Thanks Criggchef for this flickr image.

We are currently seeing some amazingly low interest rates. Rates on loans less than $729,000 fell to the lowest level on record for the second consecutive week after the Federal Reserve launched a new effort to assist the staggering U.S. housing market. Yet, also interesting is that rates on loans larger than $729,000 are abnormally low as well.

With a loan amount of $1,000,000 and 75% Loan-to-Value:

We are big believers that it is impossible to time the bottom of the real estate markets. Yet, what we can assess is the current opportunity in the market relative to other times in history. Currently, rates are reaching historical all time lows while at the same time buying conditions and available residential housing inventory are creating abnormal Bay Area buying opportunities. This market is a prime residential buying opportunity for individuals and families that are endeavoring to purchase and live in their homes for the next 7-10 years.

One only has to look at the evening news to see that the National residential housing inventory has been seriously devalued over the last 2 years. Yet, the story that is not being told is that much of this Bay Area housing stock is now being sold with multiple offers. We know for we have been watching these offers begin to pool as rates have fallen. So, with this recent shift in financing over $729,000, we are also now beginning to witness a huge opportunity in the $700,000-$2,000,000 market. Many opportunities are beginning to present themselves to those that are looking for long term ownership (7-10 years) and can afford to ride out the many ups and downs we will inevitably see over the next couple of years.

Thanks Victoria Peckham for this flickr photo.
I often read John Mauldin. He has a unique perspective on the financial markets and macro-economic issues. Yesterday, I received his weekly e-newsletter and it had an interesting quote from Charles D. Ellis.

…Charles Ellis, who helps oversee the $15-billion endowment fund at Yale University, said:

Watch a pro football game, and it’s obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, ‘I don’t want to play against those guys!’

Well, 90% of stock market volume is done by institutions, and half of that is done by the world’s 50 largest investment firms, deeply committed, vastly well prepared — the smartest sons of bitches in the world working their tails off all day long. You know what? I don’t want to play against those guys either.”

I began to ponder about this in regard to the real estate markets. I was able to establish that this statement works for the real estate market. In every market marginal value is constantly being ground out as competitors compete with one another. This is why free markets are so efficient and why competition reduces the cost to transact. Now in real estate the complexities of financing, insurance, construction and other specific knowledge, make transacting less efficient than say using e-trade to exchange stocks and bonds (this means you can find value in the inefficiency if you have the right adviser). Yet, real estate too must adhere to the indifference principal.

OK… so, work with me here. If you are a buyer or seller in the real estate markets (or any other markets for that matter)… And you are looking for value in your next transaction… And you yourself are not a big player in these markets (most home owners only transact several homes in their life times and often there is many years between transactions)… And you want to compete with others in the market…

Find the best help you can. Don’t just look for the agent that says, “I have lived and worked in the neighborhood for many years”. Although, specific market knowledge is important, the internet has now made it so any agent can search the local multiple listing service and see the limited inventory that is available. Look for the advisors that demonstrate the largest capacity to create marginal value in your next transaction. For example, in the Bay Area we have found that our strategies for buyers allow them to win competitive offers even when they are not the highest offer. We accomplish this by preparing our clients financially. Working with a competent financial planner/mortgage broker we developed a strategy for our clients that allows them to close their leveraged transaction in 7 days verses the typical 30 days. We do this with no additional transactional risk. This is based on the market mechanic that sellers are willing to take a lesser price if it means they get their money faster. This is just one example of the marginal utility that we create for our Bay Area buyers. This strategy has become even more valuable in the current liquidity crisis where sellers are highly concerned with whether a buyer can complete a transaction or not.

The real estate markets are tough. So, seek the best help possible.

There is a great series of YouTube videos of Warren Buffett speaking to the University of Florida’s MBA class. Part 1 has a great discussion about integrity and why it is fundamental for success. I found one of the most interesting segments (shown above) to be Buffett’s discussion of the rescue of Long Term Capital Management (LTCM). LTCM was a hedge fund that went belly up in late 1990’s and was rescued by a massive industry bail out, supervised by the United States Federal Reserve. Buffet speaks about how LTCM was run by 16 exceedingly high IQ, long term veterans of the investment markets that probably had a combined 300-400 years worth of experience. Buffet makes a fundamental interpretation about risk and how much is too much. He spoke to how these men foolishly risked their own livelihood when he stated, “To make money they risked what they had and needed for what they didn’t have and did not need.”

After watching this segment I began to think philosophically about how the destruction of LTCM was a smaller scale bail out that sounded very similar to our current credit crunch and massive US bail out. Both instances were caused by some of the smartest minds in their industries. Both ended with the destruction of businesses, where owners risked everything (including the jobs and the livelihoods of others) to gain much of what they did not need to be a viable business in the first place. Is greed the best word to describe this kind of behavior?

