Southern California Real Estate Bubble Crash Blog

If you were reading the previous post, you know that I was helping out a reader with some advice about his home in Arizona and what to do. Tonight I’ll take on the opportunity of what to do with the funds he has available. My next article will tackle when to buy.

Keep in mind that this advice is free, and you get what you pay for. If I were in the same situation, my actions might be different from what I am currently doing simply because each person and situation (as well as timing) is different.

When we left our friend Boomer yesterday, I had advised him to sell his home in Arizona even though that wasn’t the question. There was no question that the house was overvalued based on normal valuation methods. In addition, rates have remained stubbornly high despite a strong easing campaign by the Federal Reserve Bank. To that point, just over 2 years ago, I wrote about interest rates and what that portended:

1. Why are rates going down over time?
2. Is there a savings glut?
3. Why are risk premiums (spread) so small?
4. Are we about the enter a recession like the other small spreads indicated?

To the last point, if we enter a recession, is there any chance that housing can be saved through inflation? Does this mean 70’s style stagflation, or even worse, Japanese style deflation with ZIRP?

If anyone can provide a coherent way that housing can survive in the next 2 years, please tell us now!

At this point, I think we are out of options from a monetary perspective.

1. We already have inflation. Dropping rates will make it much, much worse.
2. Economic growth is slowing despite the mad dash of construction.
3. The credit market is precariously spread and rates could make a mad dash upward if international investors get spooked and run for the exits. The only way to keep the Dollar from meltdown at this point will be to raise rates even more.
4. Housing speculators will be crushed by negative amortization and high interest rates in this event(which arguably should have already happened by now).
5. The sitting inventory will cause personal financial distress and combined with the mad dash of rates could generate a general credit system event.

Either way, we will be seeing a much more favorable buying environment for housing in 3 or more years due to the general stress and turning of investor sentiment.

The backdrop of investor sentiment is the worst that I can remember, insomuch that you have everyone talking about a financial armageddon:

Buffet Struggles

Todd Harrison is 100% Cash

and, don’t forget the fear du jour:

Oil climbs peak, economies plumb depressions and the future will not imitate the past

While I agree that the next 10 years will not look like the last, I do think that there are plenty of opportunities that can be entered into in the next 6 months.

First, I have a couple of predictions:

1. The DOW should hold somewhere between 10,000 and 10,500. If it breaks that support level, even I’ll admit I haven’t a clue where we’re headed there.

2. I do think we are headed for a U-shaped recession, but that we have entered that recession 6 months ago and that we should emerge sometime in the next 18 months.

3. Oil is a bubble, but like the housing bubble, it is unpredictable. But, whatever you do, do not listen to the experts. They are called the experts because it’s up. If it were down, they’d be called idiots like bubble bloggers were circa 2005.

So, what should Boomer do with his new tax-free windfall?

I am also not quite 50% cash now with some recent purchases, but I do have a major cash position. I won’t recommend specific stocks, but there are some areas that I will generally avoid:

1. Oil-centric energy stocks. This is really dangerous because we learned from previous energy shocks, the seeds of conservation are being planted now and will grow into the future. Oil could very easily crash.

2. Look for investments that provide a cheaper way of performing necessities, or some game-changing technology that reinvents its space in a necessity. (wouldn’t we all like to find them) while avoiding consumer-centric stocks (many of which have already been trounced)

3. Small caps that rely heavily on borrowing for operating expenses. Many of these are already having difficulty obtaining financing, or even maintaining revolving lines.

Personally, I have invested most heavily in individual biotechnology stocks that have previously crashed by have a strong pipeline. Pharmas and biotech are littered with the remains and half-eaten carcasses from failed drugs, but entering after a crash for a company with strong fundamentals can provide some cover for potential falls. Personally, I stay away from pharmas with “lifestyle” drugs such as ED treatments in favor of those with candidates for life extending treatments for cancer, heart disease, and alzheimer’s. With an aging boomer population, I believe that we can still see strong growth in these areas in an attempt to “fix” the medicare problem. The companies I look for are those that don’t just extend life, but prevent deterioration of mental and physical faculties as these will be.

Any way you look at it, even investing in CDs is going to provide a better return for the next 5 years than real estate.

Boomer, sell and find a good place to park that money. Find a few funds that you believe in, or do the research yourself. All of the easy money was made and now it’s down to the nitty gritty of investing… yield, growth, and preservation. Good luck