Tulip bulbs, .com stocks, south sea, 1987, ...
I've found it helpful to understand this current housing bubble by seeing its similarities with past bubbles... Human behavior, being what it is, is extremely predictable. I suggest this excellent book "Manias, Panics, and Crashes: A History of Financial Crises" which I just finished
But this time, since it's so telegraphed and obvious (thus little risk if you understand where it's going), I'd recommend a few obvious things for my readers to consider doing today, if you haven't already
1) Sell your house. Seriously. Now. And then rent something even nicer for less than you're paying today (without having to suffer the loss)
2) Short all homebuilding, mortgage lender, PMI insurance and real estate stocks.
3) Sell everything except oil stocks
4) Enjoy
November 08, 2005
It's time to develop your understanding of crashes
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8 comments:
Skyler, seriously, read the book, look at the charts, read this blog
The last part of any bubble is the final flame out. An unbelievable rise in _____. This happens because of "panic buying", where everyone seems to be making money (except the last in), so the last in jumps in (at any price). At this point, the insiders and original investors are selling, leaving the last in and unsophisticated holding the bag.
Seriously, as a kind human to another, read, learn, understand, react and don't get hurt, please. It's over. The bubble has popped. And it's going to be a long, painful ride down from here (for most)
Skyler, only time will tell. And trust me, it's been an AMAZING ride - I'm sad to see it end. But now that it has (just look at the TOL release today, or the last two monthly declines in US median home price) I'm just saying it's time to switch gears and go the opposite way now
Don't you wish you had shorted the NASDAQ after the peak? All good things must end. It's human nature.
Best of luck
Housing bubble is a product of the "mass mind".
This idea is discussed by 'Metaphysics Treatise', (The title of Aristotle's treatise on the ultimate cause and underlying nature of things).
The main point is that facts are ignored and put aside because of the emotions and collective feelings of a large group of people. In this housing bubble case communication is enhansed by the media and internet. So the buy, buy, buy, feeling for a great gain pushes the market.
Yes, there is a need for now housing, Ug Ug is it necessary to have a 5000 square foot home with recreation areas for 50 people.
Sadly and inevitably those who bought above their ability to maintain payments will be hit hard.
I don't have the statistics, but I wonder when will all of these ARM loans will have an increase in monthly payments. Seems to me soon the bulk of them will be hit hard. So. Be. It. 41cadillac
Real Estate may be over priced in some markets. The sticker shock of the DC market sent me buying in Baltimore. 1 1/2 years later DC is starting to fall in price. But when you discuss the bubble you are really discussing the mark up on the house it self. It simply doesn't cost $800,000 more to build a house in DC than it does in Baltimore. True the land will cost $300,000 more. But that still leads huge margins for the builders. You say sell everything but oil. Apparently you can read the commodity nature of oil makes it easier for you to conclude if the oil business made money at $22 a barrel they must be making a fortune now. But what about the home builder? If they were able to sell houses for $100,000 and make a profit. Why do you believe they are a bad investment if houses drop to just twice that number? It makes no sense.
I just bought TOL Brothers on the preception that a realestate slump will kill them. Got in after the drop to $34 over night. I suspect this drum beating you folks have been doing for 3 years will create an instant proft for me, or a long term gain. Either way. You are misinturpeting what happens to the holders of the commodity (houses) and what happens to the producers of the commodity during a time of huge profit margins not even seen in the oil industry.
enjoy your TOL stock as it drops another 50%. See CSCO etc for what happens to bubble stocks, same charts. Don't try to catch falling knives. What will kill TOL and the other builders is comparative earnings - earn X when the market is silly crazy, earn 10% of X or a loss when the market is rational, and the comparison ("TOL reports earnings down 54%" etc will kill the stock of a company no longer growing, regardless of whether they can make (and they will) money building houses.
Another thing to consider is the unwinding of their assets as nobody will want to build and buy for a few years
Housing Panic,
Housing stocks have been a great investment. 2 years ago i heard your argument and tried explaining then that the producer of the commodity will still make great money. Like you, I was told by these people of housing decline in their market. That is not the point.
Let me try another approach.
Insurance companies will only insure up say $90,000 on a row house in the trendy Fells Point neighborhood of Baltimore. Yet these houses sell for $500,000. Their logic is that not matter what happens to the house it will only cost $90,000 to demo the burnt out building and replace it.
In other words real estate in Fells point can drop the fear 20%. Yet the home builder can come in and build for $90,000 on a lot that cost $50,000 and still sell at a large profit.
TOL brothers sighted a drop in forcasted sales. Yet we are still talking about a company that will have a single digit PE.
You are confusing the loses indivduals have buying a property at a blotted price with the DECREASE in earning of a company as it is force to sell at only a somewhat blotted price.
Now you may know of a better stock to own than the home builders. But I beleive you are playing with fire shorting a single digit PE company.
This is just my opinion. If TOL hit $25, then you can say "I told you so." If TOL and the other home builders rise with both earnings and the realization that preception held them down. Those that followed you will be out of their home and living in a rental property and lost all of their money because they were force to cover a bad short.
I never said houses were not over price in the short term. I just believe the solution is to put yourself in the position of being able to pay off your mortgage in 15 years or less. Selling your house, renting, and shorting stocks with your nest egg. Is insanity
I completed step one, two, and three. I made step two easier: buy SRPIX (short real estate mutual fund).
5) Invest in foreign currencies and gold to hedge against USD during the upcoming recession.
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