Mondays are always full of events. Some 21 years ago, Oct 19th 1987, Dow dropped 22% in a single day, which was the biggest percentage drop in history, and today September 29th 2008, Dow dropped 777 points in a single day, the most point drop in history also! Usually, 777 happens when some one hits a jack pot, now, if you allow me, the whole financial industry is like a big casino gone sour.
2008 is definitely a year not short of surprises and turmoil. It is also a year full of opportunities! Big money made and lost. In a trying time like 2008 only tried triumphs.
We have seen crude oil prices surged over 147/barrel (July 11, 08) and then retreated to below 100 mark due to fear of a slow down in global economy; gold price passed the 1,000 USD mark (in March) and waned below 800 only to find itself charged back into 900 territory right after the announcement of the 700 Billion bailout plan; US dollar retreated to almost below 0.625 Euro and the recovery is weak and tentative.
In Banking and Financial industry, big names failed and faltered: JP Morgan Chase’ rescue of the 87 years old Wall Street Bond power house Bear Stern; IndyMac’s surrender to FDIC; Fannie and Freddie’s bailout by the Government; Lehman’s bankruptcy filing; Wamu’s seizure by FDIC and subsequent flip to JP Morgan and Chase marked the biggest savings and loan failure in history; Merrill Lynch lost its independence to Bank of American; yesterday Citi’s acquisition of Wachovia the 4th largest Bank in the US might be the beginning of a series of merger and acquisition in the Banking industry; even the Oracle of Omaha Warren Buffett’s 5B investment in Goldman and Sachs was eclipsed by the drama of the 700 Billion bailout plan.
As for the already battered real estate market, foreclosure properties mushroomed all over the place pushing the whole economy into a recession (my opinion, and I don’t care the formal definition of two consecutive quarters’ of negative GDP growth).
How can we individuals with limited resources and no access to inside information protect ourselves in times like this??? Can we also gain from other people’s mishap? Is it time for snatching up investment properties and where to buy? I will try to answer these questions in this issue.
First of all, let’s look at the history. Even if the history never repeats itself, by looking into the history, one can definitely gain some perspectives.
I select 7 indices: Dow, S&P 500, Nasdaq, SFXR (Case-Shiller San Francisco Bay Area Residential Real Estate Index), Crude Oil, Gold, and Dollar vs. Euro/Foreign exchange rate to create a proxy for the portfolio of an average Bay Area resident. Basically, I select 1987 to 2008 since most of my clients have been in the Bay Area after 1987. Let’s take a look at the rate of return and where you should put your money and when:
Overall:
Overall Rate of Return | Dow | S&P 500 | Nasdaq | SFXR** | Oil | Gold | $$ vs Euro * |
1987 to May 2008 | 8.31% | 7.67% | 8.75% | 5.87% | 8.48% | 2.47% | -1.31% |
1987 to 1997 | 11.96% | 11.64% | 12.78% | 0.50% | 0.49% | -5.14% | 1.08% |
1998 to may 2008 | 4.51% | 3.53% | 4.56% | 7.39% | 23.46% | 10.92% | -3.19% |
- *dollar vs. Euro is from 1990 to 2008, I couldn’t find data prior to 1990. Please note that the formation of Euro started on Jan 2nd, 1998.
- **The rate of return for SFXR is calculated to May 2008. With the new data out today, the rate of return is down to 5.66%. The national average (10 metro-area) from Jan 87 to July 2008 is 4.86%
Rate of return for three major indices since their formation: (In order to paint a less biased picture, I calculated the “historical rate of return”):
Historical Return | Dow | S&P 500 | Nasdaq |
Oct 1928 to Sept 2008 | 4.75% | N/A | N/A |
Jan 1950 to Sept 2008 | 6.85% | 7.28% | N/A |
Feb 1971 to Sept 2008 | 6.76% | 6.73% | 8.18% |
Overall, if one puts his or her money into stock, and real estate during 1987 to 2008, at least one beats the inflation (Inflation Calculator) (inflation calculated from this link for a period from 1987 to 2008 is roughly 3.34%). No doubt the rate of return for the equity is on the higher side since 1987 to present saw the longest run of
Next, let’s take a look at the rate of returns of those “high flying” years:
Good Years | Dow | S&P 500 | Nasdaq | SFXR | Oil | Gold | $$ vs Euro |
Jan 1987 to June 1990 | 8.48% | 7.85% | 4.83% | 14.02% | 9.42% | -7.56% | N/A |
Aug 1998 to Jan 2001 | 15.30% | 14.80% | 25.71% | 18.38% | 24.50% | -1.35% | 7.69% |
Jan 2002 to May 2006 | 2.74% | 2.24% | 2.75% | 12.92% | 26.49% | 16.63% | -6.97% |
(Blue represents good years for the real estate market, green represents good years for the equity market)
Except for Aug 1998 to Jan 2001 period, it seems that whenever the real estate market delivered a double digit return, the returns in equity (stock) market only yielded in single digit. 1998 to 2001 was a period of renovation, huge influx of talented immigrants, a tax relief in real estate tax law (May 1997 by former president Clinton – a new section 121 law), and exuberance! Bay area people would never forget these splendid years! Every few minutes,
The cash machine suddenly lost its momentum after March 2000. We’ve seen terrible hemorrhage in our Valley: tech people lost their jobs, ordinary people lost their nest eggs, and landlord lost their tenants. I still personally remember those years with a shiver down in my spine. The company I worked for closed its door in the 2nd half of 2000 and I was somewhat forced to sell my cute little town house 9 months after 911. Very fortunately, I took this opportunity to go back to school and prepared myself for the next big boom in history. So, when God closed a door, a window of opportunity is always opened for people who never take failure as an answer. (Oaky, so much for self patting on the back! J)
