Simple Minded Investor

You aren't smarter than the market. It really is that simple. The real estate industry is putting on a full court press for the notion that real estate is now a bargain. But the reality is that housing prices still have a long way to fall before they reach historic norms. And there are plenty of reasons to wonder even once they hit those norms, whether that will be the bottom of the market. The bad economy, huge amounts of other consumer debt, the tightening of credit and the hangover from the binge of new houses built at the height of the bubble would all argue that the immediate future is likely to see prices stay well below those historic norms for several years even once the current price bubble has fully deflated. So if you are renting and thinking about buying, you are probably better off waiting until at least 2010 and probably 2011. Buy now and it may be 5 years or longer before your house gets back to the current price you paid for it. On the other hand, if you already ow...

You aren't smarter than the market. It really is that simple. ---------- Update: Here is an article about Yun's predecessor essentially admitting his job was "spin". ------------- Is Lawrence Yun, the Chief Economist for the National Association of Realtors, really an economist? No, I don't mean does he have a degree and training in economics. I assume that he does. The question is what services of an economist does the National Association of Realtors provide. In case you haven't noticed Yun before, it seems every time there is an article about the housing market in the New York Times, Associated Press and other media, Yun appears with his usually rosy prognosis of the future of real estate. That is not surprising, given who he works for, but it is not really the job of an economist. Its the role of a PR flak who is delivering the message that suits his employers. I suspect the job title of "economist" is also a part of that message. Afterall, id...

You aren't smarter than the market. It really is that simple. The recent stock market crash has reminded many people that there is risk associated with buying stock. But that is really the wrong lesson for people to learn at this point. What the crash has shown is that the stock market is volatile, it will go up and down. But how much risk that creates depends on your investment horizon. If you plan to hold on to your stock for another ten years, then the recent crash has few consequences. The price in the current uncertain market says very little about the price you will get ten years from now when you sell the stock. In fact, the stock markets' hourly gyrations have very little import for most investors, regardless of their investment horizon. Volatility is relative. Monthly fluctuations have consequences for short term investors. The decline in market prices since July reminds us why we shouldn't own stock that we will need to sell in a couple months for our immediate li...

You aren't smarter than the market. It really is that simple. The media is filled with plain silly inanities these days as everyone is focused on the crisis du jour on wall street. Here is one that grabbed my eye: "The Depression itself was a dynamic sequence. It wouldn't have happened if the Fed hadn't insanely tightened credit in response to the stock market crash, rather than the correct policy of easing interest rates." First, that monetary policy lead to the depression is a highly controversial explanation favored by money-supply ideologues. But the Fed did not have a policy of "tightened credit". They simply couldn't expand the money supply by printing dollars because, at the time, each dollar had to be backed by gold bars at Fort Knox. Where the government did act to make the problem worse was cutting federal spending in response to reductions in tax revenue. Essentially the folks in charge ran government like a business, cutting expenses in r...

You aren't smarter than the market. It really is that simple. There have been several articles lately that I suspect are part of a determined effort by the real estate industry to get people back into the housing market. The basic pitch is that higher interest rates will eat up any savings you get from waiting for lower prices. Even the New York Times has gotten in on this action. The calculation always goes something like this. Say you have a house for 500,000 and you make a $100,000 down payment today with a $400,000 mortage at 6.5%. Now compare that to a year from now if housing prices fall by 10%, you would make a down payment of $90,000 and borrow only $360,000, but at a higher interest rate. If the interest rate is high enough, you will end up with higher payments and paying more total for the house than if you purchased it now. There are two problems with that calculation. The first is that isn't really how people buy houses. People decide how much they can afford and th...

You aren't smarter than the market. It really is that simple. The BBC has a story about how home owners who find themselves under water, owning more on their house than it is worth, are simply walking away. In most states, they have no obligation beyond what the bank gets from foreclosure. The result is that people who can still afford the payment are making a business decision to simply let the bank take the loss. Housing prices are continuing to fall. There are some predictions that the ultimate floor on prices may be less than 50% of a home's peak value during the bubble. That means even people who bought with hefty down payments may find themselves owing more than they own. In addition, the premium for owning your own home over the cost of renting went up with the bubble and still hasn't come down again. So in many places, most people who own could rent some place similar for less money. So does walking away make sense? If you look at it as purely a financial decisio...

You aren't smarter than the market. It really is that simple. This is a quote from a CNN Money online report on the debate over whether we are faced with inflation: 'president of the Federal Reserve Bank of Cleveland and a voting member this year of the Federal Open Market Committee, explained in a speech last month. "As consumers spend more money for higher-priced petroleum and agricultural goods," she continued, "they eventually have less money to spend on other goods and services. Other relative prices must then fall."'' Well yes, prices are falllng "relative" to oil and food. But this is a clearly a statement of ideology rather than evidence based science. And it is clearly wrong. As people have less to spend, they buy less and producers produce less and lay off employees who now have less to spend, creating stagflation. From that same article: "Automakers Ford ( F , Fortune 500 ) and General Motors ( GM , Fortune 500 ) have slas...