Video: Is Credit Crisis Over?

Two Investment Ideas

Quote of the day:
“When I see people destroying their privacy — what they think, what they feel — by beaming it out to millions of viewers, I think it cheapens them as individuals.”
--Richard Widmark, on why he never appeared on talk shows.

Times of economic turmoil always present investment opportunities. A good indicator of such an opportunity is one that elicits the following response from your friends: “What are you, nuts?”

Many of us like to consider ourselves apart from “the crowd.” We say to ourselves that we are following our own unique, enlightened path. But contrarian thinking is very hard.

Investors behind the truly “smart” money are invariably contrarian thinkers. They buy when most are interested in selling, and thus they buy cheap. Smart money is patient and quiet. If and when we learn where their money is going, it’s already gone there.

The best-known contrarian is Warren Buffett, whose investments have become so large that it’s hard for him to stay quiet. It’s always news when he makes a move.

I don’t know what Warren Buffet is investing in right now, but there are two clear areas of opportunity: municipal bonds and residential real estate.

Real estate may be more obvious to the average person. There is virtual unanimity that the bottom of the market is still to come.

While everyone is standing around waiting for the bottom of the market, there are opportunities to buy properties at least 20% below their prices two years ago. Over the next two to three years, I have no idea where prices may go. But it is clear that there are some very good values appearing.

This is even more true in the municipal bond market. Because there is no tax on interest paid by these bonds, they usually pay significantly less than equivalent treasury securities.

But due to the turmoil in the credit markets--and specifically concern about the health of bond insurers--investors have been shunning municipal bonds for the rock-solid safety of treasuries. This concern has been way overdone, and top-quality munis now are yielding more than treasuries--and the yield is tax free.

Prices on municipal bonds are very low right now, and I bet there is some serious smart money taking a hard look at them.

Inflation and Recession

Quote of the day:
“General Motors is preparing to shift half of its $3 billion budget to online advertising over the next three years.”
--Advertising Age

A major focus of economic coverage on the news over the last few weeks has been are we in a recession or not, and has inflation jumped?

What is rather ridiculous about endlessly waiting for official tipping points is that they come late if they come at all, because no official wants to be accused of being negative about the economy. Also, while reporters are spending all their time quizzing economists they don’t simply look for themselves.

Have you been grocery shopping lately? Duh. Have you bought gas lately? Double duh. Have you applied for credit recently? Duh, duh, duh.

The price of wheat and other grains have gone way up, causing price jumps or product shrinkage, and causing a squeeze on restaurant owners. The price of oil is near its all-time high, so the prices of the myriad of petroleum-based products are marching upward. And all who use transportation are affected.

Yes, I know that gas and food are not included in the official CPI. But we use more of these things than anything else. This is inflation that whacks us every day.

Housing prices have declined significantly over the last two years, crimping the plans of those counting on short-term equity growth. Financial institutions are facing fast-growing loan losses, and those who took the most risk are in trouble.

Credit has become difficult to get, especially for smaller businesses. This slows business growth.

Thus it’s clear that inflation and recession are both with us.

Interesting thing, though. The parking lots at Fashion Valley and Mission Center are full. There are waits to get into bustling restaurants. And this morning JP Morgan makes a more-generous offer to buy Bear Stearns.

Maybe things aren’t that bad.

Extent of Financial Crisis

Click here for video: Ramifications of Fed bailout of Bear Stearns.

A Down Economy

Quote of the day:
“Na-na-na-na-na-na
na-na-na-na-na-na-
na-na-na-na-na-na-
na-na-na-na-na.”
--Wilson Pickett

It looks like retail sales at the end of the year were not as good as expected, though data will continue to trickle in for a while.

The Fed is saying it is ready to take some significant action to lower interest rates.

There are continuing reports that home sales and prices are both down.

It’s pretty clear that we’re in a bit of an economic slowing. If it worsens, some people will need some help, but most of us will be ok.

A lot of what is being measured is not actual decline but slowing growth. Where there is decline, the setback is not to the stone age. Rather, we are seeing numbers that were common a few months ago.

Real estate is an exception, at least here in San Diego. Prices are where they were about 3 years ago.

Still, most of us will be ok. That includes homeowners who bought a place to live at any time, including at the price peak.

Even if a homeowner who bought at the peak finds himself having to move, he should be just fine. Any loss in the value of his home should be matched by the lower price of his new home.

Real-estate investors who bought for the long term also will be ok.

