Housing Slowdown Means BOOMTIME for Stocks
Tom Jandt
April 16, 2007
I hate to be the type of person to say, "I told you so...", but in light of recent economic and market related announcements, as it relates to the real estate market beginning it's plunge and the stock market hitting new highs, I guess I'm going to have to. No, I'm not a psychic and I don't have a Crystal Ball. No tricks or special effects of smoke and mirrors using "statistical" figures to hide the true facts of the market. I'll leave such trickery and fraud to the real estate professionals, home builders and mortgage companies that have been trying to keep this party barge of fiscal prosperity afloat. Rather than listening to the "talking heads" on Wall Street and by ignoring my real estate agent, I was able to read the "data and statistics" for exactly what they were and was able to come up with an obvious outcome. I accurately predicted the current crash in the housing market. Oh, it's not "crashing" yet??? Hang in there, you'll see.
You will notice that just over a year ago, on April 1, 2006, I published an article called, "Investment Fashion - Stocks are In, Real Estate is OUT!" on www.americanchronicle.com. This particular article was actually written months before, but I had just gotten around to publishing it when I had finished another article titled, "Adjustable Rate Mortgages - Is it Doomsday for American Real Estate?". Since they both related directly to each other, I posted them up together. Now, admittedly, these titles were fairly blunt, crude and to the point...but that was my intention. Hopefully you had a chance to read it and began an aggressive migration to "liquid", equity based assets, or at least started the transition from one asset class to another. I began re-entering the stock market and recommending my clients do the same aggressively in March of 2003, just before the IRAQ War began. Fortunately, the stock market is now at new historic highs on the Dow Jones and the rest of the indices have moved up nicely while real estate values are beginning to decline. In some areas, home values may not be dropping yet, but they are sitting on the market for months and months without offers. Eventually, they'll have to lower their prices to sell and this will be the beginning of the "devaluation snowball" and will market the beginning of it's descent. This downward cycle in real estate will favor stocks and mutual funds greatly, so the transfer of wealth to equity investors from real estate investors is fully underway now. So far my forecast has been fairly accurate and I am tracking it closely day by day, I encourage you to check back soon to follow these trends with me.
Now, I'm not perfect, not even close. I have had to take losses at times and have made a couple of bad investments over the years like everyone else. My timing isn't always exact and my predictions don't always come true. In fact, I should disclose that I've actually been advising my clients against any new real estate investment purchases and have been urging them to increase their investment exposure to the stock market since late 2004, so I was about 1 year early. If I hadn't been offering loans to my clients since 2002 to generate business income while I was sitting on the sidelines from the stock market from June of 2000 until March of 2003, I probably never would have even noticed this negative housing trend developing so early. Through my lending experience, and after 3 years of financial prosperity from originating loans, I began to recognize the developing trend that was of tremendous concern. Although in 2003 my stock investments began to flourish, my clients were reluctant to invest in equities proportionate to their risk exposure in real estate assets. Similar to the stock market in the 90's, I began noticing many of my clients and their family, friends and business associates were beginning to think he/she was a "professional" real estate investor. They began to go to these real estate investment seminars on how to get rich quick, then would buy the Do It Yourself Kits for real estate income investing. I would get more loans than I could efficiently process coming in by my clients and their referrals, sometimes two or three at a time PER CLIENT!
These valued clients were getting in way over their heads and I became extremely concerned. (This was when I began writing articles on this subject.) The most alarming trend was that most of them wanted to do 100% financing, or as close to it as possible. Of greater concern was that many of these investors wanted to finance through an ARM with "negative amortization", which means they would only have a "minimum" 1% or 2% minimum monthly payment, but that the difference in the actual fully amortized rate and the minimum payment would be added to the loan amount. This is a great loan product as rates rise because they can make a profit with very little expense through the use of the low payment and increased value. "Net income" would be negative, but the capital gains would exceed the increase in loan amount if the market continued to climb.
Unforunately, very few real estate investors using these loans have accounted for a "decline" in real estate, and those whom did account for this and still purchased an investment property with this type of financing is probably not qualified for even making these financial decisions in the first place. A decline in real estate values would mean that not only would the value of the home decline, but that the amount owed on the property would increase, creating a "negative equity" situation. Many of today's recent real estate investors are just learning what this means first hand. In laymen's terms, this means that if you bought a home using this type of loan product, you would now have to write a check to your mortgage company just to sell your house!
