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The Recent Market Drop

admin 0 comments 09.02.2018

After a few very interesting days in the markets, I got literally dozens of calls so I figured now would be a great time to post my observations.

Equity Markets:

After an 8000 point post election rally, stocks did something most people forgot they could do.  They went, dare I say it, down.  Down fast and hard.  The selloff was initiated last week by of all things, great news.  Friday the labor department reported job growth picked up steam and more importantly an increase in average wages.  On the surface, this would seem like a market friendly event.  However, in late stage recoveries, particularly one that has been fueled by impossibly low interest rates, wage growth is good for people, bad for equities, bonds, and real estate.  Simply put, when wages uptick, inflation is often soon to follow.  Yes folks, rates are finally going up and this time it is for real.  The 10 year treasury has traded up almost a full percentage from its lows last year, which if it wasn't coming from sub 2%, wouldn't be a big deal.  Friday's 666 point drop was entirely a result of an overstretched market getting a does of higher rates.  The Monday swoon however was almost entirely a result of a derivative product which I happened to be short.  Lucky or smart, doesn't matter I guess. I'll take it.  Regardless, the carnage we saw was tied to a couple exchange traded funds and notes that lost almost all their value.  To keep this from getting too technical, I will leave it there.  Call me if you are interested to hear more about it.

Interest Rates

The good news is that the derivatives risk has abated and markets have recovered.  The bad news is rates are going higher.  If you have followed my blogs in the past, you will know I have been very sanguine about rates over the last decade and discounted all the chatter about higher rates.  Until now.  An already accelerating economy just got several boosts in the form of tax cuts, repatriation of oversees funds, deregulation and a likely infrastructure bill.  Each of those are extremely stimulative. January's wage growth was no anomaly.  The era of ultra cheap money is drawing to a close.  Check that, has drawn to a close.   Given this, do not be surprised to see more stock market volatility as it digests the normalization of interest rates back to historic levels.    You can expect to see 30 year fixed rates in the 5s this year with a 10 year above 3%.  If you have a variable loan, I would suggest locking in a 30 year loan unless you plan on selling before your loan resets.

Real Estate

New tax laws should have a nominal effect on real estate demand, but are not likely to be a large risk to real estate values.  Far and away the biggest headwind will be higher rates.  Fortunately, inventory levels, even seasonally adjusted are extraordinarily low in the South Bay.   After micro-corrections in the Sand and Tree Sections, last year and the year before respectively, we have seen homes selling early this season that were unable to find buyers last year. This on it's own, bodes well for our local market this year.  As previously mentioned, interest rates will certainly be a headwind.  How much, depends, not necessarily on the absolute rates, but the rapidity at which they move.  Higher rates should loosen up a very tight income property market, so expect to have a bit more to choose from on that front.

Bitcoin

I won't spend too much time on this.  For those who follow me on Facebook, I sent a SELL warning in December when the price of 1 bitcoin was trading above 19,000.  Sometimes one just gets lucky, but that day happened to be the all time high.  It is presently trading around 7000 and my best advice is to steer clear.  Any money committed to this new "asset class" should be the same money you bring to Las Vegas if that is your thing.

Undergrounding

Well if you made it this far, you get to hear yet another non-news report fresh from the desk of Stephanie Katsouleas, Director of Public Works MB.  She has met with SCE on several occasions, most recently last Friday.  Not surprisingly, they are extremely slow getting the hard bid complete.  Both Frontier and Spectrum are still working with her to get firm numbers. I asked her to give me her best guess when we would have numbers and ballots. Her answer was "hopefully by fall".  Is it me or does the goal line just keep moving every time we are near?   To her defense, she is understaffed and the service providers are intentionally slow to move.  This will however happen this year barring any new developments.  Stay tuned.  Thanks for reading.

Fall 2017 Market Update

admin 0 comments 11.09.2017

After a long, not so sunny summer, I settled down long enough to share my thoughts again on the state of the market.  A very interesting bifurcation has formed between high end and entry level homes in the southbay.  For those of you who watch the Strand market closely, the "bubble" has clearly deflated.  Burst would be a more accurate description.  While many of my peers jokingly point the finger (hopefully not the middle one!) my way after my 716 Strand sale in January, I need to remind them that I represented the BUYER and claim no responsibility for the 5 million dollar drop from the prior comp on the 600 block (14mm vs 9.3mm).  Both of these were dirt sales and yes, we bought ours for roughly 2/3 of the prior 2 sales.

