The Real Estate Bottom

Posted by Ray on August 13, 2009 under Economy, Markets | Be the First to Comment

Correct me if I am wrong, but hasn’t real estate hit its bottom? According to CNBC, TV, Cramer said that real estate hit its bottom, ‘early’, in June and all other reports yesterday everything is fine and prices will go up,up,up! However, as usual, CNBC.com has conflicting stories for example, CNBC TV says bull market with hot economic growth and there is no risk in this bull market, but CNBC.com is awash with stories about the global markets are in trouble and real estate is in pretty bad shape. This is what makes me question the integrity of CNBC commentators, who I once respected.

Regardless, real estate is a mess and July was no exception with foreclosures setting yet another record. Remember this is ‘another’ record meaning it was worse than June which means more pressure on the residential market when or if banks put those homes on the market. That is the crux of the matter, banks are holding properties, often referred to as the shadow market, and we have no idea exactly what their inventories are. Therefore, the sales numbers and inventory numbers mean nothing as there is hidden supply out there, unless they continue to destroy foreclosed home, yes banks are doing that.

All of the programs in place are simply not working and I would chalk this up to a waste of time and money considering most modified loans still defaults. As hard as this is to say, we need to let these homes be foreclosed upon, yes I am serious. This is one way of cleaning up malinvestments and people need to understand how to live within their means instead of trying to keep up with the Jones’s. Now, before you call me cold hearted or insensitive I need to let you know that I did have a family member lose their home with horrible consequences, but it was a matter of too much house without enough resources.

The foreclosure rate for July was up 7% month-over-month and up 32% year-over-year. What this means is more moratoriums are on the way and more federal rescue plans which are merely a waste of money. These programs only postpone the inevitable and will make future reports look OK in the short-term, but longer term it will simply create more bad data points. The market is telling us to let housing depreciate and propping it up will only prolongs the pain moving forward.

This data also feeds into my belief that the markets are overbought to such a high degree that I fear the next leg down will be horrific. This is why I moved mostly to short treasuries, non US dollar assets and cash only keeping 35% total in equities, enough to let me participate if I am wrong, but if I am right it will not destroy my portfolio. Either way you feel I would strongly suggest you invest defensively for the short-term. As usual, do your own homework and invest according to your goals and needs.