The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

[LargoWinch]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

Raja, the assumption of gold confiscation is a huge one, but a possibility nonetheless.

If that is the case, then of course RE is better than gold (for the citizens of the country affected by such policy only). Heck, Nortel stock would be better than gold in that case.

In the event of hyperinflation and provided the rules of the game do not change, gold is likely to benefit much more than RE in my view.

In sum, I think that what you are trying to say is that there is some validity in diversification in the event of hyperinflation. That is a very valid and important point.

Having said that, not everything will be outlawed in the event of hyperinflation (unless something even worse happens, but lets not go there). As such, I think that other PMs (platinum, palladium, silver) and commodities in general (especially crude oil) should be considered seriously as they are likely to provide for higher returns than RE in this scenario of gold confiscation/hyperinflation.

[raja]

• That assumes that the house isn't radically overvalued at the time you buy it. We saw the link with inflation rates broken in the last few years, and the return to the mean will be painful. Once values return to the mean, your thesis might be more reasonable.

I think my thesis is reasonable now.

Did I suggest the purchase of "radically overvalued house? Obviously that is not a good idea.
The purchase price of some houses have probably already returned to the mean. In my post I mentioned buying "on foreclosure or otherwise get(ting) a good deal."

On the other hand, not so much as a "store of wealth," but as a "safety net," a fully paid house with self-sufficiency (solar panels, solar hot water, a source of clean water on the property, etc.) is of great value in detaching from the vagaries of inflation altogether. In that sense, if we define "wealth" as the ability to survive and thrive, then a house can be "wealth" no matter what its convertability back to dollars is, if you live in it.

What you say is true about the survivability value of a house, but that is additive value to it's value as a store of wealth.

As far as renting the house out, I don't think that's working very well for a lot of people right now. House prices and rental prices do obey the law of supply and demand, just like treasuries and stocks and....

We got some rentals, and 2 are proving difficult to rent. But I said to my wife the other night, "Even if these houses remain unrented for some years, or we get half the rent we would like, if there is a hyperinflation at least we'll have these houses. And when things recover, renting them out will pay off again. And, we can always sell them."

There are two risks to my strategy, however. One is a war or epidemic that radically reduces the population . . . and the other is a revolution in which private property is confiscated.

[ThePythonicCow]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

Did I suggest the purchase of "radically overvalued house? Obviously that is not a good idea.

I like to think of it this way - the purchase price of a house has two components. There is the fair price of that much (size, quality and location) housing, and there is the investment (or speculative) portion.

I got a good lesson in this when I sold a 1200 sq ft California house on a modest lot for about $700K, and a few months later priced a similar (slightly newer and nicer) 1200 sq ft North Texas house on a modest lot for $110K. I figure, in 2008 dollars, that the $110K price is about what it takes to provide such a house, with a modest profit, and the remaining 700-110 == $590K is the California real estate bubble investment aka speculative portion.

In difficult times, I look to own, without debt, the most modest accomodations that I figure I'll be needing to get by on, while investing zero investment aka speculative money in that place. So I bought a manufactured home, cash, 1200 sq ft, brand new, for $38K. I get to live on the rest of what I have left from selling that California property .

Anyhow, besides taking the opportunity to brag, my point is that we shouldn't be debating whether a house is an investment or not. It is a mix of both an investment and a necessity.

Now (as of a year ago) is a good time not to be investing in real estate. Anytime you're alive is a good time to have a place to live.

[raja]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

Now (as of a year ago) is a good time not to be investing in real estate.

It depends . . . .

Lets say you somehow knew that there was going to be a global economic meltdown, and the US and most other countries were heading toward rapid hyperinflation . . . and that gold would be confiscated or restricted by the government. Where would you want to be invested?

Stocks? Bonds? Gold? Foreign assets? Yen? Euros? Real Estate? Or what?
This isn't a rhetorical question . . . I'd really like to know.

I'm invested in RE as a hedge against hyperinflation, because I think that is one of the possible futures we face . . . .

[raja]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

Just, you know -- a reasonable way to gauge EJ's degree of certainty regarding ka-poom is to look at his asset allocation.

Still, it's hard to tell . . . .

EJ may have $10 million, and he figures that $1.5 million invested in gold (15%) is enough to satisfy his needs, especially if he profits handsomely from a mania, i.e., makes multiples of his investment in real value. In this scenario, it could be that he is 75% certain of Poom.