The Strand market, particularly on the south end of town had simply run way too far, way too fast.  A number of Strand properties sat without buyers as sellers had simply gotten over optimistic.  We just happened to be there when the first shoe dropped.  Since then, a number of price cuts by those who live in reality have resulted in a readjustment of Strand comps.  Several sales have taken place since that affirm our transaction was not an anomaly, but a reset.  A healthy reset.

Giving credit where credit is due, my well respected friend and fellow agent/developer Rob Friedman made a comment at that time that has come to past.  He predicted that the Strand adjustment would work its way to the rest of the Sand Section.  High end real estate price corrections start at, well, the high end (that would be the Strand) and work their way back.  Once Strand properties could be had for such bargains as 9-11mm for dirt (so cheap I know), what then do we value walk street dirt at?  Note: I use lot value as a mode of comparing apples to apples since every home is unique.  As Rob and I both agreed, a high end slump ensued and Sand Section inventory has swelled to 60 at the time of this letter as opposed to 35 last years.

So why do I still have frustrated home buyers coming to me with stories of losing out against 10 other offers time and time again on entry level homes?  Before I answer that question, I have to interject my standard response, which is quite honestly true....

"...Well I am glad you have chosen me to represent you because as much as you hate bidding wars, you will only have to endure one more!"

Back to the question at hand (sorry Snoop)  Why ARE there bidding wars in one segment of the market and sluggish sales in another?  There are probably several reasons.  First, many doubters are finally realizing that burning rent money and sitting on cash with no return makes no financial sense.  Second, banks are lending more freely now as the memory of the crash fades.  Loath to say, I have even seen stated income loans making a comeback.  Yet another take, demographics are coming into play.  With a swell of millennials looking for a first time home and boomers looking to downsize, it only makes sense to see the high end contract while the low(er) end surges.

Since I have made prognosticating my business for the last 30+ years, I may as well keep the trend in-tact.  Interest rates will STILL remain low.  At least through the first half of 2018.  An unpopular, if not non-existent opinion, I know.  However, check my previous blogs.  All last year I predicted mortgage rates would remain low despite the federal reserve hiking short term rates.  Not only did they barely budge on the upside, the 10-year treasury has been falling precipitously all summer.  This will continue to stoke the flames of the condo and entry level home market.  There will be more price cutting in the 2.5mm-15mm segment over the next 6 months.  Too much inventory will force sellers to come to terms with this reality.  The low end will remain strong, but will taper soon as price points just above add to the inventory.  And for a non-real estate bonus call....equity markets, which I have been feverishly bullish on, will likely see a notable correction soon.  This may shake the confidence of some home buyers.  Geopolitical risk, a potential government shutdown looming, and a bull market that has been in place longer than average are being brushed off by investors.  This type of complacency generally leads to some sort of shock to the markets.  And, well...it's almost October, a notoriously bad month for markets.

I will, as always,  end on a positive note.  As I have stressed time and again, there may not be such thing as a sure thing (I know, death and taxes), but the next closest thing is beach real estate.  They aren't making more of it.  If you own it, and you are in it for the long haul, next year doesn't really matter much.  Nor does the state of the market now because in 10 years, 20 years, we will all look back and say, if only I could go back and buy more.  Given that, I hope my "state of the market" was worth a muse, as I truly believe it doesn't matter that much what happens in the short run.  We are so fortunate to call the South bay our home.   Prayers go out to Texas and Florida and Mexico.  Be well and have a great Indian Summer, the best time of year!

Manhattan Beach 2017 Market Trends

admin 0 comments 09.02.2017

El Porto is On Fire While the Strand is Falling Into the Sea!

Few may realize that just within our little (?) town, each section has its own trends and cycles.  Demographics, building trends, and price points play a large part.  Areas of our city can boom while others are experiencing mean reversion (analyst speak for declining prices) Nothing could contrast this more than looking at El Porto duplex trends vs South Strand.  To do so, we need to back up just a bit.

Following the 2009 trough, Strand prices on the south end of town literally exploded while El Porto Strand nearly stood still.  As Manhattan Beach has continually become a “brand” city, (much to the chagrin of some of our long-time residents), the big money scooped up the AAA properties.  This created a bit of a mini-bubble on ultra-high end properties.   Lot value for a standard 3500 square foot lot south of the pier topped out at about 14-15 million, while El Porto Strand dirt has held steady at roughly 6 million.