Buffet also spoke about how knowledge can create blindness. For instance, in the case of LTCM the owners were experts at mathematics, which blinded them to the simple fundamental human and business concerns that all businesses must acknowledge. I have seen this in my own industry, where some of the brightest have let their intelligence get in the way of their own ability to make prudent decisions surrounding real estate investing. I have also seen many others avoid this pitfall, by living in a mood of wonder. I have seen how part of success is an awe-inspiring willingness to learn more and explore new possibilities, while thwarting moods of over informed arrogance. There is also something to Warren Buffett’s ability to be explicit about the offers, actions and investments he makes and how he rarely relies on inexplicit decisions. We should all be mindful that the philosophies we hold directly influence the actions and practices we live in.
 

The Millennium Wave

By John Mauldin, November, 2008

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore 

Over the next ten to twelve years, we will see three recessions that will slowly move the average price-to-earnings ratio of stocks to historic lows. Rising oil and energy prices will be a main culprit of both the slowdown in the economy and an increase in inflation. Ever-increasing monetary inflation will, in fact, trigger a huge increase in all commodity prices, as well as a decline in bonds. Asset inflation will show up in the housing markets as home values continue to skyrocket. The dollar will continue to weaken against major foreign currencies. The current war will become increasingly unpopular, and the next administration will be forced to withdraw troops, under the guise of declaring victory. The American voting public will be split as never before, with major patterns in voting habits making a generational change. The newspapers will continue to write about how an Asian country will dominate the world economically in less than a few decades.

Following this period of malaise, there will be an amazing cycle of new technical innovation that will spark yet another major bull market. The new technologies will change the world in ways that simply cannot now be imagined and will lead to whole new industries, putting amazing new power and abilities into the hands of individuals and governments.

The preceding scenario would, in fact, all come to pass. Except that the year that was written was 1970, (more…)

None are safe.  Today it’s the car company, tomorrow the hospital and very soon the States and Cities will begin to renege on their pension promises.
November 10, 2008
Some G.M. Retirees Are in a Health Care Squeeze

By NICK BUNKLEY
DETROIT — General Motors is living on borrowed time, spending more than $2 billion in cash a month and lobbying for a government bailout to keep it out of bankruptcy.

And for about 100,000 of its white-collar retirees, time is about to run out on G.M.’s gold-plated medical benefits.

To conserve its dwindling cash reserves, G.M. is eliminating lifetime health care coverage for its legions of retirees at the end of this year, leaving people like Ken Hewitt to fend for themselves in deciding how to cover their doctor’s bills and prescription drug costs. (more…)

So who can we trust to anticipate the future in the markets? It looks like no one.
The New York Times, October 26, 2008

ECONOMIC VIEW

But Have We Learned Enough?
By N. GREGORY MANKIW
LIKE most economists, those at the International Monetary Fund are lowering
their growth forecasts. The financial turmoil gripping Wall Street will probably
spill over onto every other street in America. Most likely, current job losses are
only the tip of an ugly iceberg.
But when Olivier Blanchard, the I.M.F.’s chief economist, was asked about the
possibility of the world sinking into another Great Depression, he reassuringly
replied that the chance was “nearly nil.” He added, “We’ve learned a few
things in 80 years.”

Yes, we have. But have we learned what caused the Depression of the 1930s?
Most important, have we learned enough to avoid doing the same thing again?
The Depression began, to a large extent, as a garden-variety downturn. The
1920s were a boom decade, and as it came to a close the Federal Reserve tried
to rein in what might have been called the irrational exuberance of the era.
In 1928, the Fed maneuvered to drive up interest rates. So interest-sensitive
sectors like construction slowed.

But things took a bad turn after the crash of October 1929. Lower stock prices
made households poorer and discouraged consumer spending, which then
made up three-quarters of the economy. (Today it’s about two-thirds.)
According to the economic historian Christina D. Romer, a professor at the
University of California, Berkeley, the great volatility of stock prices at the
time also increased consumers’ feelings of uncertainty, inducing them to put
off purchases until the uncertainty was resolved. Spending on consumer
durable goods like autos dropped precipitously in 1930.

Next came a series of bank panics. From 1930 to 1933, more than 9,000 banks
were shuttered, imposing losses on depositors and shareholders of about $2.5
billion. As a share of the economy, that would be the equivalent of $340 billion
today.

The banking panics put downward pressure on economic activity in two ways.
First, they put fear into the hearts of depositors. Many people concluded that
cash in their mattresses was wiser than accounts at local banks.
As they withdrew their funds, the banking system’s normal lending and money
creation went into reverse. The money supply collapsed, resulting in a 24
percent drop in the consumer price index from 1929 to 1933. This deflation
pushed up the real burden of households’ debts.

Second, the disappearance of so many banks made credit hard to come by.
Small businesses often rely on established relationships with local bankers
when they need loans, either to tide them over in tough times or for business
expansion. With so many of those relationships interrupted at the same time,
the economy’s ability to channel financial resources toward their best use was
seriously impaired.

Together, these forces proved cataclysmic. Unemployment, which had been 3
percent in 1929, rose to 25 percent in 1933. Even during the worst recession
since then, in 1982, the United States economy did not experience half that
level of unemployment. (more…)