The Benn Pacific Blog

Tuesday, January 13, 2009

MIKE TYSON ECONOMICS

When asked his response to a competitor who stated he had a plan to defeat Mike Tyson in the ring, Iron Mike said “Everyone has a plan until they get hit in the mouth.”  Thus it is so with your investment portfolio perhaps?  You’ve been hit…but are you out? 

For several years, before I had kids, I would travel regularly to Las Vegas with friends and we would often play craps.  Invariably I would lose most of my money and go to my room to lick my wounds… meanwhile one of my friends, who was also losing, would decline to retire and say, “Im gonna stick it out a little longer.”  In the morning when I would check on his status, I was almost always met by the response that things had turned around and he was back to even or profitable.  While I am not suggesting gambling as a solution to your financial woes, the point is that you shouldn’t sell and run… you might actually consider investing more at these low levels to ride the wave back up, provided you have a long-term time horizon.

Shelby Cullom Davis, a renowned investor put it best:  “You make most of your money in a bear market.  You just don’t realize it at the time.”  Whether you prefer equities or real estate, you have two markets that are beaten down but you have to have confidence when others do not. 

Posted by Trevor Benn on January 13, 2009 at 10:09 AM
Investment • (3) CommentsPermalink

Friday, January 02, 2009

OAHU REAL ESTATE 2008 recap

Well the final figures are in for 2008, and they are showing s 26.9% decline in overall sales volume (both single family and condo).  Price declines have been much less than in other markets across the country, with a 3% decline in the median price of single family homes and zero change in condo pricing.  This condo anomaly can best be explained by the closings of several new condominium projects.  These projects tended to be of a higher price point but, also, these sales are recorded when the buildings are completed and transactions close…but the actual “sale” took place two to three years prior, when the developers began its pre-construction sales contracts with buyers. 

WHAT DO THE NUMBERS MEAN?
Well, in general, the real estate market (like all markets)  are subject to the forces of supply and demand.  We are currently facing lessened demand which results in an over-supply of inventory.  Those Sellers who do not recognize the changes in the market will be beat to the punch by those Sellers who do and price accordingly.  In addition there continues to be a segment of the market that is forced to sell (short sales, foreclosures) and those units will be priced aggressively to move, adding further pricing pressures to the market. 

CRYSTAL BALL FOR 2009?
To quote a famous line: “The only thing I am certain of is uncertainty.”  To predict the future is generally a fool’s task but since my wife often refers to me as a fool …I will take a shot.

Here’s what we look for:

  1. Weak macro-economics.  Global credit crisis.  Unless you have been living under a rock, you are aware that we are in a recession.
  2. Studying the trends of previous down cycles we see that Hawaii generally trails the US Mainland real estate markets (most specifically California) which would indicate we have more to fall before we see a bottom.
  3. We also look at inventory levels and see that “days-on-market” for existing inventory has been stretched to approximately 60 days in 2008 from the “fast-pace” of 30 days in 2005 (remember:  days-on-market only apply to those units that actually sell…there is a large number of units currently on the market for over 60 days).  We suspect there is about 4 months of excess inventory currently for sale.
  4. Certain segments of potential Buyers have also been removed from the market, as lending restrictions have pushed them out. 
  5. Certain Sellers must sell due to defaults or pending defaults on their loans.  These Sellers, under pressure from their creditors, will exacerbate the price pressures.
  6. We have seen a major decline in off-shore Buyers.  The typical West Coast baby boomer who was looking for a second-home in Hawaii is waiting until his own home in California recovers before stretching for another property. 
  7. Tourism is down.  Our economy, in general, is as close to a one-trick pony as you get…when tourism is down there is a slow ripple effect through the labor markets, direct tourism-related industries and indirect industries in like kind.

So, factoring these indicators we believe sales volume could drop another 30 percent and prices may come down 10-15% in various areas.  Ultimately, demand is different in different neighborhoods and across different segments so it leaves a relatively wide range of possible price declines but in general the direction of the market will be down.

WHAT COULD SAVE US?
Well…here’s the bright spots that might combat some of these negative forces:

  1. Weak dollar.  A weak dollar against foreign currencies makes buying in Hawaii a veritable bargain… particularly Japan, Korea, China and Canada who have shown a liking to Hawaii real estate in the past.  But be aware, many of those countries are also facing economic difficulties.
  2. Scarcity of product.  I know, I know… I just got through saying there was excess inventory.  BUT Oahu is an island and, as such, the developable land areas are limited.  Over a long time period the population will continue to grow and urban sprawl replaced by vertical development.  Take it from my Grandmother, “They’re not making any more land!”
  3. Low interest rates.  This is by far the brightest spot in the “bright spot” area.  With mortgage rates in the mid 4%’s the Buyers who have a long-term focus and are ready to buy will be doing so with very inexpensive dollars.  AND…IF the long-term effects of the Federal bailout package is inflation (remember they are increasing the monetary supply through the bailout) then those Buyers will also be using 50-60 cent dollars.  (See my other blog titled “De or In…Flation that is” for deeper confusion on this possibility).
  4. Government aid.  Depending on how the government reacts to further economic data on housing should impact the markets.  It looks like they will continue to support the lenders in trying to minimize loan defaults and also buy up bad loans on the bond side.