What has many developers and realtors scratching their collective heads is how a 600 block Strand property could go for 14.5 million last year, only to see 716 Strand close for 9.3 million on Jan 13 of this year.  I know this because I represented the buyer on the latter.  Granted, there is a bathroom on the beach just north of said property, yet my clients were not bothered by it one bit.  Even if you knock off a million or so due to the bathroom, how can one explain another 4 million dollar decrease in value?  Amazing negotiating skills?! Ok maybe a little but….It seems the air may have just left the balloon.

Strand inventory has been building quite markedly in recent months.  The reality is that there was some irrational exuberance in the stampede to buy these properties.  Most Strand sellers, and there are plenty, are unwilling to admit that asking prices need to come down to match what others are selling for.  Time will tell if my purchase was an outlier or the new comp to compete with.

Now let’s take a quick peak at El Porto duplexes.  Last Spring, I purchased a fixer for 1.6 million and resold it for 1.83 million.  Only months before that, I sold a turnkey SFR for a client on 40th Street for 1.6 million (175k above asking).  A few heads turned when I paid the same price for my flip in such short order.  However, there are two duplexes now in escrow here will close another 10% to those prices.  In six months!  While I cannot discuss the exact prices publically until they close to protect the sellers, rest assured, El Porto comps are exploding.  Unlike Strand properties, there is next to NO inventory here in our neighborhood, despite a softening in the rental markets.

The bottom line is that real estate is TRULY local!  More so than people realize.  Here is a snapshot of the health of MB sub-markets.

MB Strand- high inventory per norm (8 including a new one today), no turnover
COLD.

Sand Section < 3mm excluding El Porto- low inventory (7), high turnover
HOT

Sand Section > 3mm high end- moderate inventory (16), low turnover  COOLER with highest the price points COLD.

El Porto- next to no inventory (2), high turnover
SMOKING HOT

Tree Section-moderate inventory (22) decent turnover
LUKE WARM 

MB Village- low inventory (2) fast turnover
VERY WARM

Hill Section-moderate inventory (10) decent turnover
COOL

East MB-moderate to lower inventory, decent turnover
LUKE WARM

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Pain Is…Good?

admin 0 comments 08.09.2016

I am often asked about my opinion as to where home and other asset prices are headed. I promise this diatribe will lead to an economic conclusion applicable in today’s world. Where shall I begin?

We live in a generation of pain avoidance. Somewhere along the line, we decided that somehow we could shield ourselves from pain. It honestly started with my own generation. We did everything we could to spare our kids from pain or discomfort. I myself recall ranting to my kid’s teachers about some inequity bestowed upon my child in school. We wiped tears and cleaned the slightest of knee skins. We had nanny’s and gardeners to spare our kids (and u-hum, us) from having to take time from club soccer or volleyball to exercise our discomfort muscle and actually get our hands dirty. Of course a bottle of hand sanitizer was always handy just in case. We made our kids soft. For better or worse, it’s an undeniable truth.

The fictional Gordon Gecko once famously said, “…greed is good…”. While clearly that is preposterous on one level, it is still a natural part of the human psyche. A much more salient and astute statement may have been, “pain is good”. No one likes it, yet it exists for a reason. Pain keeps our hands from resting on hot stoves.   Pain keeps us from making the same stupid mistakes over and over. Pain is what turns busts to booms. Greed is what turns that tide. Enter moral hazard.

When I made my debut on Wall Street, the Dow was trading just under 800. Yep, that’s not missing a zero. August 12, 1982 will be indelibly etched in my mind forever.   After a decade of massive inflation and plenty of pain, then fed chairman, Paul Volcker began an easing of rates that would continue to this very day. With plenty of fuel to burn, this propelled high single digit GDP gains throughout the sweet spot of the 80s. Despite a rude intermission in 1987, this hyper-growth lasted past the turn of a new millennium. In another venue, I could write reams about that day on the trading desk, but I digress.