Also, timing is an issue.
He may have 15% in gold, figuring that if future signs indicate the certainty of Poom, he may be able to invest 75% more in time to still make considerable profit . . . albeit not as much as if he had that higher allocation from the beginning.

On the other hand, he could have a net worth of $2 million, and he figures the the chances of Poom are so low that he's only willing to pay $300,000 (15%) for insurance against what he considers an unlikely event.

It seems to me we really need to know something about EJ's values and his net worth to have some reasonable gauge as to what his 15% gold allocation really means in terms of his probability assessment of Poom occurrence.

Of course, EJ's net worth is none of our business . . . but I, too, would like to know his probability assessments of the various future economic scenarios. I just don't think we can learn the answer based on his 15% gold allocation.

As a side point, the more assets one has, the easier it is to diversify. If I've got 50 million, I can allocate a small percentage of investment dollars to certain possible outcomes and still feel that I can survive in comfort.
If I'm retired and I've got $1 million, I may not have that luxury. If I put 15% in gold, that may not be adequate to survive for the rest of my retirement in some scenarios. So I might have to gamble on 75% gold and hope for a particular outcome in order to have a comfortable life. In this case, the less money you have, the more risk you need to take.

[metalman]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

Still, it's hard to tell . . . .

EJ may have $10 million, and he figures that $1.5 million invested in gold (15%) is enough to satisfy his needs, especially if he profits handsomely from a mania, i.e., makes multiples of his investment in real value. In this scenario, it could be that he is 75% certain of Poom.

Also, timing is an issue.
He may have 15% in gold, figuring that if future signs indicate the certainty of Poom, he may be able to invest 75% more in time to still make considerable profit . . . albeit not as much as if he had that higher allocation from the beginning.

On the other hand, he could have a net worth of $2 million, and he figures the the chances of Poom are so low that he's only willing to pay $300,000 (15%) for insurance against what he considers an unlikely event.

It seems to me we really need to know something about EJ's values and his net worth to have some reasonable gauge as to what his 15% gold allocation really means in terms of his probability assessment of Poom occurrence.

Of course, EJ's net worth is none of our business . . . but I, too, would like to know his probability assessments of the various future economic scenarios. I just don't think we can learn the answer based on his 15% gold allocation.

As a side point, the more assets one has, the easier it is to diversify. If I've got 50 million, I can allocate a small percentage of investment dollars to certain possible outcomes and still feel that I can survive in comfort.
If I'm retired and I've got $1 million, I may not have that luxury. If I put 15% in gold, that may not be adequate to survive for the rest of my retirement in some scenarios. So I might have to gamble on 75% gold and hope for a particular outcome in order to have a comfortable life. In this case, the less money you have, the more risk you need to take.

been following for a while. best guess... if 15% in aug 2001 @ 270 per the original gold article here and if 15% gold and 85% cash then ej's now like 30% gold vs 70% cash, up 25% total, right?

but the gold is not for 'retirement' but insurance. got to put the $$$ to work but in 'real' projects with real people doing real things!

[VIT]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

I can say about house appreciation in Russia or Ukraine during hyperinflation. There are distinct features which are not the particular case for US:

- Real estate was not "overvalued" before hyperinflation. The term "overvalued" is not perfect of course, but I mean no bubble that is for sure.

- Real estate before ~2003 year was priced in USD because of inflation so it was flat. Nobody measured it in national currencies. It was more exchanges of private flats then buy-sell operations. No credit, no buy operations. Tiny market expressed in monetary terms.

- But when the dust settled and inflation stabilized in less than 20% range the price of RE skyrocketed. It is not only about oil since Ukraine had the same phenomenon. So those who had money (not many) 2002-2005 and bought real estate they were very good with prices doubled, tripled and etc. As example flat I bought in 2005 tripled in price in 2008. Not sure this will be the case in 2009 but still this was very good investment. But the "price" of money dramatically changed since that time.

So it is all about time frame: during the crisis and soon after RE is bad investment (short, mid-term), if you can buy and hold it during the time when money is expensive this would be great investment. Not sure about US market today since it is much different from mentioned examples.

[metalman]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

I can say about house appreciation in Russia or Ukraine during hyperinflation. There are distinct features which are not the particular case for US:

- Real estate was not "overvalued" before hyperinflation. The term "overvalued" is not perfect of course, but I mean no bubble that is for sure.