The only folks at risk are speculators who expected continuous upward price movement and who therefore bought with the intention of selling in a few months or years. If they can’t live in their investments and don’t have the resources to wait a long time, they’re likely in trouble.

Speculators expect great reward and take great risk to go after it. We are seeing the downside of that risk right now, as we saw it in 2000 with day traders.

We don’t hear much about day traders anymore. Many of them were wiped out in 2000. Just as many amateur house flippers are being wiped out right now.

Home Prices Tumble

Quote of the day:
“I am a writer. That’s it. No adjectives. The first thing is writing. Christianity is secondary.”
--Madeleine L’Engle, who died at age 88 on September 6.

The big, front-page headline in today’s “San Diego Union-Tribune” is “Home Prices Tumble.” It is the most e-mailed news story from today’s paper.

172,358 San Diego County households read this headline. In 171,231 of those households, at least one person said: “They’ll go up again in a few years.”

There is one perfect word to use in response to that. “Maybe.”

I’d say it’s 50-50. Maybe home prices will go up again in a few years, maybe they’ll stay the same or go down. How can anyone know?

And that’s why I bring this up. Home prices “going up again in a few years” seems to have attained the status of some sort of absolute truth. Perhaps it’s wishful thinking.

I sure hope no one is basing major life decisions on this. Why? Because no one knows. It’s in no way the sure thing so many people seem to think it is.

It’s not a “given” that prices behave this way. No matter how many people say it. No matter how many real estate agents say it. No matter how many economists who want to be celebrities say it.

Not only is it not a sure thing, it really is a tossup. Here’s a clue. Read real-estate news from one year ago and two years ago. What was being said then?

If you look at real-estate prices since the 1920s, there is no consistent trend that suggests that prices recover “in a few years” after a decline. The longest-term trend since the 1920s shows an average appreciation of 6% a year.

Maybe prices will go up again in a few years. Maybe they won’t. I sure don’t know. Over 15 to 20 years, I’d say your odds are pretty good, though also not certain.

Bernanke is a Bit Cranky

Quote of the day:
"There is no present or future, only the past, happening over and over again, now."
--Eugene O’Neill

Ben Bernanke, the chairman of the Federal Reserve, can’t get no respect.

Everyone--or at least everyone who cares--tries to divine the future by listening between the letters to every word he speaks.

We are singularly and obsessively interested in the economic future, about which we have no information. We are little interested in the past, about which we have infinite information.

The present? Forget it. We know our own present--why do we need to know anything else?

Too bad. When I watched Bernanke’s testimony before the joint congressional economic committee last week, I was very impressed. He very clearly explained the current situation in the credit markets. He was reasonable and down-to-earth, using a minimum of arcane economic terms.

He described the reality that many of us see going on around us every day. Home sales have slowed down. Some of those who bought two to three years ago with adjustable rates are facing payments they can’t afford.

He said that extending subprime credit has significant benefits, including enabling home ownership among people who otherwise wouldn’t qualify. But some institutions had overdone this, and they are increasingly suffering the consequences.

And then he said something that really should be at the top of the news. He said that economists are very bad at predicting trends. They predict because we loudly and endlessly demand it. But they are always wrong.

So what’s the point of strenuously fixating on predicting the future? No one, especially trained economists, can do that. They’ve never been able to predict. Do we think somehow the ability will magically arrive?

I suggest we all try to just get a grip on what we can know, which is the bigger-picture present and the past. Maybe we can learn from it.

My House is Worth What?

Quote of the day:
“When a man’s best friend is his dog, that dog has a problem.”
--Edward Abbey

Are we living in homes or commodities? It’s hard to tell from hearing people talk about the value of their houses, and watching the real-estate reality TV shows.

On the popular HGTV program “My House is Worth What?" those who show off what they’ve done to their houses are roundly and routinely criticized when they’ve done things that they like but that a lot of potential buyers won’t.

But who is living in the house, you or the potential buyer?

Of course, the very premise of that show is determining what someone might pay to buy your house, so figuring out what the “average” person might like about it is part of that guesswork.

My concern is that hearing what “buyers are looking for” begins to be the same as “what I like,” which is actually “what I guess I should like because everyone else likes it.”

It’s like the culture of high school, where you have to wear what everyone else is wearing. What you like and don’t like is secondary, if it matters at all.

Who is wearing your clothes?