Irrational exuberance gave way to, you guessed it, moral hazard! The loose definition of this is the notion that the fed will always be there to save us from, well, another great guess, pain. Why is pain good? Ramped speculation gives way to huge economic imbalances. Our lawmakers as well as the “independent” federal reserve in all their wisdom decided they could spare us the pain. Social and economic engineering are both well intentioned and doomed for failure. From legislation in 1999 to make homes affordable to everyone, to massive bailouts once that didn’t work quite as planned, we have made it a practice of sparing ourselves pain.

For millennia, there have been economic cycles. Like the forest, which cannot sustain without the pain of wildfires, too the economy is destined to booms and busts. The Great Generation was great for a reason. They came of age at a point in history of unmatched economic pain. Yet, what became of them? Did they all lay down and curl up in the fetal position or did they get off their proverbial asses and put their noses to the grindstone to ensure their survival? Humans are much more resilient then we give ourselves credit for. The 1930s was the cornerstone of mental and physical toughness. Patriotism. Hard work for a day’s pay.   It cleared the markets of the speculative foolishness of the late 20s and then paved the way for generations of prosperity.

Until, it got too easy. Again. I say again because this is the natural long wave cycle noted by Russian economist Nikolai Kondrateiv (later shot by a firing squad under Stalin). It predates well before the Dutch Tulip bubble in the mid 1600s and likely back to the dawn of civilization. The basic idea is that these major market catastrophes occur about every average lifespan. This is due to the fact the it takes a generation to die off who remember what excess and complacency ultimately lead to. The CLEANSING mechanism once the speculative fever returns just so happens to be, pain. So how does this relate at all to today?

In essence, we put the wildfire out prematurely through impossibly easy monetary policy, massive bailouts for whom many had no business getting. Everyone was culpable yet not many paid. When zero interest rates didn’t work, they took it another step further through “quantitative easing”. In essence, our fed basically bought mortgage bonds to artificially force rates below the market clearing supply and demand level. To put it simply. THEY SPARED US THE PAIN. I seriously doubt we would find ourselves in this insane election we find ourselves in, had we not fooled ourselves into believing we could finally conquer the economic cycle. Well congratulations, we may have done just that. The problem is, 2% growth is not exactly what the fantasy envisioned.

It is said that economists have predicted 9 out of the last 8 recessions. It’s a cheeky way of saying that no one has a crystal ball. Not even the “experts”.   While I don’t wish to hold hands with the soothsayers, I do feel this has to play out in one of 3 ways. Either the false hail Mary forever cured us of long term pain, or….ok forget that one.   Let’s say there are 2 ways this likely plays out. The deficits that were a necessary tool in shielding us from the last wildfire,( the one that could have given birth to a GREATER generation) have consequences.

The first scenario is that of the fate, yet to be fully played out in Greece and most of the EU. That is, a day of reckoning that brings on massive deflation. A depression that would make the 1930s look like a gentle squall. For those who aren’t paying attention, this is already playing out in Europe, as they continue to defer their pain. The second scenario which I believe we are smack dab in the middle of is that of accrued pain. That is several decades of poor job growth, weak GDP in the 0-maybe 3% range on a good year. The best way to understand this is to take the real pain that should have lasted 3-5 years and spread it over decades. Another way to understand it is, well, Japan.

Okay, so what does this mean for our future? Going back on my word not to make predictions, here goes. No matter who is president, no matter what these geniuses do, we have a price to pay. The big party is behind us. We have enjoyed a boom in asset prices due to the massive liquidity created by money printing. We will continue to monetize our debt. No matter what armchair quarterbacks are telling you, interest rates have nowhere to go but…….remain where they are. The fed is in a box. They indicate tightening under huge criticism for letting things get this out of hand. However, this is a symbolic gesture. They know that if they raise rates, they will endanger the already weak and deflationary environment. They will raise 1 more time this year. You can go back to last year to see that I predicted no more than 2 rate hikes this year. Higher rates would mean a still higher dollar since we are the best house in a very bad neighborhood. Exports, which are already pathetic, would decline further. Protectionism would ensue, which is already starting to play out. They can’t raise and they can’t NOT raise. Quagmire. So the aforementioned party is due its hangover. Instead of getting it over with, we decided to keep drinking the Kool-aid until it claims what it deserves.   Maybe there is a day of reckoning. Maybe not.. Maybe we just take a 5 year hangover and spread it out over 30 years. The latter is my personal view, but at some point the piper gets paid either way. Grandpa say sorry kids.

