Bird Watching

Most of us are sick and tired or reading about the housing
bubble, which is why your New York editor has decided to
devote ONLY two of this week’s columns to the topic.

We would prefer to avert our editorial gaze from the
proliferating signs of excess in the national real estate
market, but these signs seem to appear everywhere we turn –
they have become even more numerous than the voices in our

Today, we’ll take a peak at a few of the latest signs of
home-buying exuberance. Tomorrow, we’ll gaze into the
future and try to imagine the after-life of the housing
bubble. Perhaps, by contemplating this inevitable Day of
Reckoning, we may achieve a partial salvation.

But first, let’s consider the here-and-now…

When we queried Google yesterday for the term, "housing
bubble," we received 476,000 responses. The phrase "stock
market bubble" produced only 144,000 responses. "Oil
bubble," returned 9,910 responses, while "soybean bubble"
yielded a mere 6 results.

Clearly, therefore, the notion of a housing bubble is no
secret to the masses. (But wouldn’t we all be blindsided by
a soybean bubble!) The topic attracts debate and discussion
nearly every day in nearly every media outlet. Therefore,
could anything as widely anticipated as the end of the
housing boom ever come to pass? Our contrarian instincts
rebel at the thought. Perhaps, therefore, we have not yet
reached the terminal stage of the bubble, but are merely
drawing closer to it. On the other hand, for every 10
individuals who scorn the housing bull market as a
"bubble," 100 seem to embrace it as a "sure thing."

"Of course it’s a risk," one high-stakes property
speculator recently admitted to a Wall Street Journal
writer, "but where else can you make this sort of money so
fast?" Such is the sentiment that seems to be powering much
of the break-neck appreciation in the real estate market.

Property speculators and second-home buyers represent a
growing percentage of the overall demand for real estate,
thereby inflating demand above what "ordinary" home-buying
might produce. Self-proclaimed "investors" represented 25%
of the nation’s homebuyers last year, up from only 14% the
year before, according to the National Association of
Realtors. Inflated demand, all else being equal, produces
inflated prices.

A recent "monthly update" from a real estate agent
operating in a Westchester County town, north of New York
City, beams, "The median sales price for a house [in her
town] jumped to $1,496,250 in the first quarter of 2005,
38.3% higher than just three months ago."

"In-town trading-up continues and there now appears to be
significantly more buyers seeking weekend homes," the giddy
broker explains. "Increasingly affluent buyers, many of
them Baby Boomers, are placing their capital in real
estate, considered not only stable and secure, but an
excellent investment vehicle. All of these factors have
combined to create a red-hot real estate market."

We have no idea when the red-hot housing market might turn
stone-cold. But we do know that asset markets are
stubbornly symmetrical. Any investment that can produce
large, rapid profits can also produce large, rapid
losses…at some point. And that point often arrives at the
very moment when prices are rising most rapidly. Despite
this historic tendency however, few property investors
admit to any fear.

Meanwhile, the real estate investors on Wall Street exude
just as much optimism as those on Main Street – most
homebuilding stocks have quintupled over the last four
years. These stocks are rising so sharply that their
trajectory bears an eerie resemblance to the trajectory of
Nasdaq stocks between 1996 and 2000.

Admittedly, housing stocks do not appear to be very
expensive. Most still sell for less than eight times
earnings. But those earnings would shrink dramatically, or
disappear, if the gait of home sales were to slow from a
gallop to a trot.

Elsewhere on Wall Street, real estate investment trusts
(REITs) are becoming a bit pricey. These securities, which
hold a portfolio of investment properties, typically pay
plump dividends. Occasionally, REIT shares will also
produce plump capital gains. For the last few years, they
have been delivering both. Since the end of 2002, the S&P
REIT Index has produced a total return of almost 75% – or
about double the return of the S&P 500. Perhaps, therefore,
REITs have "over-delivered."

They have climbed so high that their dividend yields
(dividend yield = total annual dividend divided by the
share price) have fallen to multi-year lows relative to the
S&P 500’s dividend yield. At present, for example, Equity
Office Properties’ (EOP) dividend yield of 5.97% is only
3.93 percentage points higher than the S&P 500’s yield of
2.04%. For perspective, as recently as 2003, EOP paid a
dividend yield more than 6 percentage points higher than
the S&P’s.

This trend does not inspire terror, but neither does it
instill confidence that REIT shares will continue their
strong relative performance.

We would not dare to plant a flag on June 16, 2005,
declaring the end of the real estate bull market. But
neither would we join the hordes who are rushing in to buy
ever-pricier "investment" homes and homebuilding stocks and
REITs. We would prefer to "sell into strength," rather than
chase after it.

"You can’t stop the birds from flying over your head," a
married friend once remarked as an attractive female
strolled though our line of sight, "but you CAN stop them
from building a nest in your hair." We suspect investors
would do well to adopt a similar philosophy toward real

We cannot stop the housing bubble from expanding throughout
our neighborhood – and besides, it’s rather nice to look at
– but we can prevent the bubble from expanding throughout
our entire investment portfolio.

Did You Notice…?
By Justice Litle

Nuclear energy never really left the scene; it just avoided
the spotlight for a long while. Today, nuclear power
accounts for approximately 16% of total electricity
generation worldwide.

The United States has more than 100 nuclear reactors in 31
states. India has 14; South Korea, 19; and China, just nine
– for now.

As you might imagine, uranium prices have seen a wild ride.
In the late 1970s, before the disasters of Three Mile
Island and Chernobyl, "yellowcake" ran to $50 a pound.

After Chernobyl, a supply glut relentlessly hammered prices
to an all-time low near $7 per pound in December 2000.
Today, yellowcake changes hands around $25.

But the tide has turned for nuclear energy. China and India
alone have plans to build more than 40 new nuclear power
plants in the next 15 years. South Korea and Mexico could
take the tally of new plants over 50! So we doubt the new
nuclear power boom will end any time soon.

And the Markets…



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