The logical outgrowth of changing our homes for the sake of saleability is that they become just like any other commodity, like soap or fertilizer. They’re all alike, with granite countertops, stainless steel appliances, a large master bathroom with a spa tub, french doors to the backyard, vaulted ceilings, 4 bedrooms, and a 3-car garage. One is pretty much the same as another. Except it needs to be painted taupe.

What is your home worth?

To you.

Language Mangling

Quote of the day:
"I'll try to terrify you first, and if that doesn't work, I'll try to horrify you, and if I can't make it there, I'll try to gross you out. I'm not proud."
--Stephen King

It’s been awhile since I’ve vented about some peeves du pet. Today is a good time.

Why is it that most realtors on the real-estate TV shows can’t pronounce “realtor”? Get a clue, guys. It’s two syllables, not three. Real-tor. Not real-i-tor.

Real-i-ly.

And furthermore, what’s all this I hear about “stepping foot”? I’ve heard this over and over again. Just the other day there was this: “Before you step foot into your flip, you must have a budget.”

Step on your own damn feet. As for me, I’m going to set foot in our TV room and turn the sound down when I hear you come on. And I will continue to set foot in the interesting places of my life. Just like normal people.

And don’t get me started on reticence and reluctance.

What Would Puccini Say?

Quote of the day:
“I’m a Republican, but I have to say he was an effective President.”
--Former Federal Reserve Chairman Alan Greenspan, talking about President Clinton on NPR’s “Morning Edition.”

North Park is a community of residences and businesses just north of San Diego’s Balboa Park. Housing there is a mix of apartments, condos, modest single-family homes and a few swaths of affluence--including a luxurious compound adjacent to the park where basketball legend Bill Walton lives.

It’s always been pleasantly diverse, with a very noticeable creative element in the population.

During our recent housing boom and condo-building mania, a high-end condo complex was planned and built right in the commercial heart of North Park. Construction is just now being completed.

I’m not sure how sales are going. The real-estate slump may have made it difficult.

The complex has a curious name. It’s called “La Boheme,” just like the Puccini opera. Merrie, who speaks French, reminds me that “La Boheme” means “the bohemian.”

There must be a resident bohemian. Or this complex is being marketed to bohemians who demand granite countertops and stainless-steel appliances.

What are bohemians coming to?

Investing As Life

Quote of the day:
"I go about looking at horses and cattle. They eat grass, make love, work when they have to, bear their young. I am sick with envy of them."
--Sherwood Anderson

One of the first investments I made, some 26 years ago, was in the very successful Twentieth Century Growth mutual fund. Learning the investment philosophy of its founder, James Stowers, had a big effect on me.

Stowers said that to succeed as a stock-market investor you had to be in it. And stay in it. He wrote that the history of the stock market showed that most of the accumulated price increase came during a comparatively few, sometimes dramatic, trading sessions every year. And, despite endless prognostications from analysts, no one ever knew when these days would happen. No one. Ever.

Therefore, in order to capture this movement, he said, you had to be in the market, and stay in. If you attempted to time the market and buy low and sell high you’d wind up being out of the market for many of the “up” days.

If you think about it, this is why so many people make money in real estate. They buy a home and they stay in it. Or they sell one and immediately buy another. This is why they’re in the market for all of the “up” months or years. Because it’s not a liquid market, time is measured in months or years, rather than days or weeks.

All this is an intolerable big yawn to fast-money “I’m-smarter-than-everyone” types who think jumping in and out of investments indicates advanced intellect and superior manhood. They often tout some good results they or someone they know had recently. But how many of these people do you still read about 26 years later?

Note: Twentieth Century has changed its name (to American Century) and expanded its mutual-fund offerings from two to a few dozen. James Stowers retired long ago, a very wealthy man.

As is often the case with investing, this is a great metaphor for life. In order to appreciate life, you need to be “in” it--and stay in it.

Got Mortgage?

Quote of the day:
“I think God’s going to come down and pull civilization over for speeding.”
--Steven Wright

The other day I heard an “expert” say that we are having the worst credit crisis since the Great Depression. That may be true by some specific measure, but I haven’t seen any bread lines yet.

As usual, there is lots of analysis, speculation and prognostication about the mortgage-lending industry, interest rates and real-estate prices. There seems to be a lot more attention to lenders with serious problems than to the unfortunate and often tragic effects on individual lives.