Folks, buckle up...it's going to get much worse before it gets better. It's always humorous to hear people talk about how "You can never go wrong buying good real estate". Wow!!! I bet alot of people were saying that about buying Microsoft, Dell, Enron or Yahoo when they were trading at their all time highs. What goes up, must come down folks.
Stocks, real estate, commodities and even currencies have a "cycle" that they follow based on political and economic factors. Many of these asset classes have an inverse relationship to the other, meaning that when one is doing well, the other is not. That is why the decline in real estate values is good for the stock market and why the stock market has hit new highs in recent months while real estate is beginning it's decline. You can predict the new trends by following government policies and economic policies globally. For me, this trend was easy to spot as Alan Greenspan, the Federal Reserve Chairman, was publicly noting that there was "froth" in the real estate market a couple of years ago. Rate hikes began and that was the sign that the government wanted to slow down the real estate engine and shift economic prosperity to Wall Street. As each hike was made, the "business cycle" was shifting. Now, mortgage companies are going bankrupt and home builders are struggling to meet expectations and are practically giving homes away with rebates and perks. These cycles are not quick and don't reverse quickly, so count on the real estate market languishing and possibly crashing over the next 3 years while the stock market hits all time highs.
America is built on the "wealth creation" model, which means that in order for us to consume our way to maintain a dominant global economic position, our population must create disposable income through the creation of wealth so that we can buy, buy, buy consumer goods. This wealth is created through investing, because the average worker isn't going to have a huge increase in income. Most people get a big boost to their spending budgets through wealth creation - buying a home, having it increase in value, then taking cash out, or buyings stocks, having them run up and selling them for a big profit. It doesn't matter to our government or economy whom has the wealth and whether it shifts from die hard equity investors to die hard real estate investors. All they care about is making sure someone is making money somewhere and that they keep spending.
Follow the trends and move your money frequently from sector to sector as each rotation occurs. Do not buy and hold, this strategy is for past generations and true wealth will be created by the active and astute investor, not the herd mentality. If the media is touting an investment sector, it's probably too late to get in. When they are bashing a sector, begin to watch for value...it's not far off.
In closing, I want all readers to understand that my business earns income from both equity markets and the real estate industry. There is no benefit to me, one way or the other. I recommend that all of my investors maintain a "balance" in their portfolio. It's my 50/50 Policy. If you have $1,000,000 in net real estate equity, you should have $1,000,000 in cash or cash equivalents, which means CDs, Treasuries, Notes, Stocks, etc. I have no benefit or conflict of interest here. I am a huge proponent of owning real estate when it makes financial sense. I merely want to spare you all from the great mistake of losing your nest egg due to becoming fooled by your seminar scam artist promising riches in real estate through foolish leverage and false hopes of eternal prosperity in any one asset class.
Happy Investing!
You will notice that just over a year ago, on April 1, 2006, I published an article called, "Investment Fashion - Stocks are In, Real Estate is OUT!" on www.americanchronicle.com. This particular article was actually written months before, but I had just gotten around to publishing it when I had finished another article titled, "Adjustable Rate Mortgages - Is it Doomsday for American Real Estate?". Since they both related directly to each other, I posted them up together. Now, admittedly, these titles were fairly blunt, crude and to the point...but that was my intention. Hopefully you had a chance to read it and began an aggressive migration to "liquid", equity based assets, or at least started the transition from one asset class to another. I began re-entering the stock market and recommending my clients do the same aggressively in March of 2003, just before the IRAQ War began. Fortunately, the stock market is now at new historic highs on the Dow Jones and the rest of the indices have moved up nicely while real estate values are beginning to decline. In some areas, home values may not be dropping yet, but they are sitting on the market for months and months without offers. Eventually, they'll have to lower their prices to sell and this will be the beginning of the "devaluation snowball" and will market the beginning of it's descent. This downward cycle in real estate will favor stocks and mutual funds greatly, so the transfer of wealth to equity investors from real estate investors is fully underway now. So far my forecast has been fairly accurate and I am tracking it closely day by day, I encourage you to check back soon to follow these trends with me.
