LOS ANGELES — This was sent in by a reader, someone with a financial background, so we’re calling him Money Guy. This week we’ll follow up with the argument on why this is actually a good time to buy. But today he has the floor so we’re all learning about "coordinated currency devaluation." Better go get some coffee.
"I think it’s a bad time to buy for a few reasons. Let me include the caveat that I expect markets to appear more buoyant for the remainder of the year with 2010 ushering in renewed economic weakness. I’ll give you four points that are reality and two more that are speculative.
1. The supply of new construction, particularly condos, is staggering. Every time a Rowan et al goes to auction it provides a cheap entry to someone who maybe preferred West Hollywood or Pasadena but who’ll now go downtown based on reduced price. The trickle-down effect. Koreatown, Hollywood, mid-Wilshire are all overdeveloped given demand.
2. As said supply segues from condo to rental it becomes another drag on resales. Who knows cost per month better than a renter looking to become a buyer? In this climate few folks are willing to swap $1,800 a month on a walkaway lease for $3,000 a month virtually forever, including quite variable HOAs and taxes. By the way: There’s rumblings that the new tax bill will slightly penalize "jumbo" buyers by disallowing a full 100 percent interest deduction on upper-bracket filers.
3. It was bad enough a year ago when resale prices were stretched compared to rental rates (p/e so to speak), but what’s happened since? Rentals have weakened — which by the way is counterintuitive to the conventional wisdom argument that states former homeowners would then crowd the rental market. Hasn’t happened. My best guess why the absence is because of unemployment. During the last housing downturn, job growth was actually increasing, so while L.A. was getting slammed ’89-’96ish the employment situation from ’92 on was improving … That’s not the case this go around. There’s no divergence. Job loss is pronounced, and asset prices reflect that reality.
4. Listen to the tape. Granted it plays a confusing tune. But look at that great-looking Silver Lake house you wrote up that sold for $1.8 million after just days on the MLS. By and large though, there’s little activity on the ask side and it seems the only preponderance of buyers are those buying at distressed prices. Obviously, you too notice new sellers are pricing more aggressively. Trading 101: In bull market the offer trades out. In a bear, the bid trades. For now it looks to me like sellers outnumber buyers and once the "dip buyers" (i.e. the folks buying these auctions are done) there could be another leg lower.
Two "speculative" worries:
1. These huge global government borrowings could cause liquidity problems for long-dated paper. What do real estate prices look like if the 30-year Treasury ever goes back to 7 percent with mortgages 200 basis points over?
2. I think there’s at least a 50 percent chance we’re only in the 3rd inning of something really, really, really bad.
One macro bull argument and it’s why gold is $900 and perhaps why real estate has yet to fall off a cliff: coordinated currency devaluation. I think it’s a given, but I suspect it’ll only occur in response AFTER deflation causes debt to be unserviceable in present notional currencies."
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