Discussion of a "Bottom" One Year After a 7 Year RE Market Run Up is Pure Ignorance!

By: Reggie Middleton | Fri, Apr 11, 2008
Print Email

I was talking with my father yesterday about the meanings of the terms recession, depression, inflation, nominal and real prices. My dad (and my mom) are my heroes. They are hard working, god fearing, extremely loving working class folk. BTW, we had this discussion on the way to talking to the local Hyundai dealer to sell us their top-of-the-line, fully equipped Azera model for just over $23,000, brand spanking new. This car has 85% of the amenities as luxury cars literally costing four times as much, not to mention a 7 year warranty. This is the Edmunds pricing breakdown for that exact car.

TMV Pricing Report
2008 Hyundai Azera
Limited 4dr Sedan (3.8L 6cyl 5A)
TMV
What Others
Are Paying
  MSRP Invoice
National Base Price $28,550 $26,517 $27,306
Regional Adjustment
for Zip Code Change
- - $175
Optional Equipment $2,750 $2,538 $2,639
06 Option Group 06 Ultimate Navigation Package $2,750 $2,538 $2,639
Color Adjustment - - $32
Sage Green
Destination Charge $695 $695 $695
Total with Options $31,995 $29,750 $30,847
 
Incentives & Rebates -$2,500
Customer Cash Adjusted True Market Value $28,347

Now, why would they sell us the car for $5k less than what "others" are allegedly paying? The truth of the matter is, as many have already surmised, that the car business is doing horrible. These dealers have inventory on a floor plan (credit line) and they are apparently losing enough money where they are willing to take deep losses in order to move it off the lot. This is a sign of a depressed economy. Hyundai are the "everyman's" car. If these can't move without discounting past the point of extreme pain, the debate about recession and hard landing is simply academic. Okay, I digress. On to the topic at hand.

If I hear another pundit (ex. Ara Hovnanian) query or comment on reaching a "bottom" in the real estate market anytime soon, I am going to scream. In the conversation I was having with my father, I explained the current housing like a ball that we usually play with at ground level. Ground level is the equilibrium point. Now, I said, imagine throwing that ball 50 feet into the sky, then expecting it to suddenly stop in mid-air or 5 feet down in its descent back to the ground - ex. finding the "bottom" that the CNBC crew are in search of and expecting to come sometime next year. Physically, and realistically, this expected stop (or bottom) for the ball just ain't gonna happen. The same can be said for real estate values. When things pop that far outside of historical mean, expect a reversal. The following graph makes this point crystal clear, congealing the entire conversation I had with my pops into one picture...

Looking at the real (inflation adjusted) prices of homes over time and comparing them to the rates that tend to power them and the costs to build the home, that ball that was thrown up 50 feet into the air (the blue line) will have to drop at least 50% before it even comes close to hitting the ground again (the largest distance between the two lines, historically, excluding the 1997 spike, at at a realistic minimum). So all those guys who think the largest historical housing price spike since the US gold rush that lasted at least 7 years will be over after a year or two of relatively minor correction, study your history!

Now there is another way of looking at this. Many people ask me when I think the housing market prices will stabilize. I say the that houses will sell when people will be able to buy them. After the long run up, median prices have outstripped median incomes by so much that the (vast) majority of housing stock is out of reach of the everyday working couple. People like my mon and dad. It's as simple as this - houses won't start selling until people can buy them.

So taking the previous, and rather simplistic but highly informative theses into consideration, any one who believes that housing industry and financial industry that levered up on real assets and related securities at the very tippy top of that blue line in the first graph will stop writing down values by year end or even next year, I strongly suggest you start studying your history. It will be decades before we see those prices levels again. Where excessive leverage has come into play, it is quite possible that some of these assets may actually NEED to be written down to zero. Just look at the first chart and think of buying at that apex with 30x leverage, then having to suffer the trip down as the ball falls back to the ground.

 


 

Reggie Middleton

Author: Reggie Middleton

Reggie Middleton
Veritaseum

Reggie Middleton

Who am I?

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency.

I pay for significant information and data, and am well aware of the value of quality research. I find most currently available research lacking, in both quality and quantity. The reason why I had to create my own research staff was due to my dissatisfaction with what was currently available - to both individuals and institutions.

So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned consumer banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.

So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me.

Copyright © 2007-2016 Reggie Middleton

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