So how do we invest in this unparalleled climate? Do we run to cash as so many have as if cash is somehow the dugout in a tie game and there is no risk? If your team is down 2-0, staying in the dugout is not going to win the game. Cash is nothing but another asset. It’s a bad one too. With inflation running at an albeit tepid 2% or so, cash earns zero. Better put, cash returns negative 2% per year as of late. Stocks and real estate have lost some of their momentum. It doesn’t mean crash. It means, the stimulus is disappearing for the time being and assets are taking a break. Metals are on fire. Some think this is a predictor of inflation. I don’t think so.   It may support a mirage of rising assets prices, but real inflation, the kind made of wage push and an overheating economy is laughable. One thing you can bet on, our government will continue to both create and spend more money. This “stimulus” can keep it going, but has lost the punch of the mid 80s and will likely continue to do so.

We can’t live our lives in fear of the next doomsday. Most of my counterparts that went bust over my finance career did so because they thought they were smart enough to predict the end of the race and were perpetually predicting market tops. Wrongly. Costly. We have to go on. Optimism is good. Pain is good! The pain we were denied post 2009 is just playing out in different ways. A divided country. Divided races. Unstable world affairs Worse income gap, despite attempts to bury Adam Smith and engineer our way out. Loath a finance, real estate guy saying this, but maybe we just need to accept low returns and focus on something other than things. This may be a cleansing yet. Sometimes painful, but as humans have in the past, we too will overcome our mistakes.

So in conclusion, keep a well diversified portfolio of real estate, stocks, metals, bonds and you will do just fine. I believe in quality. Own quality real estate. Observe demographics. We live in the best there is. Own great companies. Own AAA bonds. Don’t be tempted to chase the allure of “high return” risky assets. I am not one to say this lightly as I have lived my life with a disproportional degree of risk taking both financially and physically (I have broken most of the bones in my body engaging in extreme sports), but it’s time to play defense. Play it safe. You cannot “hide” in cash as so many Americans are doing. It is just another bucket in a field of many and you are hiding behind your hands. There is really no “hiding” from consequences is there? Who knows, maybe we will wring out a new “great generation”. It may just take a little longer than we planned.

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Brexit, Rates, and Trends

admin 0 comments 25.08.2016

At the time of this writing, the Great Britain's vote to leave the EU is underway.

Should Britain leave the EU? At this moment, the early exit polls have it at nearly a dead heat.  While noble in their intentions to avert wars between neighboring nations, the EU has grown to an economic experiment that is bound for failure.  One cannot expect different cultures and vastly different economies to share the same economic course, let alone a single currency. The idea that stronger (relatively) economies like Germany should bail out the disastrous socialist policies of the likes of Greece where 2 of 3 workers is employed by the government, is as ludicrous as the free handouts our own government pledged at the taxpayer's expense. Against the poll numbers, I believe Britain should go. The Pound will take a..well, pounding, and world markets will likely not love it, but in the end, the bandaids our world leaders continue to put on the mortal wounds caused by reckless spending will eventually be too soaked to do any good. Sooner or later the piper gets paid.

I am humored by the plurality of backseat rate watchers still holding their breath for some wild spike in rates. Folks, the world is in a deflationary spiral and that is NOT the backdrop for rising interest rates. The fed, which will likely raise the fed funds target again this year, is only doing so to send a poorly crafted signal to the markets that they cannot be accomadative forever. The fed has transformed from a central bank to a market saver. Adam Smith knew very will, tinker all you want, the economy has a mind of it's own.  I am here to say, rates are going to stay depressed for quite a while.

Local markets have slowed. That scares some folks. Can you imagine we aren't gaining 15% again this year? That is terrifying! The word "slowed" is misinterpreted by some to mean declined. To others, an alarm sounding 2008 all over again. If something grows at 15% and now grows to 5% it has slowed. Is that really bad?? That does not mean crashed. It is quite typical after a generational crash for people to expect another one as soon as the rebound ebbs.  History has never born that out.  So before cashing in your chips to go back to earning .002% in a Bank of America CD, contemplate what you would do with that pile of cash. Yes, the market could flatten. The usual culprits are risings rates, which I say...not happening, or overbuilding. This is mildly the case in some areas outlined in prior letters. Either way, we live along the very the last western mile of the entire country, bound by a massive (and beautiful) body of water! Where exactly will they build once all the little ones are gone? If you are in it for the long run, hang tight and don't sweat the blips.  I predict home prices along the beach will be affordable for only the most wealthy of Americans at an increasing rate. They seem to be making more of them, but not a lot more coastline.   That is a formula for long term parabolic growth.  You couldn't pay me to sell my coastline real estate. If we see a move down at some point, and rest assured we always will, that will be nothing more than a chance to pick up Boardwalk and Park Place at a discount. Happy 4th!

