After a year where we felt housing prices drop precipitously, the previous decade of strong real estate appreciation seems forgone. The credit crunch has drained the pool of home buyers to mostly families with impressive credit scores and the ability to make large down payments (as it should have been for the past two decades!).
While the good old days of high returns on real estate investments seems fleeting, today the Wall Street Journal debated the subject with real estate bulls and bears..
Karl Case, an economics professor at Wellesley College whose name adorns the S&P Case-Shiller home-price indexes, has studied U.S. house prices going back to the 1890s. Over the long run, he says, home prices tend to increase on average at an inflation-adjusted rate of 2.5% to 3% a year, about the same as per capita income. He thinks that long-run pattern is likely to continue, despite the recent choppiness.
On the bull side was Kenneth Rosen from the University of California at Berkeley…
People should think of their own homes mainly as places to live, not as investments. Sure, home mortgages provide tax benefits, and most homes appreciate in value over the long run, he says, but there is always risk.
Although I agree Mr. Rosen has an argument that housing prices may continue to fall a bit in the near term, especially with a remaining 35% real price growth for houses since 1989, houses have always been considered most families biggest investment. For him to propose that homes will no longer be an investment is to propose a major paradigm shift.
Paradigm shifts in the investment world consitently prove fallacious. Recently, consider the dot-com bubble when people believed that the way companies grow profit had changed forever with the advent of the internet. Investors believed that high initial growth in internet companies meant that those firms deserved marketcaps in the hundreds of millions or billions with meager income statements and balance sheets.
I believe in Karl Case’s assessment that housing prices will continue to grow at about a 2.5% to 3% adjusted rate. The latest numbers from the U.S. Department of Housing and Urban Development affirm that we have not hit a real estate bottom – in October 433,000 one-family homes were sold, a 5% drop from the 457,000 homes sold in September of this year (the data is seasonally adjusted).
However, I do believe a housing bottom is due in the next 10 to 24 months. Housing prices have already taken into account much of the return of responsibile lending by banks and when the economic cycle returns to a bull market, unemployment will reverse course, individuals investors portfolios will appreciate and they will be in a considerably better position to purchase homes.
Is the 47 year old Timothy Geithner prepared for arguably Barack Obama’s most important appointment? The first decisions made by Mr. Geithner will clearly be crucial to the U.S.’s economic future, as Harvard economist Kenneth Rogoff emphasized, “the decisions that are going to be made in the first 100 days of this administration could have an imprint on the economy for three or four decades.” Man.. I hope Mr. Geithner exceeds expectations if his first decisions will affect the unborn grandchildren of my unborn children.
I am happy to report that I can at least sleep at night knowing that Geithner’s will need no introduction on Wall Street or in Washington. He has worked for the Treasury Department since 1988, and served directly under Robert Rubin (when he was Secretary) and Larry Summers (when he was Deputy Secretary) from 1999-2001. In the late 1990s he collaborated with Summers on the highly-successful, internationally-funded, $100 billion bailout of Brazil, South Korea, and Thailand; so he has 10+ years of experience for his new post as “Secretary of Baillouts” as the WSJ called it. He was Director of policy development and review department at the IMF, so we can assume he is well versed in the world’s exponential level of globalization and the affect the U.S. currency has on the world. Finally, he has been President of the New York Federal Reserve since 2003 and is Vice-President of the Federal Open Market Committee (FOMC).
President of the New York Federal Reserve
Mr. Geithner role at the epicenter of the Wall Street crisis may raise eyebrows. How prepared the President of the New York Federal is to be Treasury Secretary can be seen in varying lights. At best, it has made him capable of reversing the financial toilet flush in the U.S. with his relationship with the crisis’ players and major events. At worst, he was a Wall Street watchdog who sat on the sidelines while financial institutions took bigger bites of risk than they could handle. Refuting the the latter assessment, Gary Weiss wrote “The Fed, despite its broad financial oversight, does not have authority over investment banks—either to audit their books or lend them money. The day-to-day task of overseeing investment banks falls mainly to the S.E.C.”
What we can judge is the rescue packages the New York Fed was involved in: Bear Stearns and AIG, and he was one of the fingers on the Government’s hand that smacked Lehman Brother’s.
The Bear Stearns negotiations were held in the Fed’s office where he represented New York taxpayers and served as a medium for Bear Stearns and JP Morgan. I’d rather not imagine what would have happened had the big Bear fallen. – point to him.
Mr. Geithner’s work on the AIG bailouts is a mixed bag. The Wall Street Journal described the original September 16th bailout package as ” rescue medicine (that) was killing the patient.” The WSJ article notes that the bailout would have forced the insurer to sell assets into weakness, pay back the loan with a high interest rate whether they used the money or not, and was drastically undersized. Even on the new AIG bailout plan the government is demanding a 79% equity stake. Do we really want the government to run another financial company after the Fannie Mae and Fredie Mac disaster? – minus one.
