There is a bubble forming in today’s economy and I believe that bubble is in U.S. Treasuries. Yesterday, the yield on 10-year Treasuries fell to 2.5% for the first time since 2009.
Why the big rush to U.S. T-bills?
A one-word answer explains the situation: fear. The fear is that the anemic U.S. housing market will not recover, and thus the U.S. economy will lapse back into recession.
Despite the rate on a standard 30-year mortgage sitting at only 4.53%, according to the National Association of Realtors, purchases of existing homes fell 27.2% in July 2010 from the previous month. And that has fear setting back into the stock market.
But I see the fear as opportunity. Here’s why:
With the housing market backtracking, the S&P 500 has hit a five-week low, with the popular stock index’s price/earnings multiple falling to 14, matching the price/earnings ratio of the Dow Jones Industrial Average for the first time in weeks.
I see the decline in the U.S. home price market and the fear surrounding a further price decline in housing as an opportunity for investors to buy at bargain basement prices. Yes, home prices in the U.S. have fallen during this recession by more than double the rate they fell during the Great Depression; but remember unemployment during the Great Depression hit 25%. Today, unemployment in the U.S. is less than half that, at 10%.
Further, during the Great Depression, about 10,000 banks went under in the U.S. The Great Recession that started in 2008 is expected to claim 1,000 U.S. bank failures before the economic contraction we are experiencing is over — and depositors at those banks will have their deposits protected by the FDIC.
Only a few short decades ago, the U.S. government created the Resolution Trust Corporation to deal with all real estate U.S. thrifts and savings institutions foreclosed on, as oil prices crashed in 1986 to about $10.00 a barrel level. I remember those days very clearly.
No one wanted to buy U.S. real estate in the later part of the 1980s because no one believed real estate prices would ever come back. Boy, were the great majority of investors wrong. The smart money made a fortune in the late 1980s buying foreclosed-upon real estate from the banks and RTC. I see that opportunity again today for risk-takers.
This year, U.S. banks will foreclose on about one million homes in the U.S. The “smart” money is buying foreclosed real estate, as property prices continue to be depressed across America. Meanwhile, the “scared” money is chasing U.S. Treasuries for meager returns.
Who do you think will be the big winners in the end? Michael’s Personal Comments:
Ever hear of a fellow named Douglas Yearly Jr.? Didn’t think you did. Douglas is the CEO of Toll Brothers, likely the largest builder of luxury homes in the U.S., with an average price per home in excess of $500,000. Toll, which has been around for over 40 years, lost over $1.0 billion since the U.S. recession started.
But, even with U.S. homebuilder confidence at its lowest level on record, Yearly is buying land at dirt cheap prices…and plenty of it. Since January 2010, Toll Brothers has invested 250 million dollars in land acquisitions at bargain basement prices. I believe that time will prove Yearly to have been a very smart fellow.
Where the Stock Market Stands
While I’m long-term bearish on the general economy (due to too much government debt, a falling U.S. dollar, the U.S. Treasury bubble, and higher interest rates ahead), I have yet to see evidence that the bear market rally that started in March 2009 is over. Yes, the rally has stalled for several months now, but the rally has not reversed or ended.
The huge profit that one earns through real estate investing attracts many people from different walks of life to invest in this business sector. But most of them fail to understand that, with huge benefits come huge losses and high risks. If the real estate market goes down and the value of their property declines, you might have to lose big.
There are so many aspects to a successful real estate investment. The very basic thing is to understand the market and take a note of the factors that are directly proportional to the value of your property. Things like space, location, proximity from places of work, and connectivity with other parts of the city and places of entertainment and alike, greatly influence the amount of profit you can make from dealing that property.
In addition to this, you must decide which of the two options i.e. either selling or renting the real estate will bring you more rewards. Often experts are of the opinion that, when the market is low and you are getting no good deal for your investments, you must rent out the estate. This will bring you a fixed amount of money and that too at regular time intervals. No sooner the market recovers; you can then put the property for sale and move ahead with your investments.
Similarly, another important issue that risks your real estate investment is to determine that the property which you are buying is free from any dispute. Buying a disputed property will put you in great trouble. Moreover, finding a buyer for such a property is a very mind-numbing and time consuming task. Also, you don’t have to buy everything that is in the house, for example just because there is an exercise bike in the living room (http://www.fitnessverve.com/best-exercise-bikes/), it doesn’t mean you have to pay for it. Therefore, expert real estate investors always recommend, seal the deal only after verifying the legal status of the property.
These are some of the most common real estate investment risks that may hamper your positive cash flows. Besides these, there are many other hidden factors that may take away all your income for life if not taken into consideration while investing in the real estate sector. One of the biggest risks that cropped-up last year is because of the launch of Executive Order 13603. The rule has been imposed by the President of United States, Barack Obama, with the aim of supporting the nation’s economy in case of extreme emergencies. As per the rule, the president can take away all your income and assets in case the nation is an alarming state of emergency.
Each one of us strives hard with the aim of making money for the benefit of oneself and to safeguard our future financial needs. Moreover, we try to follow the market predictions and apply strategies proposed by top financial and economic experts to make more profits.
We take all possible steps to protect our savings from all kinds of adverse situations so that it is available when needed the most. But, a rule like the Executive Order 13603 provides the government with the power to seize all your savings and investments if disaster strikes the nation.
In a modern busy world, most people simply do not have enough free time to be able to buy or sell their property personally, and this is the reason why real estate sales agents are still very much necessary. They act as a connecting element in the whole process, a kind of liaison, and they are the ones who actually buy or sell the house or some other type of real estate. The service that they provide is therefore very important, and people sometimes do not realize the full aspect of duties and responsibilities that such a position demands.
Real estate agents need to be well-informed, efficient, talkative, hard-working and honest, but unfortunately, not all of them fit into this mold of an ideal representative. This makes the selection process even more important, and some rules and instructions are formed over the years with experiences and accumulated knowledge from thousands of buyers and sellers.
Most of them emphasize the importance of good information, which is all perfectly natural and can be related to many other fields of human activity. However, in the area of real estate trading good information about possible sales agents most often comes from the family, relatives and neighbors, i.e. from the narrow social circle of human interaction, since people ask their close ones for recommendations. There is a high chance that somebody in your surroundings has had some experience with the process and that they know a good real estate agent, which is the first step in the right direction. If they were satisfied and have only positive things to say, you know that you are on the right track.
After this step, the process of acquiring information is not nearly over. A lot of research should be invested if this is to be done right, and the good choice of agent can mean the difference between success and disaster. Online reviews are a next possible step, but they should be taken with caution, as should most things on the global network, since those reviews can be written by anyone and with all sorts of intentions. Naturally, if they are written by other professionals then they can be taken into consideration, and could potentially give additional insights into performances of the agent in question.
But, this is certainly not enough, and clients should check if the real estate agent has a proper license and if there are any awards (Realtor of the Month/Year, etc.) or complaints. Also, years of experience in the field can be a good indication of the quality of the agent, since this highly competitive area allows only for the best to stay on the surface. Most people will generally avoid agents with less than five years of experience, and some experts support this claim, but this theory is very subjective and doesn’t have to be true in all cases.
Connections and expertise in the local area are also very important for a successful agent, and new clients should always look for someone who already has a web of connections with lawyers, home inspectors and similar professionals, since all these elements can be of use when you want to sell or buy that precious piece of land.