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A TALE OF TWO CITIES…

admin 0 comments 22.03.2016

It's that time of the season again. The Fed sat tight on interest rates during the March meeting. After raising a 1/4 point last December, only to witness act VI of the financial crisis play out in other parts of the world, the Fed had little choice but to keep their hands in their pockets. Ironically, and somewhat predictably, rates fell to new post war lows in the early part of this year, despite the hike in the funds rate. As a matter of fact, I had a client lock a loan in during the week of the market swoon, only to re-adjust 7/8 of a point lower before closing! I had advised many to take advantage of the stock market panic and buy. The adage, buy when there is blood in the streets has proven (so far) to be correct. The Fed had reason to wait as becoming too hawkish in the wake of world events could put us at risk of making the same mistakes Japan did in the 80s, 90s, 2000s, and....well. Assuming things stabilize, I will not be surprised to see a hike at the next meeting as the USA is the best bet in town.

Trees don't grow to the sky, but castles made of sand may not in fact, melt into the sea. The Tree Section has seen an enormous number of new listings in the last weeks, particularly in the 3mm price point. A slew of new construction has come to market with more to follow. I would expect modest reductions in prices in the Trees and have already seen prices of tear downs come down. Not to panic, just an adjustment to the increased inventory.. At last count, there were 85 listings in the Trees, about double last year at this time. Sand Section listings number 21 with quality inventory still near historic lows. In short, people want beach front property. There are several factors at work. There are fewer build-able lots in the Sand. The vintage duplexes that remain still provide steady incomes to those who have owned them for a long time and still have low property tax. Additionally, the tax bite is hefty as ownership in years, far exceeds Tree Section homes.  For this reason, we see very few come up for sale. The remaining inventory of dirt value lots is very low.  The aging baby boom population is also at work. As kids move out, many are choosing smaller homes, closer to the beach.  Another factor keeping the boom sizzling in the Sand is the rise in wealthy young entrepreneurs from nearby technology hub, Silicon Beach. They are far more likely to purchase something smaller in the Sand and have no need for a 4500 square foot 5 bedroom house in the Trees or East Manhattan. Of course there are the Rams. Finally, the Sand Section has been a historical out-performer. Notwithstanding a massive polar ice cap melt, there is a very finite number of ocean front, or near ocean front property.  

In short, the boom is still alive and healthy down here in our neck of the sand. By no means is there any meaningful decline elsewhere in Manhattan, but prices have moderated a tad east of Highland. I continue to believe the average price of south bay real estate will still increase in low single digits this year, with aforementioned areas outperforming. We live in one of the most desirable communities in the entire country! Never forget how fortunate we are.

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Are We in a Bubble?

admin 1 comments 06.01.2016

So where do we find ourselves now? The worry by many of a bubble in stock and real estate prices is rooted in the rapid rise in prices dating back to the 2009 lows. Their error lies in the fact that the rise occurred, not from an already rising market, but to the contrary, generational lows. Just as bubbles reach emotional extremes the ensuing crashes mirror this in the opposite direction. When the Dow hit sub 7000 in 2009, many, including myself felt that the financial system was literally imploding to a point of no return.  Since that year, the market has risen roughly 150%. Land value has risen anywhere between 30% and 100% depending on the area. OMG! BUBBLE!!!!  Actually no. Had these gains occurred from high starting points, I would be crying bubble along with those who are. However, they occurred from massively depressed, emotional lows. I would suggest that half of the gains of the last 6 years, were merely unwinding the anti-bubble, or to put another way, the artificially low prices brought on by fear and forced selling. What’s more, this run has been characterized by well qualified borrowers and cash buyers. Far from over-leveraged.

