Only Fools Rush into this Market and I’m Not Talking Stocks

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

Hear the good news on the housing market yesterday?

“Home Prices in 20 U.S. Cities Rise for the Fourth Month,” ran the headline across Bloomberg. Major newspapers ran even more positive headlines and stories on the recovering housing market.

What’s all the “positive” news about?

According to the increasingly popular S&P/Case-Shiller Home Price Index, home prices in 20 major U.S. cities have now increased for four consecutive months in a row.

While this is principally an economic and stock market e-letter, you would be surprised at how many enquiries we get about investing in real estate. The most popular question, “Is this the right time to jump

My response is that only fools would rush into the real estate investment market at this point in the economic cycle. Here are my top five reasons not to buy properties for investment right now:

— If we look at the S&P/Case-Shiller Home Price Index closer, we see home prices in the 20 major U.S. cities that the service tracks have fallen another nine percent from September 2008 to September 2009. You know my feeling — don’t buy an investment when it is declining in price, because you never know where the bottom will be. It is always wiser to buy an investment when it is rising in price (e.g. gold).

— According to the Mortgage Bankers Administration, foreclosures on prime mortgages and home loans insured by the FHA rose to a 30-year high in the third quarter of this year.

— The stock prices of the major homebuilders have yet to start rising. The prices of these stocks are a leading indicator of future housing activity.

— According to First American Logic, about one-quarter of U.S. homeowners owed more on their mortgages than what their homes were worth in the fourth quarter of this year.

— Finally, interest rates, which I believe play the most important role in determining the price direction of real estate, have immense pressure on them to rise because of the collapsing U.S. dollar and pending inflation.

Real estate investing? Not my cup of tea right now.

Michael’s Personal Notes:

Did you hear the one about the fellow who bought the Pontiac Silverdome in Detroit for $583,000?

The former home of the Detroit Lions football team, the stadium that set an indoor attendance record when it hosted a mass by Pope John Paul III, and hosted a Super Bowl and Wrestle Mania III, cost an estimated 58.0 million dollars to build in 1975.

So the new owner paid one percent of the construction price. Great deal. But what is he going to do with it now? This 88,000-seat elephant costs over one million a year just to maintain — empty.

I bring up this example to show just how low real estate prices have fallen — make that collapsed.

Where the Market Stands:

The Dow Jones Industrial Average starts this fine morning up an astounding 18.9% for the year. I was the only economist I could find predicting 10,000 on the Dow Jones and I’m likely the only one predicting Dow Jones 11,000 now.

I read somewhere yesterday that the yield on U.S. T-bills actually turned negative a couple of days in November. People are willing to buy T-bills and get a negative return just to keep their money safe. Can you imagine that? More importantly, can you imagine what will happen to stocks when the money re-enters the stock market?

Very few people understand why the stock market is going up against the backdrop of a pathetic economy. And most market analysts are predicting a long overdue correction for stocks given the huge rally stocks have experienced since March of this year.

You know what? The stock market loves proving investors and analysts wrong. As long as the gloom continues and as long as the monetary and fiscal policies of our government are so accommodative, the stock market will continue to rise.

What He Said:

“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in PROFIT CONFIDENTIAL, April 8, 2004. “We will wish Greenspan never brought rates down so low as to entice so many consumers to have such big mortgages.” Michael Lombardi in PROFIT CONFIDENTIAL, April 27, 2004. Michael first started warning about the negative repercussions of Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.