At the center of all this is a basic business judgment--when a lender takes more risk, it expects more reward. That’s not necessarily a problem, except for two things:

1. There has been inadequate preparation for, or even acknowledgment of, the risks being taken when lenders extend credit to customers who usually are considered uncreditworthy. The attitude seems to have been that real-estate was going to continue to appreciate with no end in sight.

It’s the same thing some folks assumed about the stock market in the late 1990s. The mantra became “the usual rules do not apply.” The primary rule that does not apply was stated this way by Frank Capiello, a panelist years ago on “Wall Street Week”: “Trees don’t grow to the sky.”

We’ve all heard the words indicating that, indeed, trees do grow to the sky: “you can’t go wrong with real estate”; “real estate is the best investment”; “real estate always goes up.”

2. I believe anyone who is responsible and is at least close to having the means should have the opportunity to own a home. It’s not a bad thing when lenders take the risk of extending credit to people who are “close” but not quite “there” with their income or credit histories.

The problem is the sometimes-exorbitant price that lenders charge for extending this credit. Usually it is buried in high fees that are added to the mortgage amount, or in the ultimate rate or other terms of the loan. These terms may not come into play until 2, 3 or 5 years after documents are signed.

Of course, there are many people who simply cannot afford to buy a home, and should not be encouraged to do so. But those who are sincere, responsible and “close” should be helped, not soaked.

Many mortgage lenders did really try to help. But many did not. And that’s the problem.

Underwater Mortgages

Quote of the day:
"It is much easier to make war than peace."
--Former French Prime Minister Georges Clemenceau

23 percent of adjustable-rate mortgages are in negative equity, according to Alan Abelson in today’s Barron’s. That compares with 17 percent one year ago.

The question of the day is, will the other shoe drop?

Let’s take a journey back in time. To 1999. That’s when the stock market, led by technology stocks, was red hot. It had been red hot for four years.

Many people had avoided the market for those four years, either because they thought it was too risky or because they didn’t understand it, or both.

After watching the market make 20+ percent gains every year for four years, some of these folks threw in the towel (more precisely, the trowel--because hole-digging is involved) and jumped into the stock market. That was the first shoe dropping.

Then came 2000, and the market headed south in a hurry. Some of those who had gotten in a year earlier panicked and got out. They lost a lot of money. That’s the second shoe dropping.

Many others stuck with it. And now, seven years later, most of them are doing just fine. They’ve bought new shoes.

So. Almost one-quarter of those with ARMs now look at their mortgage debt and the selling prices of homes around them and see that the first is more than the second. Many of them purchased in the last year of the “boom.”

Will they be able to hang in there? Or will the second shoes begin dropping?

Keepin' It Real, Estate

Quote of the day:
“It's all about sex and territory, 
which are what will finish us off
in the long run.”
--Margaret Atwood, from her poem February

I’ve mentioned before how the daily press seems festooned with daily developments about real estate. The other day there was a story about the imminent expiration of “initial rate periods” for a significant number of adjustable rate mortgages. In other words, those who bought in 2005 with a low 2-year “initial” or “teaser” rate would soon find themselves with higher rates and higher monthly payments--in some cases, much higher.

Let me get this out of the way: You are a brilliant real estate investor. So am I. So is everyone. We’re all brilliant real estate investors. Now I can continue.

The mantra-like refrain we are repeatedly hearing is “I’m waiting until the market turns up.” For those who want to sell real estate (brilliant, all of them), this is a good strategy.

The market may “turn up” in a few months (who knows, really?), but it is much more likely that it will “turn up” in a few years or longer. All of us brilliant real estate investors seem to have temporarily forgotten that, historically, the market can be flat or choppy for many years at a time.

So, waiting for the upturn is good, and we need to be ready to wait a long time.

Dwelling on Dwelling Prices

Quote of the day:
“Dude, there’s those dried peas in there. That counts.”
--John Loeh, a college student subsisting mainly on Cup-O-Noodles, reacting to a suggestion that he might need some vegetables.

Current candidate for most overused and annoying phrase of emphasis: “first and foremost.”

Average number of minutes into the TV shows "Flip That House" and "Property Ladder" that the word “granite” is first used: 2.5.

Average number of times that the word “granite” appears in one of these programs: 7.

Quote of the day No. 2:
“[Realtor Patti] Jelley blamed a slowing market on news media concentration on local real estate’s downward trend.”
--Roger Showley in today’s "San Diego Union-Tribune." His story reported a 4.4 percent year-to-year decline in San Diego home prices in September.