HOW TO PLAY IT?
Some will benefit from this market and some will not. 

Winners:  Organic Buyers.  This term is my term for the local Buyer…could be the first-time homebuyer, Buyer who is moving up to a better home, or the downsizing retiree.  These are Buyers who are here for the long haul. 

Whatever the scenario for these Buyers, the market moving down allows them to Buyer more home for less money.  For the first-time homebuyer it’s a perfect setup…  low interest rates, low price.  For the upwardly mobile Buyer, he will sell for a bit less but buy more house for less anyway so the difference is still a net positive (since the Buy-side is a bigger transaction).  For the downsizing Buyer he will likely still get a great price for his home, relative to what he paid for it and he will get a great buy in a mower maintenance or smaller home and pocket some dollars to invest or spend.

Other Winners:  Some investors.  Some investors who have equity built up in their existing portfolios can leverage that equity by borrowing at these low rates and buying more investment properties at these low prices, OR they can sell and do a 1031 Tax-deferred exchange and move their investments from less desirable properties into more desirable properties.

Losers:  Developers and unrealistic or highly leverage Sellers.  Developers holding onto lots of inventory (especially inventory that’s leveraged…which they all are) are already faced with some tough decisions.  Slash prices and affect the previous sales they have closed or have under contract, or offer incentives (fee upgrades, etc)? 

Highly leverage Sellers are in a tough spot too.  They have to decide, depending on their situation, whether to sell at a loss, or support the payments until the market turns.  These guys often are unrealistic with the market conditions and learn all too painfully that time is your enemy in a declining market. 

WHEN WILL IT TURN AROUND AGAIN?
Well since you can see I’m dumb enough to try and forecast 2009… why not try to predict even further out?  If you are holding out for the market to turn, consider the “Buyer of 1995”.  He was convinced that after 5 years of price declines from the peak of 1990, the market had to have reached a bottom!  That Buyer (now an owner) saw the real bottom in 2000 and then had to wait until 2004 to break even.  So the last cycle was from a peak in 1990 to a trough in 2000, then from the trough of 2000 to a peak in 2005.  We are now in year 3 of a sideways or downward market (yet most didn’t realize it until recently)… we feel the bottom might take until the earlier 20-teens to arrive (say 2013 or 2014).  I know, I know… for a real estate Broker it’s like hitting myself with a blunt instrument! 

MY TWO CENTS
People often ask me what I am doing with my money.  Well…I am a long-term investor in real estate and, while I have done some investing in the mainland US, I am guided by one major principle… #2 in the list of “bright spots” above.  I always listen to my Grandma!

 

Posted by Trevor Benn on January 02, 2009 at 10:02 AM
Real Estate News • (1) CommentsPermalink

Friday, December 26, 2008

DE or IN?  …Flation that is.

There is general understanding that we are in a period of deflation.  I understand what that is…it’s when gas goes from $4/gallon to $2/gallon, or mortgages go from 6% to 4.5%.  It’s the “Japan economy” everyone has been predicting.  Where we essentially “flat-line” for awhile (although Japan’s been doing it for a long time now!); the experts say we will see contraction in spending, declines in earnings, weak job reports, cheaper goods and services, etc.  Okay, okay…I get it.  I have a degree in Finance from the Harvard of the Pacific (UH)! 

So what is the government’s reaction to this?  Bailout.  What’s the Bailout mean?  Print money, buy bad debt, print money, invest in banks, print money, invest in car manufacturers and print more money.  So you say we won’t see this affect inflation because corporate America is in liquidation mode so it’s a sum zero game just like Japan?  Maybe.  But increasing the monetary supply is supposed to lead to inflation right?  Maybe.
This is a tough one for my crystal ball.  Here’s what one Forbes article says:

“One last investment that should work out well over time: Buy property, if you live in a place with a forest of for-sale signs. The housing crisis is terrible, but it won’t last forever. If you can get a mortgage, and if I’m right about inflation, you will eventually be paying it back with 50- or 60-cent dollars. Pay 20% down on a house that rises 40% in five years and you’ll triple your investment, assuming you can cover the interest and maintenance with rental income. If prices rise above the rate of inflation, a reasonable possibility given how depressed they are now, your return will be still higher, possibly significantly so.

Take that money out of your mattress. If you don’t, you’ll miss one of the great buying opportunities of your life.”

David Dreman is chairman of Dreman Value Management of Jersey City, N.J. His latest book is Contrarian Investment Strategies: The Next Generation. Visit his homepage at http://www.forbes.com/dreman.

All I can say is…I hope he’s right!

Posted by Trevor Benn on December 26, 2008 at 09:59 AM
Investment • (3) CommentsPermalink
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