Finally, Geithner didn’t extend a hand to Lehman Brothers as it free-falled off the solvency cliff. Lehman’s chapter 11 filling it took over $600 billion of assets down the drain with it. When the Treasury and Fed was handing out money faster than it can be printed, why overlook Lehman Bros? – minus one.
Overall, Mr. Geithner’s scores a negative one, but clearly he believes in responding to the economic crisis with agressive government intervention, which brings a huge wave of confidence to the markets.
Timothy Geithner’s experience as VP at the FOMC is welcomed in his new role. The major issue that can be taken with his actions as VP is not being a dissenter in Bernanke’s sluggish reaction time in cutting the federal funds rate . Cramer, take it from here…
In His Own Words…
“What you want to do is design a system that doesn’t prevent people from losing money and making mistakes … because that is inevitable. What you want to do is make sure you run a system where the consequences of those mistakes are less damaging and consequential for the more prudent and for the economy as a whole. And that balance is very hard.” – Timothy Geithner, July 2008
Mr. Geithner is undoubtedly qualified to be the new Treasury Secretary. He will be a stark contrast to Hank Paulson, he is a lifetime public servant, and has never been a wall street executive.
Larry Summers described Geithner by saying “the ego is disengaged, but he’s very comfortable with himself and very direct—not promoting himself, but just concerned with doing the right thing.”
Geithner faces gargantuan and unparalleled challenges to effectively implement the trillions of the treasury’s bailout dollars effectively and reform government regulations. I hope the WSJ headline for their article on Geithner and Summers – “Duo Has Proved More Pragmatic Than Ideological” will still be an apt description in the coming years. At least there is comfort in knowing that Timothy Geithner will avoid making the mistakes of Treasury Secretary Andrew Mellon (1921-1932) when he refused to lend money to banks during the Great Depression.
Sometimes the spontaneity of the market makes me doubt my investment competence. This now ridiculously off the mark clip from Jim Cramer in July 2007 reminds us that we are all only human and we shouldn’t put too much faith into the words of “investment professionals.”
My favorite line has to be “”if every loan in 2006 that was sub-prime blew up – 500 billion, you would still not notice!”
Elaine Garzarelli was a Partner and Managing Director at Lehman Brothers prior to starting her own company, Garzarelli Capital Inc. in 1995. Dr. Garzarelli has studied the stock market for over 25 years and was ranked First Team in Quantitative Research in Institutional Investor magazine’s All-Star poll for 11 years; she was also top ranked in Portfolio Strategy and Market Timing. In October 2012, Elaine Garzarelli was inducted into the Institutional Investor All American Research Team Hall of Fame which is a highly coveted prestigious honor.
Elaine currently uses her own self-built econometric mathematical models to predict the direction of the market and then determine the most favored sectors and industries likely to outperform the S&P 500 index. This quantitative methodology allows her to predict the major trends in stock prices and the earnings of over 80 S&P 500 industry groups. Elaine currently uses these mathematical models for stock market timing and sector selection in producing her Sector Analysis weekly reports which she issues to sophisticated investors and institutions.
Elaine Garzarelli is credited with predicting the bear market bottom in the S&P 500 price index in 1982, the top and bottom in 1984, the Crash of 87 and the upturn that followed, and the top and bottom in stock prices in 1990. She warned of overvaluation and problems with “phantom” company profits versus tax return profits as early as 1996, several months before Alan Greenspan’s “irrational exuberance” speech. She was bullish from early 1997 until December 1999. Her indicators showed an overvaluation in the S&P 500 of more than 40 percent in late 1999. In May 2000, her indicators fell to a bear market signal of below 30 percent. Her indicators were bullish at the bear market bottom in late 2002. She turned negative in January, 2008, and had a 100.0 percent hedged position for most of 2008, into early 2009. In March 2009, her indicators turned bullish.
Elaine was featured as a top businessperson in Fortune magazine and was listed in Business Week’s “What’s In” list. In addition, Elaine Garzarelli has been featured in the Wall Street Journal, USA Today, Forbes, the New York Sun, FONDS exclusiv, and other international media. She is a frequent guest on CNBC, Fox Business News and the Nightly Business Report on PBS. For over two decades, Elaine Garzarelli has been a frequent guest speaker at The Money Show throughout the country.
Elaine Garzarelli did her undergraduate and graduate studies at Drexel University where she holds a doctorate in economics and statistics. In 1992, Elaine was inducted by Drexel University into The Drexel 100 which is the University’s alumni hall of fame in which it recognizes a select group of alumni whose lifetime achievements are outstanding. In addition, Elaine has a scholarship fund at Drexel University for female undergraduates students in the Bennett S. Lebow College of Business.