Patti, that’s called shooting the messenger.

We homeowners all take delight in watching real estate prices rise. And we share disappointment when they fall. In both this delight and disappointment, we are a tad irrational.

The reason we are irrational is that most of us plan to continue to be homeowners, so the rise or decline in prices will have little real effect on us. We will stay in our current home, or we will move to a different home here or in a different city.

The people at risk in this situation are over-leveraged investors. If you bought an investment house or a condo a year or two ago, anticipating a quick profit, your profit may have evaporated. If you borrowed more than your house or condo is now worth, you likely will not make any money if you sell it now. If you are not financially prepared to hold on to the property for a few years or more, you have a problem.

Here’s a rational note. Do you know what the average annual appreciation of real estate is, nationwide, since records have been kept? 6 percent. The reason so many people have done well is that they buy in, live in and stay in.

Play and Be Happy

Quote of the day:
“Perhaps, above all, play is a simple joy that is a cherished part of childhood.”
--From a new report from the American Academy of Pediatrics, which suggests that free play is being sacrificed to scheduled activities.

Statistic of the day:
25-30 percent of children with learning disabilities will deal with addiction in adolescence and adulthood.
--From the A&E documentary series "Intervention," which follows the lives of those suffering from addiction, and their families.

Followup to my entry "Who is Your Editor?":
Here is an excellent guide to good information and resources on the internet: The Librarians’ Internet Index at www.lii.org.

"The Wall Street Journal’s" Jonathan Clements recently wrote on “Nine Tips for Investing in Happiness.” Seven of the tips are: make time for friends, forget the pay raise, count your blessings, enjoy a good meal, challenge yourself, volunteer, and give it time.

The other two tips were intriguing. First, “keep your commute short.” Clement says, “it turns out that commuting is one of life’s least pleasurable activities. While we’re usually pretty good at adapting to hardships, it’s hard to adjust to commuting because it is so unpredictable.”

Second, “don’t trade up.” Clement says, “research indicates that, once folks achieve a fairly basic standard of living, it takes a lot of additional money to bring about even a small increase in reported happiness.

“Yet your income and wealth could still loom large--if you start comparing yourself with those around you. For instance, if you moved to a neighborhood you could barely afford, you would likely be disgruntled. The reason: You will be surrounded by wealthy families, and this will be a constant reminder of your financial standing

“’If you can look out your window and see neighbors with lower incomes, you’ll be happier,’ says Andrew Oswald, [economics professor at Warwick University in England]. ‘People are very keen to move into the elite neighborhoods. They don’t realize that they won’t be as happy as they expect. That’s the curse of being human.’”

Who is Our Designer?

"We shop at cookie-cutter stores in cookie-cutter malls and eat at cookie-cutter restaurants, not because the food is special but because it is familiar."
--Leonard Pitts

One of my favorite TV shows is "House Hunters." I'm not alone, because it is the most-popular show on HGTV. Each episode features someone shopping for a house and considering three different possibilities. It is rigidly formulaic yet oddly satisfying. Not only do we get to see inside lots of houses, but we see how people select where they will live.

Some people seem keenly aware of their own needs and choose based mostly on affordability, comfort and convenience. Others choose based on specific features and extra size. Sometimes someone makes what I think is an irrational choice to live an extra 30 minutes from his/her workplace to get an unnecessarily larger house.

Every once in a while a very interesting house is shown--perhaps a charming, unusual design or a vintage house in wonderfully-preserved condition. I find it rewarding when these houses wind up being chosen.

There's a spread in this morning's San Diego Union-Tribune about a one-of-a-kind midcentury house, lovingly and passionately restored to its original design. (See it at http://www.signonsandiego.com/uniontrib/20060903/news_mz1hs03moder.html)

In restoring the house, the owner, Keith York, committed a number of "House Hunter" no-no's, including installing the same model cooktop and oven as in the original design, and removing two bedrooms from the side of the house, reducing the overall square footage. He's quoted in the story as saying he's thinking of moving the rear wall back to its original position, further reducing square footage.

As I read this I realized that many of us have allowed our homes to be, in effect, designed by realtors for sale, rather than allow our homes to be designed simply to live in. Good realtors are good stewards of "what sells." In a way, they carry contemporary taste and trends--at heart, I think this is what is fascinating about "House Hunters."

Surely our homes are more than interchangeable commodities. If so, who is our designer?

(photo by Paul Body)