Red Shift

By: Rodney C. Cook | Mon, May 19, 2003
Print Email

For most of us our primary tangible asset is our home. Or our savings for a home. A few are fortunate and have a second home or income property as well. But are these assets safe? Surely, they are tangible and can't be destroyed. Except by tragic accident. But in the current macro economic environment the "ownership" can easily shift to the banksters. So what strategies can I employ to avoid being on the wrong side of the real estate game? And why should gold have a key role in this strategy?

Happy Campers
Most of us "home owners" are very happy right now. The price inflation of our houses has been astounding, especially in the urban areas where there is a physical shortage of real estate within an easy commute of the major high income job centers. In this blue zone, we all feel rich. So our houses are worth more? But when I stand in my backyard and survey my domain, it's the same domain. A few things have changed. I have improved the place: a fence, some nice plantings; a pond, shed and gardens. But does this justify the big jump? Or is there just a surplus of dollars chasing a limited supply of properties.

Just Another Bubble?
There has been a lot of news and editorial comment this past week about real estate. And, after lengthy albeit shallow discussions, the talking heads typically conclude that there is not really a bubble. Well maybe. In the traditional sense. After all mortgage rates are at historic lows. And home prices continue to soar. Projections are made that single family home prices will double in a few years in certain hot urban markets, and given last year's increases this certainly appears possible. So a catastrophic short term decline, as has happened in stocks, is not in the cards. So who's to worry? Well, me.

There is considerable reluctance to acknowledge that real estate inflation may end badly. I share that reluctance. There is a strong natural urge to own your own home. It is the fundamental component of the American Dream. So it is difficult to look rationally at the situation. And the politicians know this, and dare not preside over a general price deflation in real estate. So there will always be the equivalent of a Greenspan put in this market. And it will likely work. Until it doesn't. So when might that happen?

This is a different sort of bubble. It is made up of a collection of miniature bubbles. Individual bubbles. And Americans will continue to buy into their personal residential real estate bubble. Until they can't. And with the worst job market in decades, and personal bankruptcies breaking records the bubble is bursting every day for an increasing number of individuals. And their personal derivatives position slowly unwinds. And it will continue. Slowly, but inexorably. No wonder the current administration is focused on creating jobs. Continued job erosion is pressuring the real estate market. The last bastion of strength in our national economy.

Landowner
By having a mortgage I do not own my home. I am renting the money from the bank, and have used that money to obtain certain property rights. I am really just playing the real estate futures market. If real estate prices decline the money debt remains. And I owe the bank the difference. If I have no other assets this is less of a problem. Except for the bank. So, in this instance it appears that moral hazard is on my side. A rare anomaly? Or is something happening here and I don't know what it is. And the land owns me.

Nomads
If you think about it, the concept of owning land is a bit bizarre. After all the land is forever. And we are here for a very short time. Even the best of residences built by man typically last but for a generation or two. Recent construction suffers from the same greed and excess typical of a bubble, and may last but a decade. So in the big picture we are just nomads. Guests of the land. And property rights just a man made construct. A financial construct that has been designed to enslave.

Land of the Free
Our founding fathers debated the phrase life, liberty and pursuit of happiness, considering for a time life, liberty and property. The wisdom of these men continues to astound me to this day. If you substitute pursuit of happiness for property in you life's ambitions you are more likely to achieve liberty. A measure of sovereignty in you life. And more likely to understand the trappings of slavery superimposed upon the land to devise a personal strategy to shake off the yoke of personal debt.

So what tactics does this perspective imply? Well, take advantage of low rates to "buy" a home and ride the subsidized price inflation. If you have no assets to protect, be fairly aggressive. But listen for the sound of a fading bubble bath in your locale. Don't lose sight of the fact that, financially, you are speculating in real estate futures. As such you must have an exit strategy. And be watching key indicators so that you can objectively implement this strategy. Rapidly appreciating prices can be a warning flag. This can continue, but when everyone is in agreement that it will continue, then watch out. This is the sign of a peak in your local market. In most of these markets housing prices have been increasing much more rapidly than income. At some point this imbalance will dampen prices. But this can be postponed if the population of wealthy individuals keeps shifting financial assets such as stocks and bonds into the perceived safety of real estate. Especially if there is an endless supply of the wealthy. Already, however, this shift is waning for income properties, where prices are eroding. And you want to affect your exit strategy before prices start to decline. Usually time on the market will lengthen well before prices drop. This statistic is regularly published for local markets. Watch it carefully for a signal to consider exiting real estate futures.

And entering tangible assets: Cashed out property and precious metals topping the list. Most of us want a cashed out home. A sovereign place to create memories for family and friends. A place of sanctuary to rest your head. Mortgage free, and shielded from taxes.

So a long term goal of owning your own home helps define your personal exit strategies. Everyone is in a different stage of life, has different earning potential, and exhibits a different tolerance for risk. So there are no firm rules, but some significant trends have emerged. And front running these trends is always a good idea. The astute are shifting away from the urban centers. A shift to the red zone and the attendant conservative lifestyles. To rural properties that have not appreciated much relative to the urban centers. To rare and beautiful vacation properties as both investment and retreat. Away from terrorists, epidemics, and moral decay. In search of home. There are many who have cashed out of the big city. Some choosing to rent, others moving out. And in these markets there is less debt financing, and as such the properties are less subject to price deflation. Besides, in a cashed out home, price deflation just lowers your taxes.

There are way too few seats in this game of musical chairs. Those whose emotions cause them to think of their futures position as a home will be left standing angrily. A home is only built with years of hard work, savings and sacrifice. And maybe with a shrewd investment strategy. But not with a quick visit to the mortgage bank.

Gold's Role
Gold can be viewed as cashed out real estate. It is portable, and gives you the flexibility of moving from one market to another. It is divisible and allows you to do so incrementally, slowly accumulating gold as equity. It is a hedge against your personal residential real estate futures position as it will inflate when debt based real estate deflates. It also avoids the weakening dollar. This is especially important if you are planning to move out of country someday, or use imported building materials for your dream home. It is not subject to property taxes. But then you can't live in it either. So it is a store of value for your personal real estate strategy. For building tangible wealth for your home equity position, regardless of the magnitude of your wealth.


 

Author: Rodney C. Cook

Currently Rod is the founder and manager of Bull Trout Capital, a boutique investment company, and author of the FishWrapper, a private investment newsletter. Bull Trout Capital was founded to maximize returns based upon long cycle dynamics and Austrian economic principles. Dr. Cook uses internet based methodologies to identify sectors, strategies and shares that will most likely outperform at the current point in the cycle whilst maximizing upside exposure to potential economic dislocations. The FishWrapper features Dr. Cook's personal investments, methods and strategies where he has demonstrated extraordinary returns. Before Bull Trout he founded Sightward and authored patents (now owned by InfoUSA) to forecast human behavior on the internet; co-founded Ark Interface (now owned by xSides) to develop and patent innovative computer user interfaces; founded Optimas (now owned by Media Cybernetics) for medical and scientific image processing systems; and founded BioSonics Imaging division and developed their Optical Pattern Recognition System. Dr. Cook began his career as a Biometrician for the International Pacific Salmon Commission applying his doctoral dissertation in applied pattern recognition from the University of Washington College of Ocean and Fisheries Science.

Copyright © 2003-2006 Rodney C. Cook, Ph.D. All Rights Reserved

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com