- Real estate before ~2003 year was priced in USD because of inflation so it was flat. Nobody measured it in national currencies. It was more exchanges of private flats then buy-sell operations. No credit, no buy operations. Tiny market expressed in monetary terms.

- But when the dust settled and inflation stabilized in less than 20% range the price of RE skyrocketed. It is not only about oil since Ukraine had the same phenomenon. So those who had money (not many) 2002-2005 and bought real estate they were very good with prices doubled, tripled and etc. As example flat I bought in 2005 tripled in price in 2008. Not sure this will be the case in 2009 but still this was very good investment. But the "price" of money dramatically changed since that time.

So it is all about time frame: during the crisis and soon after RE is bad investment (short, mid-term), if you can buy and hold it during the time when money is expensive this would be great investment. Not sure about US market today since it is much different from mentioned examples.

thanks for the points. our gov't is working day and night to make $$$ cheap to invest in property. now we are wondering if anyone will have the income to buy (put money down) or finance (have credit) to buy in 2009.

[BiscayneSunrise]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

Any thoughts as to why the retail sales chart showed a negative YOY in 1950 and 1967, two years that were not recessionary?

[CENTER]
[B] Consumer are not buying

[ThePythonicCow]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

It [whether investing in real estate is a good investment or not] depends . . . .

Lets say you somehow knew that there was going to be a global economic meltdown, and the US and most other countries were heading toward rapid hyperinflation . . . and that gold would be confiscated or restricted by the government. Where would you want to be invested?

I suspect that we are not really disagreeing.

Real estate has not been a good investment this last year (that's easy to agree on) and I don't believe that it is a good investment for the next few months, at least, either. Real estate prices are still falling, from what I can tell.

Yes, when and if hyperinflation hits, real estate will be a better investment than many other things.

The way I look at it is this. You may recall the inverted pyramid of asset classes, typically with gold at the apex at the bottom, and some highly leveraged derivative at the wide base at the top. Well ... I figure that there is another layer below what's usually labeled "gold" on that inverted pyramid. That layer is the essentials of substained life -- food, clothing and shelter. To the extent that real estate means something serviceable as a source of food (farmland, say) or shelter, and to the extent that you can purchase it close enough to the bottom that you manage to hold through any further declines, and to the extent that serious inflation or hyperinflation follows, then yes you made a good investment relative to the various currencies on that pyramid that are a layer or two above gold.

However, another factor applies here. One needs to stay relatively flexible these days, as volatility is high and massive changes and reversals in markets more common than usual.

For investors of decidely modest means such as myself, real estate is not a flexible investment. It takes me months of time and a major fraction of my net worth to engage in most any interesting real estate transaction. Wealthier individuals might start to bottom feed here on real estate. It takes them but a wave of their hand to have some underling start paying cash from a few percent of their networth for choice real estate opportunities.

But I'd still recommend that people of modest means continue looking for ways to reduce, not increase, their investment in real estate, down to the minimum they figure they will need for the next decade or two, unless perhaps they are already situated so that they can live in place even in turbulent economic times.

In short, keep ones powder dry. Stay light on ones feet. For small time investors, choose inflation hedges (GLD, UDN, ...?) that are more liquid than real estate, beyond ones minimum ongoing shelter needs.

[raja]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

Having said that, not everything will be outlawed in the event of hyperinflation (unless something even worse happens, but lets not go there). As such, I think that other PMs (platinum, palladium, silver) and commodities in general (especially crude oil) should be considered seriously as they are likely to provide for higher returns than RE in this scenario of gold confiscation/hyperinflation.

Unlike some others here, I was not caught in the commodities crash. I was sorely tempted to go along with the crowd, but resisted, saying to myself, "In the coming global economic meltdown, the demand for commodities is going to plummet." (Similarly, I also was met with general disapproval when I previously recommended TIPS, but I'm getting close to 7% now . . . still losing a bit after taxes and real CPI, but not suffering catastrophic losses. I have to sell these if there's a hint of hyperinflation, however.)

I don't know if the ship's going down or not, but regardless, I think we're at least in for several years of reduced commodities demand, as the unemployment-business failure cycle deepens.

Of course, supply will contract and sometimes over-contract in response, so there will be periods of prices going up, but I believe these fluctuations will be minor, and the general trend will be stagnant or down for several years.