To further this point, let's look at the 15 year return of both stocks and real estate. Rather than cherry picking small time frames to make a case, it helps to look at longer, more normalized periods. On Jan 1, 2000, the Dow Jones Average stood at 11,473. With today's level of roughly 17,000, this represents a 15 year increase of roughly 50%. Not taking into account dividends, this equates to roughly 3% annualized gains. If you include dividends, you could argue the number is more like 6%. With the long-term norm of something closer to 10%, this is far from bubble behavior. Without getting too deep in the weeds, real estate gains have similar metrics nationally, albeit coastal land numbers fair better for obvious reasons. 

The reality of the situation is that despite unprecedented volatility, the last decade and a half have actually seen sub-par returns. We are actually now in a place that has normalized some of the extremes seen in the 21st century. Could we see a correction in these markets?  Of course! Can you time these by trying to sell high and buy low? Very unlikely. Wealth is created by investing in quality and avoiding the wrath of the tax man by holding for the long run. Ask Warren Buffet. If we are lucky enough to see a meaningful correction, and you are fortunate enough to have some dry powder (not the kind we are seeing in the Sierra's), take that cash and shop while things are on sale. There is no bubble. The world is not ending. America is still the best place on the planet in which to put your hopes and dreams, despite questionable leadership. Prosperity awaits anyone with patience, vision, and discipline. So forget the bubble scenario. Keep your eye on the ball. Live life without fear and trepidation and have an AMAZING 2016!

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The Fed Is Not The Grinch

admin 1 comments 07.12.2015

THE FED

For those of you who read my August letter, you will recall that despite a widespread belief there would be an interest rate hike in September, I gave it ZERO chance as the emerging markets and Europe were doing their best impression of USA 2008. Now that things have stabilized, I am prepared to accept the likelihood of a rate hike.

What does this mean?  First, understand the Fed Funds rate (the rate institutions lend to each other for overnight balance squaring) is basically zero.  In 2007, when the Fed began lowering rates to combat deflation, it was 5 1/4 %. In 1979 it was 20%. The normal range is between 2 and 5%.  The Fed is likely to raise from zero to 1/4%.  This is far from a reason to panic.  As a matter of fact, it is a signal that the fed believes the deflation risk is subsiding and that the economy will return to it's targeted inflation rate of 2% (a little inflation is a good thing).  Mortgage rates trade freely in the open market.  While Fed Funds do not directly dictate mortgage rates, they can influence them and other rates.  Mortgage rates are not likely to budge much from historic low levels and the risk to the economy, capital and real estate markets in minimal at best. Over the next year, expect a bias to slightly higher rates, yet still far below historical norms.



SAVERS

There are still a large number "savers" in this country, shell shocked from a generational crash that have yet to put their cash to work. Some people have a perception that cash is a "safe" asset. Shockingly, the amount of deposits held nationwide is at an all time high of over 8 trillion dollars.  What these people fail to grasp is that their money is not earning the .001% indicated on their bank statement. In fact, these "savers" lost close to 2% this year, 2% last year and will lose 2% next year.  Compounded over a decade, this "safe" asset would return a 30%+ loss as a result of inflation eating away the purchasing power of those dollars. For this reason, a diverse portfolio across different asset classes is the only way to build wealth and counteract the inflation effect, albeit moderate at present.  Real estate should be a major part of that portfolio. They aren't marking more of it, particularly along the coast where tear-downs are becoming more scarce and vacant land is long a thing of the past.



2016 MARKET

While my last newsletter indicated a top in the market, I should qualify that to say we have seen a subsiding of the buying mania. This does not mean we are due for a correction of any sort. There is still a shortage of inventory and there are still plenty of buyers looking for homes. The leveling off we saw over the last few months was due to several factors. First, the world stock market declines made headline news putting some nervous buyers on the sidelines. Second, sellers of late have been demanding prices that in many cases were above market which resulted in longer "days on market" stats. Last, seasonality of course comes into effect this time of year.  Barring any major economic disruption, 2016 should see gains more akin to historical norms. A quick drive around town will reveal a fair amount of new construction coming to market, yet there is still demand to absorb that inventory. Additionally, El Nino may slow construction not yet past the framing stage, by a few months. Slightly upgrading my prior prediction, I see local gains in the low single digits for the coming year. So when you find the present under the tree with "Yellen" written on the tag, don't fear that 1/4 point.  It is given with care and forethought. The market can easily absorb it and may actually benefit by not overheating, otherwise creating a bubble.... Wishing everyone a happy and safe holiday season!

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