Smoke, Mirrors And Real Estate

By: Sol Palha | Thu, Jun 23, 2005
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Why is it that reality, when set down untransposed in a book, sounds false? - Simone Weil 1910-1943, French Philosopher, Mystic

Since I basically only had 3 days to come up with my essay (I was out of the country in Costa Rica and Nicaragua evaluating the real estate market and several other investment opportunities) I decided that it would be best if I answered some of the corollary questions Gale bullock offered.

a) How long can it last?

The feds are masters at this game and they have managed to convince the world that everything is just fine and dandy; this game will last till the consumer is completely broken and destroyed. Only when he has nothing left will he snap out of his drunken stupor and realize that everything was just smoke and mirrors. Nothing short of extreme pain is going to bring about change.

b) What are the prospects for real estate investment?

This question is slightly ambiguous in the sense that not all areas have experienced a wild boom in real estate. I am going to attach a chart below that was sent to me by one of our subscribers. It clearly illustrates the 5 hottest markets and illustrates historically how they have moved up and down together.

Real estate markets will not crash across the nation in one shot. You will have localized crashes that will slowly spread; the hottest markets will be the ones that will be affected the most. Factors such as job growth, future prospects and overall appreciation in the value of the real estate in the last 5 years will also play a vital role in determining the extent of the pull back. Areas that have good job prospects but have not experienced a wild increases in the price of real estate should remain relatively unscathed, while those areas that have gone ballistic such as Las Vegas, New York, Miami and California will experience huge pull backs as prices regress towards the mean; the current prices in most of these areas are simply unsustainable.

I can add a bit of a global perspective here. I just returned after having spent approx 3 weeks in Costa Rica and Nicaragua. Costa Rica and especially Nicaragua should offer some great real estate values; well that's what conventional wisdom would say. Luxury condos in Costa Rica that were selling for 400K several years ago are now going for as much as 1.2 million. When one takes the local salaries into consideration these prices seem even more obscene then those here in the US. The situation is worse in Nicaragua; one would have thought that one could find great bargains here. For example a small hostel business, which is actually run out of home (it has about 6 bedrooms) in a not so good a part of town was being sold for upwards of 80K. It might sound cheap when you compare it to the US but one has to make this comparison based on the average salary in Nicaragua. The average salary is about 135 dollars a month.

I also spent sometime in Asia this year and can say that for the most part certain parts off Asia offer a far better bang for your buck (we cannot reveal this info right now as its for subscribers but will do so on a delayed basis at some later date).

Another interesting tit bit; Australian real estate took off much earlier then the US real estate markets and currently housing prices are down roughly 20% in Sydney. Hum I wander what lies in store for us.

Coming back to the question at hand, rural areas that have not seen much of a price appreciation will not be affected that much when prices pull back. However those that have seen huge price increases will experience huge corrections which depending on where you got in could end feeling like a crash. One should avoid investing in any of the super hot markets because when they correct the corrections will be just as powerful if not even stronger. The smartest thing to do right now if you own no real estate is to rent and wait for another buying opportunity to present itself. Those that own several homes should look to sell most of them and make sure you have a fixed mortgage and not one of those adjustable mortgages; should rates ever rise significantly you will be roasted alive.

c) What are the mechanisms of manipulation for real estate markets?

There are so many here that one could write over 3 pages on this topic. However I will just summarize some of them below.

One way is to have property falsely appraised or promote the concept of inflated appraisals. Banks want to lend money and if the property appraisers do not play ball suddenly they find themselves with a lot less work. Since they have to put bread on the table sooner or later they will switch sides. Eventually this becomes the norm and prices slowly get pushed up even higher based on fraudulent valuations and not true valuations.

The other mechanisms are to provide easy financing to anyone who has a pulse regardless of credit. To heat up things even more offer Zero down programs and to truly set the stage for insanity even offer to add the closing costs to the mortgage so it appears that they are no out of pocket expenses till the idiot moves into the house; once in he gets whacked too death and it becomes a struggle to just make those monthly payments.

Offer mortgages where one only has to pay the interest for a set number of years thereby providing the illusion that the payments are actually manageable.

Offer absurdly low rates via ARMS and once again the consumer is fooled into thinking that the payments are manageable. Should condition change slightly this chap could find himself on the street and with his credit completely destroyed.

Use the mass media to create the impression that real estate is one of the fastest ways to create wealth. By the way this has already been done and that's why everyone and his grandma think that real estate is the investment of a lifetime.

All of the above end up having a direct impact on the price of homes as they tend to drive them up by creating demand; the means to create this demand is questionable to somewhat illegal to say the least, but then again who cares right its all about living the American Dream.

d) Are there any similarities in previous histories of the markets?

They definitely are one of the best ones is the Tulip mania where individuals were paying huge sums of money to own these tulips; when the market crashed the transition from riches to rags was rather rapid. A more recent one is the mania where trillions of dollars were lost. You would think that such a huge loss would be a lesson that would last for at least 50 years but this generation is so brain dead that it hardly lasted 2 years. By the way they are creating another market (subtle signs are slowly being given as they were for the real estate market years ago) in anticipation of the real estate crash that will occur sooner or later and based on the data it seems that the masses will jump into that one and learn nothing from the real estate crash when it does finally occur.

e) Why is or is not real estate investment, the greatest thing since sliced Wonder Bread?

Actually it is the greatest thing since sliced wonder bread and at the same time it's one of the most dangerous arenas to enter. The rules are simple buy when nobody is buying and sell when everyone is buying. Another simple measure is that if the rental rates are lower then your monthly mortgage payments the market is now overvalued and therefore buying no longer is a wise option.

Two markets have created more millionaires in the world then any other area, or sector, real estate and the stock market. But both of them are laden with mines and so one has to know when to play and when to fold. Most players don't even know how to hold the cards up let alone play the game and as result most will be slaughtered. Just remember the era; everyone appeared to be making money but when the dust settled almost 90% had lost it all.

f) How should the consumer for real estate vote with their money in the marketplace?

It would be interesting if for once in their lives they could use their brains instead of you know what. Instead of spending so much time listening to the gurus out there they should spend more time evaluating the facts. You don't need a guru to tell you that jumping off a sky scrapper is going to kill you; on the same token you don't need to be told that for the most part real estate is not the place to invest in right now. So think before you leap or leap before you think and get fried alive.

The reality of life is that your perceptions -- right or wrong -- influence everything else you do. When you get a proper perspective of your perceptions, you may be surprised how many other things fall into place. - Roger Birkman American Publisher


Sol Palha

Author: Sol Palha

Sol Palha

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at

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