The time for investing in commodities is when this economic meltdown bottoms, and there are strong signs of world growth. That's not now, and I don't see any signs of it on the horizon . . . just the opposite. So, investing in commodities now is a dead investment, with maybe some meager dividends. At least with real estate you'll probably collect some rent, even if you have to reduce it 50% or lower to find renters who can afford it.

I think gold is a good investment, but not without some risks, which is why I'm in gold, RE and TIPS. All have risks . . . nothing is a sure thing.

[raja]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

Real estate has not been a good investment this last year (that's easy to agree on) and I don't believe that it is a good investment for the next few months, at least, either. Real estate prices are still falling, from what I can tell.

I depends on whether you get a good deal or not, like a foreclosure or distress sale.

We live out in the sticks in the South, and recently bought a 3 bedroom house for $35,000. In this area prices didn't go up like they did elsewhere over the past 5 years, and prices are sometimes shockingly low compared to what they were when we lived in big city. The guy had to sell because he needed the money -- it was an investment property for him (we didn't kick a widow with 3 children out in the street :eek.

We spent $2000 to fix it up, new appliances, etc. We're now getting $425/month rent, which is 13.7% gross return.

Housing prices and rents will probably fall further, but will rebound . . . and meanwhile we're getting a cash flow and a great return.
I'd call that a good investment, especially if there is a sudden event triggering hyperinflation.:eek:

Yes, when and if hyperinflation hits, real estate will be a better investment than many other things.

Agree.

there is another layer below what's usually labeled "gold" on that inverted pyramid. That layer is the essentials of substained life -- food, clothing and shelter. To the extent that real estate means something serviceable as a source of food (farmland, say) or shelter, and to the extent that you can purchase it close enough to the bottom that you manage to hold through any further declines, and to the extent that serious inflation or hyperinflation follows, then yes you made a good investment relative to the various currencies on that pyramid that are a layer or two above gold.

Gold and other monies are merely agreed upon markers for real things such as houses, food, energy sources and other commodities. Pro-gold folks talk about gold being "real" vs. fiat, but they may be burnt by the fact that, as you point out, there is another layer at the base of the inverted pyramid. (I'm invested in gold, too, so I'm hoping it won't come to that . . . .)

However, another factor applies here. One needs to stay relatively flexible these days, as volatility is high and massive changes and reversals in markets more common than usual.

It is just because of the volatility and uncertainty that I think RE is a good investment. When the SHTF in Ukraine after the Soviet breakup, only the people with gold and RE were saved. I believe the same was true in Argentina.

For investors of decidedly modest means such as myself, real estate is not a flexible investment. It takes me months of time and a major fraction of my net worth to engage in most any interesting real estate transaction.

I don't think flexibility is an issue. But I do agree that those who can't afford RE shouldn't try to buy it. Also, as I mentioned in another thread, the greater one's net worth, the easier it is to diversify, and vice versa.

Wealthier individuals might start to bottom feed here on real estate. It takes them but a wave of their hand to have some underling start paying cash from a few percent of their networth for choice real estate opportunities.

Everybody has a different financial situation. When we buy a rental property, we sell some Treasuries from my retirement money and pay cash. Takes about a week total. Our only underling is our 12 yo daughter, whom we force to do the dishes under threat of allowance reductions for non-compliance ;)

For small time investors, choose inflation hedges (GLD, UDN, ...?) that are more liquid than real estate, beyond ones minimum ongoing shelter needs.

Agreed.
Not as safe as diversification with some RE, but it's best to invest within one's means . . . unlike the Wall Street gamblers.

[LargoWinch]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

Any thoughts as to why the retail sales chart showed a negative YOY in 1950 and 1967, two years that were not recessionary?

[center]
[b] Consumer are not buying

That also happened in 1955. My guess is that retail was a much smaller component of the economy back then.

[LargoWinch]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

Any thoughts as to why the retail sales chart showed a negative YOY in 1950 and 1967, two years that were not recessionary?

[center]
[b] Consumer are not buying

That also happened around 1955. My guess is that retail was a much smaller component of the economy back then.

[ThePythonicCow]

Re: The US economy glides like a box of rocks. Don't stand under it - Eric Janszen

a 3 bedroom house for $35,000

That's a good deal, raja. And here I thought the prices (about three times higher) that I was seeing here in the Dallas - Fort Worth area of Texas were good deals. It sounds like you're doing ok.