Now, I'm not perfect, not even close. I have had to take losses at times and have made a couple of bad investments over the years like everyone else. My timing isn't always exact and my predictions don't always come true. In fact, I should disclose that I've actually been advising my clients against any new real estate investment purchases and have been urging them to increase their investment exposure to the stock market since late 2004, so I was about 1 year early. If I hadn't been offering loans to my clients since 2002 to generate business income while I was sitting on the sidelines from the stock market from June of 2000 until March of 2003, I probably never would have even noticed this negative housing trend developing so early. Through my lending experience, and after 3 years of financial prosperity from originating loans, I began to recognize the developing trend that was of tremendous concern. Although in 2003 my stock investments began to flourish, my clients were reluctant to invest in equities proportionate to their risk exposure in real estate assets. Similar to the stock market in the 90's, I began noticing many of my clients and their family, friends and business associates were beginning to think he/she was a "professional" real estate investor. They began to go to these real estate investment seminars on how to get rich quick, then would buy the Do It Yourself Kits for real estate income investing. I would get more loans than I could efficiently process coming in by my clients and their referrals, sometimes two or three at a time PER CLIENT!
These valued clients were getting in way over their heads and I became extremely concerned. (This was when I began writing articles on this subject.) The most alarming trend was that most of them wanted to do 100% financing, or as close to it as possible. Of greater concern was that many of these investors wanted to finance through an ARM with "negative amortization", which means they would only have a "minimum" 1% or 2% minimum monthly payment, but that the difference in the actual fully amortized rate and the minimum payment would be added to the loan amount. This is a great loan product as rates rise because they can make a profit with very little expense through the use of the low payment and increased value. "Net income" would be negative, but the capital gains would exceed the increase in loan amount if the market continued to climb.
Unforunately, very few real estate investors using these loans have accounted for a "decline" in real estate, and those whom did account for this and still purchased an investment property with this type of financing is probably not qualified for even making these financial decisions in the first place. A decline in real estate values would mean that not only would the value of the home decline, but that the amount owed on the property would increase, creating a "negative equity" situation. Many of today's recent real estate investors are just learning what this means first hand. In laymen's terms, this means that if you bought a home using this type of loan product, you would now have to write a check to your mortgage company just to sell your house!
Folks, buckle up...it's going to get much worse before it gets better. It's always humorous to hear people talk about how "You can never go wrong buying good real estate". Wow!!! I bet alot of people were saying that about buying Microsoft, Dell, Enron or Yahoo when they were trading at their all time highs. What goes up, must come down folks.
Stocks, real estate, commodities and even currencies have a "cycle" that they follow based on political and economic factors. Many of these asset classes have an inverse relationship to the other, meaning that when one is doing well, the other is not. That is why the decline in real estate values is good for the stock market and why the stock market has hit new highs in recent months while real estate is beginning it's decline. You can predict the new trends by following government policies and economic policies globally. For me, this trend was easy to spot as Alan Greenspan, the Federal Reserve Chairman, was publicly noting that there was "froth" in the real estate market a couple of years ago. Rate hikes began and that was the sign that the government wanted to slow down the real estate engine and shift economic prosperity to Wall Street. As each hike was made, the "business cycle" was shifting. Now, mortgage companies are going bankrupt and home builders are struggling to meet expectations and are practically giving homes away with rebates and perks. These cycles are not quick and don't reverse quickly, so count on the real estate market languishing and possibly crashing over the next 3 years while the stock market hits all time highs.
America is built on the "wealth creation" model, which means that in order for us to consume our way to maintain a dominant global economic position, our population must create disposable income through the creation of wealth so that we can buy, buy, buy consumer goods. This wealth is created through investing, because the average worker isn't going to have a huge increase in income. Most people get a big boost to their spending budgets through wealth creation - buying a home, having it increase in value, then taking cash out, or buyings stocks, having them run up and selling them for a big profit. It doesn't matter to our government or economy whom has the wealth and whether it shifts from die hard equity investors to die hard real estate investors. All they care about is making sure someone is making money somewhere and that they keep spending.
Follow the trends and move your money frequently from sector to sector as each rotation occurs. Do not buy and hold, this strategy is for past generations and true wealth will be created by the active and astute investor, not the herd mentality. If the media is touting an investment sector, it's probably too late to get in. When they are bashing a sector, begin to watch for value...it's not far off.
In closing, I want all readers to understand that my business earns income from both equity markets and the real estate industry. There is no benefit to me, one way or the other. I recommend that all of my investors maintain a "balance" in their portfolio. It's my 50/50 Policy. If you have $1,000,000 in net real estate equity, you should have $1,000,000 in cash or cash equivalents, which means CDs, Treasuries, Notes, Stocks, etc. I have no benefit or conflict of interest here. I am a huge proponent of owning real estate when it makes financial sense. I merely want to spare you all from the great mistake of losing your nest egg due to becoming fooled by your seminar scam artist promising riches in real estate through foolish leverage and false hopes of eternal prosperity in any one asset class.
Happy Investing!
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