Monday, August 3, 2009

Understanding the Noise

Over the past few weeks the "housing bottom" news has been relentless. A big part of this is due to the recent month over month increase in prices in many areas.

However, a closer look at the data shows that a major reason for the rise is due to some of the more expensive homes finally selling at fire sale prices. Let me explain:

Imagine that you live in a community with 200 homes. 100 of the homes were purchased from a builder for $200,000. In another gated section of the neighborhood 100 homes sold for $1 million. All the homes in the neighborhood are currently on sale. Over the past 12 months there have been 24 sales in the neighborhood, all of them coming from the lower priced side. Over the past 3 months sales have looked like this:

May: $205,000/$198,000

June: $195,000/$203,000

July: $190,000/$198,000

Based on the numbers you would say that the price of the homes have only fallen a small amount under the $200,000 price point from a year ago. But what would happen in one of the big homes sold at market value and you had three properties sold that month?

August: $200,000/$200,000/$600,000

The average price of the homes in the neighborhood today is now $333,000! A massive increase. But wait, in reality what happened is that the million dollar homes were just not selling before. There were no buyers.

This is what has recently happened in the market. Either through foreclosure, or through sellers accepting reality, the high priced homes have now entered the market at fire sale prices.

There is another reason why many of these higher priced homes have not sold and entered the market.

Lets say that you are the Bank of Charlotte. You currently have 10 different million dollar homes on your books that are on their way to foreclosure. You know that those homes will most likely sell for around $600,000. That means that each home will be a write off of $400,000 in losses.

$400,000 x 10 homes = $4 million in write downs

This bank has what is called "tier one capital" or "liquid cash" of only $2 million. If these homes hit the market and sold, the bank would not have enough capital to keep its doors open.

This is making banks keep a flood of foreclosures on their books and not listing them. They are hoping and praying the market will turn around before they have to mark down the assets.

The FDIC travels around the country and closes banks every week. They announce the list every Friday night. What is now a steady dribble will turn into a downpour of closings. The FDIC will need hundreds of billions from the Fed to keep the savings accounts protected.

The FDIC cannot let a bank fail because if they did they would have to pay out up to $250,000 per individual holding money there. The FDIC has no money to do this. They have to bail out the banks and sell them to another buyer. The difference in costs is printed from the Fed.

The losses coming are staggering. Commerical loans were kept on the small banks balance sheets because they were considered far "safer" than residential. The commercial write downs are in the early stages.

Sunday, August 2, 2009

Opportunities Ahead

I spend the bulk of my time explaining the fall of the economic might of our country and how you can protect yourself during this process. I plan on continuing to spend the majority of the time here discussing that macro event and why it is taking place.

The main form of protection of this oncoming change is to take yourself out of the US dollar. You can do this in multiple ways:

1. Foreign currencies invested in foreign stocks, bonds, and cash.

2. Natural resources and natural resource stocks.

3. Gold/Silver and mining stocks.

I feel that if you spread your wealth 100% across these investments (including selling your home and renting), you will not only be protected but will significantly profit when our currency falls.

This is actually the easy part, the tougher question is what happens then? What happens if you protect yourself and it turns out that I am right?

In my mind what will happen is that the United States will become a much poorer country. We will be focused on family, friends, and working to rebuild the country that we destroyed.

We will become an emerging market with fantastic investment opportunities.

One of those investment opportunities will be businesses focused on exports. When our currency falls it will not hurt everyone; businesses that sell goods to foreign markets such as Asia will thrive. In my mind the absolute best business will be to sell food to China; agriculture.

If I lay out a map in front of me and I look through the lens of the future, I look at an area like Tri-Cities in Washington. This is one of the largest food producing regions in the country, but more importantly they are close to the west coast. Close to a shipping port that can send goods to China.

My personal focus is real estate. I spend my business hours managing a large apartment complex. I do this to see, touch, and feel on site what it takes to make an asset perform. I particularly like real estate for two reasons:

1. The market is just beginning its fall and before the downturn is over will present buying opportunities never again seen in our lifetimes.

2. It can be bought with leverage; borrowed money. I can approach banks with management experience, private capital, an attorney, an accountant, and solutions to remove their debt. If you are professional and can speak with the vocabulary of a real estate investor then no part of the conversation with the bank will focus on how much money you have in the bank.

If anything that I say here during my rants and raves makes sense or seems reasonable, I would do two things:

1. Take at least some portion of your wealth out of the US dollar.

2. Try to imagine how to position yourself best as the world re-aligns.

Wayne Gretsky used to say that he skated to where the puck was going, not to where it was.

If you have any thoughts or ideas on how to profit from our new world, I would love to hear them.