The Rude Awakening
Wall Street, New York
Friday, August 26, 2005
------------------------- The Rude Awakening PRESENTS: Our emotions are in check. We
fear the frothy housing market, but we do not fear buying -
and holding - undervalued real estate stocks. --- Advertisement --- ------------------------- WHAT TO DO ABOUT REAL ESTATE RIGHT NOW
By Dan Ferris The "Most Viewed News" story on Yahoo.com last week carried
the following headline from USA Today: "Home Prices 'Extremely Overvalued' in 53 U.S. Cities." I mentioned the headline to my colleague, Steve Sjuggerud,
and asked, "If it's a USA Today headline, could it possibly
be true?" Steve agreed with my sentiment, i.e., that any headline on
USA Today should probably be taken as a contrarian
indicator. In other words, the housing boom isn't over yet.
Steve added that house prices fall during recessions and
when there's oversupply. Right now, we have neither of
those two conditions. Even so, the housing market feels
like its much closer to a peak in prices than to a low. The USA Today story discusses a study by Richard DeKaser of
National City Corp. that examined about 300 metropolitan
areas, representing about 80% of the U.S. housing market. De Kaser considers a market overvalued if home prices are
30% above where he says they should be, based on historic
price data, area income, mortgage rates and population
density as a proxy for the scarcity of land. According to
his research, most real estate markets are vastly
overpriced, while very, very few markets offer an
attractive investment opportunity. According to DeKaser, four of the five most overvalued
housing markets are in California. The fifth is in Florida.
The cheapest are in Texas and Alabama. Then there's Chris Mayer over at the Fleet Street Letter.
He's been talking with the folks over at SNL Financial. SNL
follows 128 REITS. Only 17 are selling below their net
asset values. Only five are more than 10% below their net
asset values. Based on the above input from USA Today, Steve Sjuggerud
and Chris Mayer, it sure looks like most real estate
investments are better sold than bought. Here in my local market of southern Oregon, prices have
soared lately. Everybody and his brother is coming up from
California to escape its high prices and the Draconian
taxes and regulations that contribute to California's high
cost of living. I don't blame them. The climate up here in
Oregon is pretty nice, and there are plenty of wineries,
mountains, lakes, redwood forests, and all the other things
you get down south. Homes here are in high demand and very
short supply. Prices should be rising in that kind of an
environment. Buying a house here is a wonderful value
proposition compared to the nearby alternative. There's no
bubble here in Oregon, despite price increases of between
30% and 50%. Nevertheless, because of the nation's soaring real estate
prices and the attention they've been getting lately, I
feel compelled to address the topic of what investors
should do with real estate stocks I've recommended like
Alexander & Baldwin, St. Joe, Tejon Ranch, and Consolidated
Tomoka. As far as the geography goes, they're all in bubbly-priced
areas, except Alexander & Baldwin, which is in Hawaii.
Prices are up in Hawaii, but you have to look at what
you're getting versus what it costs. If I owned ALEX, which
I'm not allowed to, I'd just hold it. If it fell 50%, I'd
jump for joy and buy a bunch more. All four of those stocks represent outstanding decades-long
business propositions, each one involving the development
of at least 10,000 acres of land. I'm not going to remove any of them from the Extreme Value
Model Portfolio right now. As five to ten year investments,
they are not overvalued. But I will say this: if you think you're going to do as
well with these stocks over the next 2-3 years as you did
in the previous 2-3 years, I believe the odds are way
against you. Most of these land holding companies are up 150% or more in
about 3 years. That's a compound average annual return of
around 35.7%, which is obviously much better than you can
expect to do in an average year over the long haul during
your investing career. Net-net, I wouldn't try to stop anyone from taking some
chips off the table. But I'm not going to remove these
solid long-term investments from the Model Portfolio. I
think there's plenty of value left in them. Finally, don't feel bad if you're not great at knowing when
to sell stocks. It's not normal to be good at it. I just
read an article at Forbes.com that said that brain-damaged
players in a coin toss game did better than normal players.
They made better investment decisions in the game because
their emotional responses were weaker. The study went on to say that the very best investors could
have functional psychopathy. That means they're able to
train themselves to keep their emotions in check when
making investment decisions. Here at Extreme Value, our emotions are in check. We fear
the frothy housing market, but we do not fear buying - and
holding - undervalued real estate stocks. [Ed. Note: O.K., we have a confession to make…We had an
ulterior motive for asking Dan back to the Rude Awakening.
In addition to his housing insights, he has also discovered
what he calls the 'expert savings account.' Do away with
measly bank interest and start earning the real returns
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And the Markets… | | Thursday | Wednesday | This week | Year-to-Date | | DOW | 10,451 | 10,435 | -109 | -3.1% | | S&P | 121 | 1,210 | -1098 | -90.0% | | NASDAQ | 2,134 | 2,129 | -1 | -1.9% | | 10-year Treasury | 4.16% | 4.17% | -0.05 | -0.06 | | 30-year Treasury | 4.36% | 4.39% | -0.06 | -0.46 | | Russell 2000 | 658 | 655 | 5 | 0.9% | | Gold | $438.30 | $437.17 | $1.20 | 0.2% | | Silver | $6.84 | $6.94 | -$0.17 | 0.4% | | CRB | 318.33 | 320.02 | 3.15 | 12.1% | | WTI NYMEX CRUDE | $67.49 | $67.32 | $2.14 | 55.3% | | Yen (YEN/USD) | JPY 110.08 | JPY 110.20 | 0.36 | -7.3% | | Dollar (USD/EUR) | $1.2300 | $1.2271 | -137 | 9.3% | | Dollar (USD/GBP) | $1.8028 | $1.8008 | -67 | 6.0% |
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