Only Fools Rush In

by Michael Lombardi, CFP

Being April Fool’s Day, I thought it would be appropriate to quote the famous Elvis Presley song, as I write today about something dear to all our hearts, something investors can make a lot of money in, an investment many people are starting to jump back into, but something I think will not rise in value for years.

Of course, I’m talking about real estate. At its most basic form, housing is dear to our hearts, because we all need to live somewhere. And who doesn’t want to live in a beautiful home? President Clinton tried to bring the dream of owning your own home to all Americans. And many consumers did buy new homes or second homes, renovate old homes and more. We all know that the housing bubble created by reduced interest rates and easy access to money burst. Most Americans are paying dearly for the housing bubble that burst.

On January 10, 2008, in these pages of PROFIT CONFIDENTIAL, I predicted that home-building in the U.S. would enter a quasi depression state in 2008. I also predicted that a major U.S. homebuilder would go bankrupt. That happened on August 4, 2008, when WCI Communities, the largest U.S. luxury homebuilder, filed for Chapter 11 protection.

Now I’m hearing from my readers and my friends that they are starting to get back into the real estate game. In my opinion, it’s too early. Banks are not lending. Hence, you need to have ample cash when you are making a real estate investment these days. That’s a lot of capital to tie up waiting for the market to start moving higher again.

It has always been my preference to get into an investment when it starts rising, as opposed to getting in at what you may believe is the bottom and waiting for the investment to rise. According to the S&P/Case-Shiller Index, home prices in the U.S. fell 19% in January 2009 compared to January 2008.

There is a glut of unsold houses in the U.S. and that glut needs to be cleared before price appreciation starts again. I just don’t see the benefit in getting into real estate investing now, because I do not see prices stabilizing for at least another three to five years.

When I’m looking or thinking about real estate, I always turn to the price chart of the Dow Jones U.S. Home Construction Index, an index comprised of the stocks of largest U.S. homebuilders. This index has fallen from a high of 1,100 in 2005 to 213 today, an unbelievable fall of 81%. The chart has shown some signs of bottoming out lately, but I believe this has more to do with the recent strength of the stock market than anything else.

Getting back into real estate as an investment…buying up the homebuilder stocks at depressed prices? You know my thoughts: Only Fools Rush In.

Michael’s Personal Notes:

A warm welcome and thank you to the 9,514 new readers of PROFIT CONFIDENIAL that joined us this past March. When we created this daily “e-newspaper” early in the decade, we had no idea it would become so popular. Each day myself, George, Mitchell, Inya and our special guest columnists provide you with our financial, stock market, and economic opinions as best we can. I’ve been an avid student of the stock market and the economy for almost 30 years now. My personal best calls since we started PROFIT CONFIDENTIAL: calling the start of the bull market in gold in 2002; calling the top to the housing market in 2005; predicting the current financial mess we are in starting in 2006. Hopefully, we are making a difference in how you see and deal with your own finances.

Where the Market Stands:

After rallying as much as 200 points at one point yesterday, the
Dow Jones Industrial Average was not able to maintain the advance. The Dow Jones ended up 86 points for the day. Still, March was the best single month for stocks since 2002. As I have been writing, I see the recent strength of the stock market as a rebound from a severely oversold condition. Many analysts are now claiming that the bottom for stocks is in. On the contrary, I believe we are still in a bear market and that, while stocks may rally here and regain most, if not all, of their 2009 losses, the market lows of 2009 will be retested. The Dow Jones Industrial Average is down 13% for the year.

What He Said:

The year “2000 was a turning point of consumer confidence in high tech stocks. 2006 will be remembered as the turning point of consumer confidence in the housing market. That means more for-sale signs going up, longer time periods to sell homes, bloated for-sale inventory and eventually lower prices for homes. But this time, the turnaround in consumer confidence will have a bigger impact on the economy. Hold onto your seats, this is going to be a nail biter.” Michael Lombardi in PROFIT CONFIDENTIAL, August 24, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.