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International Investments and Bubbles of Wealth IV

investment trends

By
Gary Scott

Recent messages have looked at the real estate bubble, if there is one.  Are real estate prices high and if so where should we invest?

The first part of this series has been looking at reasons why real estate prices may not be as high as they seem.

We continue to look at why some analysts do not think so.

For exampleRichard Maybury in his Early Warning Report says: "on 9/11, it took 519 ounces of gold to buy a U.S median priced home, today it takes only 488 ounces". 

In short, Maybury is contending that the rise of nominal U.S. housing prices (as well as global residential real estate) reflects the fall of the USD relative to other currencies, natural resources, gold, etc.  As he continues, he says "I'd be confident my average real estate holdings would rise as fast as the dollar falls".

We could compare real estate prices to oil and other some other commodities and come up with a similar picture.

Best selling author and attorney, William Bronchick says:

"A lot of hoopla has been floating around the news media lately about the 'bubble' theory of real estate, that is, the theory that the real estate market is going to burst. In my opinion, this theory has no merit. First, understand that there are three basic premises that undermine the discussion of a real estate bubble:

"1. There is no ‘national’ real estate market
 2. The real estate market doesn’t explode or crash
 3. The market has limited relevancy to the shrewd investor."

Peter Miller at Realtytimes.com
also has confidence in property.

"For some time the debate has been raging: If the stock market can quickly go from zooming to zonked, what about housing? Do we have a housing bubble that can quickly deflate at anytime?

"While the economy was in a recession, the housing market soared. Both existing and new home sales reached record levels, and prices generally rose. Meanwhile, while the NASDAQ used to be above 5,000, it is now floundering at 1,800 -- a 64 percent decline. The Dow Jones Industrial Average of 30 industrials is around 10,200 -- down 9.7 percent from the 11,300 levels seen last May.

"So could it happen to real estate?

"Real estate is a commodity and like all commodities there is risk: be assured that prices can both rise and fall. That said, there are several factors which suggest that real estate values are unlikely to implode.

"The population is increasing. As the population grows the demand for housing swells.

"Household size is declining which means that more units are required even without population growth. Census Bureau figures show that between 1990 and 2000, household size fell to 2.59 people per property from 2.63 in 1990. During this period, the country added 13.6 million new housing units.

 "We measure real estate value in cash. As inflation reduces the spending power of dollars, apparent costs rise. In other words, $300,000 doesn't buy what it did a few years ago, therefore it costs more dollars to purchase what was a $300,000 home. Same property, same number of rooms, but as the value of the dollar declines with inflation more mini-dollars are needed for a purchase.

 "Real estate values are localized. It may be that prices fall in a given community because of job losses or population migrations. But a decline in one area may well mean more demand in other communities as job bases grow and populations swell."

Upcoming messages will look at those who believe the market is in a bubble. Those who believe and those who do not are the ones who make markets.

In the long run real estate has almost always risen, but often it is the short term that matters. Here are three defensive tactics to take when buying property.

First, study whatever market you are considering carefully. Look for areas that offer good value. Second, be patient! Look for good value within an area, bargain hard and try to buy types of property that might weather any market downfall. 

For example, I have purchased a condo in Naples, Florida where the market is about as hot as a market can get. I bought a modest property that is surrounded by condos selling at four and five times the price I paid. My reasoning is that this gives my purchase plenty of upside potential, but if the market crashes I’ll have a condo I can sell to someone who is sizing down.

Third, avoid debt and invest in a time line that allows you to hold on if the market stagnates or takes a down turn.

Next message looks at some who warn that there is a real estate bubble and why. Until then may all your bubbles be good!

Gary

P.S. Join us at our International Business and Investing course. DETAILS

investment trends
International Investments that Sell
updated April 10, 2005
investment trends

 

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