Market Tops

 admin  0comments  01.11.2015

So here we are. Halloween just gave us a fun scare, but should we be fearful of the future? In my last 3 newsletters, I have been warning that we were nearing a top. For those of you who read my features, you will recall that I predicted lower rates and slowing sales. To review, this had to do with the collapse of emerging market economies, continued slowing in Europe, and the simple fact that trees do not grow to the sky. Time for a breather. Alas, here we are. Home sales here and nationwide are in a transition for a sellers market to a balanced market. The price of a tear down (dirt value) even in Manhattan Beach has fallen in the last 30-60 days. This is a leading indicator, as developers begin to see slowing demand for their new homes, they become more frugal for what they will pay for dirt. While some will blame seasonality, I can say, this is the end of the manic bull run. I am never short on words, nor am I bashful about offering my opinion. When I managed a special situations portfolio for Jefferies & Co, I was able to capitalize on the plentiful data that pointed to a collapse in 2008. In short, there were millions of variable mortgage resets coming due in 2007. This data was available to anyone who dared pay attention. The collapse was inevitable. THIS IS NOT THE SAME THING. What we are experiencing is simply a supply/demand curve that is finding equalibrium. The shortage of supply is ending as there is always a price that will draw sellers out. Prices for sure have softened. This has much more to do with the "high water mark" being set by frothy panic buyers who had bid prices above intrinsic values. Let me make an analogy. Consider a cup of coffee with foam on top. As the cup is poured and the coffee is at its hottest point, the foam bubbles up and creats a high water, rather a high coffee mark. When the froth settles, the level of the coffee has not fallen, yet the high water mark has. This is where we are in the present market. There are some high comps that represent the bubbles, the froth. However, the core prices are holding farily steady. The takeaway is that sellers can no longer depend on the froth to get a premium over the fair market value from buyers panicked to "get in". This does not fortell a collpase as I mentioned before. It simply means that sellers will now have to negotiate with buyers and perhaps lower list prices to meet the level which buyers still await. Next year should see continued balance, with a small risk of moderate price declines should the world economy continue to falter. The good news is that equity markets have bounced back and confidence is returning. Sanity is also returning. A balanced market is good for everyone in the long run. As I mentioned in my last newsletter, amatuer flippers (analogous to day traders in the stock market) should be worried. There will be some casualties. Seasoned investors, long term holders and home owners with equity in their homes have nothing to worry about. 10 years from now, prices will be higher as they will even more so 20 years from now as the population continues to explode. All for now. Have a great holiday season!