04) wrote:

I am to tired to type. Let billionaire Jim Rogers explain it to me:

 

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#7) On January 23, 2008 at 2:59 AM, DemonDoug (74.00) wrote:

"When the interest on a 15-year mortgage falls below the official rate of inflation, even the most stubborn permabear will run to the bank and fill out the application."

Can you please explain to me why this is?  What fundamental factors would be causing this?  Would it be all the people that are making money on appreciating real est... oh, hmmm, no.  Would it be all those people with new job... oh, no unemployment is going up.  Would it be all those mortgage brokers laid off and making unemploym... hmmm, no, they wouldn't be able to afford a home.  I'm sick and tired of you echoing the NAR (are you part of the NAR?  are you david lereah?  are you lawrence yun?), with absolutely no fundamental reasons behind your reasoning.

 And btw I'll take that bet, if XHB outperforms SPY from 1/1 to 12/31, remind me and I'll write a contratulatory blog.  Real estate was a good investment for about 5 years in the mid 1990s, and then was arguably fairly valued, and since 2002-3 has been significantly overvalued, and continues to remain overvalued based on historic metrics of median income to median price, dow/housing, gold/housing, inflation adjusted dollar/housing... these fundamentals are not going to go away.  The Fed rate cuts will allow for a slower decline in asset prices, but who in their right mind would buy an overvalued asset that is declining in a recessionary environment?

So those are a bunch of fundamental reasons for the bear side of housing.  What are the bull arguments again?  (Besides the "interest rates will spur people to buy" - okay if that's true then why?  Just because someone offers me a credit card with a lower rate doesn't mean I'll take it, or a lower credit price on a car, or if I am offered a lower percent on a margin account it doesn't mean i'll use it...) 

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#8) On January 23, 2008 at 9:56 AM, EScroogeJr (< 20) wrote:

DemonDoug,

Very simple. Because inflation wipes out savers and rewards those who own tangible objects like houses, stocks, cars, gold, canned food, etc. In an inflationary environment, you want to be in debt, not to hold a mattress full of cash. And inflation we'll have because Bernanke knows that lots of cheap credit is the only way out of this trouble...when the land under the house costs more than bricks and mortar, you've crossed the line of no return. Bernanke knows that any tightening of credit will cause the whole thing to fall apart. He will keep lowering rates gradually all the way to zero and then some.

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#9) On January 23, 2008 at 12:06 PM, saunafool (98.68) wrote:

I'm with dwot. No way.

I'll be more specific. No way.

ARMs will not be resetting to 5.5%. A typical ARM sets to Prime Rate + 100 basis points (or more).

(According to Wikipedia: The Prime Rate is used often as an index in calculating rate changes to adjustable rate mortgages (ARM) and other variable rate short term loans.)

The Prime Rate is currently 6.5%. To get ARMs to reset to 5.5%, the Fed has to cut 200 more basis points.

No way. Way too much risk of out of control 70's style inflation if they go that loose with monetary policy. Inflation is already higher than Bernanke's stated goal. Sure, he might cave to Wall Street again, but he does so at great peril.

I agree with you on one point, no one in power gives a damn about the responsible people who save their money. However, that doesn't mean anyone will have any appetite for overpriced homes that are falling in value.

I'll say it again: inflation at the consumer level, deflation in housing and stocks. Buy gold. 

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#10) On January 23, 2008 at 12:44 PM, EScroogeJr (< 20) wrote:

And what makes you think that Bernanke hates inflation? Do you imagine that Bernanke or the people he plays golf with keep their life savings on a 2.5% interest-earning savings account and will have to go begging if nominal wages and prices triple and then quadruple? I am not convinced :):):)

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