And, don’t forget the bad years:
Bad Years | Dow | S&P 500 | Nasdaq | SFXR | Oil | Gold | $$ vs Euro |
July 1990 to March 1996 | 11.605 | 10.54% | 16.38% | -2.23% | -2.11% | -0.68% | -1.13% |
Feb 2001 to Sept 2002 | -20.28% | -26.19% | -37.76% | 4.14% | -0.67% | 15.42% | -4.01% |
June 2006 to May 2008 | 6.55% | 5.10% | 7.83% | -15.20% | 29.61% | 17.89% | -9.36% |
(Blue represents bad years for the real estate market. Green represents bad years for the equity market)
This time, it is very clear that during a bad year for the real estate market, the equity market managed to stay above the water, vice versa. The money will always flow to either safe heaven (like the recent surge in Treasury prices and the alarmingly wide spread between Treasury bill and LIBOR) or asset class that can yield above market return. No matter how dire the overall market is, there will be winners. And now, the real estate as an asset class is the least favorable.
With these rates of return on different asset class in mind, one can see for him or herself, whether it is a good time to buy, or where to put the money.
Let’s focus on real estate for now: The famous Case-Shiller Index, my favorite and forget about zillow.com and its flawed valuation model. Please pay more attention to this index and the micro-dynamics of specific pockets of market.
The blue line is the index, and the yellow line is the 12 month moving average which I interpret here as the cost / benefit of waiting. Right now, the July 2008 level (at a reading of 157) receded back to Jan 2004 (at a reading of 156) when most of the Bay area markets took off and sky rocketed after a brief slow down in post 911 era. The bubbled area is deflated for now, but the downward momentum is still strong. We can tell that the market tried hard to form a bottom (most of
In 2004, we had easy credit, cheap money, and inexperienced investors, which are three biggest factors in fueling any bubble. Greed is another ingredient which we won’t discuss here. The 46 year low interest rate and no money down, no income and asset verification underwriting standard opened doors to people who would never be able to afford a house in the past. These people usually filled up the low end or entry level homes and pushed the values so quickly that making money in the real estate seemed a no-brainer. In
Bay Area was 2000 again, the talk of real estate was wherever, in restaurants, in coffee shops, in supermarkets, one could hear people talking about their real estate investments: someone bought something in Arizona, in Florida, or in Las Vegas, or in Central Valley, or in Riverside, or in Sacramento…Real estate as an asset class seemed so hot and such a sure bet. “You can’t go wrong, since the land is scarce!”. People forgot the pains other people endured in 1990 to 1997. But if some one bought a house in 1993 in
In 2008, a lot of local markets experienced huge drop in prices, but in exchange of the drop in price, an uptick in sales volume and a significant decrease in inventory, let’s take a look at some of the local markets:
This year, San Ramon market tried really hard to form a bottom. August sold numbers and September projected sold numbers are all in line with same month last year. But again, the effect of the so-called Financial Tsunami has not yet built into the local market. It will take at least 3 months to feel the pain if there is any.
The median price this year dropped a lot due to the increasing number of short sales and REOs (bank owned property). The upside: the decreasing inventory and the uptick in sales volume.
This year, after a slow February, market saw more and more properties got over asking price. Most of these listings are short sale or REO properties.
And when you deal with an emotional seller, what on average you can chop off the asking price? Here is the overall picture. Remember, the % is based on the last asking price, not the original asking price.
I compiled a lot of data for cities that I follow. I will not copy and paste in this email, but I strongly recommend you Click here to down load graphs and data for other cities like: Danville, Pleasanton, Fremont 94555, Castro Valley, Dublin, and a few cities for possible investment property like Antioch, Tracy, Richmond, Concord, and Walnut Creek. Once you go through these graphs and data, you can tell that with the median price at a very low level, and the increase of sales volume, most of the markets I follow were stabilized or showed signs of bottoming out. But the unprecedented explosion on Wall Street will definitely have huge impact on
Going into Q4 of 2008, buyers should have the ability to shield themselves from the impact of bad news on Wall Street, and focus on what is important to them on
For sellers, my suggestion is be flexible, work with good buyers, and price your property at least 5% below market!!! There is no secret of selling a property, priced cheaper than anybody else, and anything can sell because every one wants a deal! Our human brain is hard wired that way…
Hope every one stay strong and positive in times like this. I don’t have a crystal ball. But I can assure my clients: real estate as an asset class will be in and out of favor, but it is a long term hedge against inflation. 2 to 3 years down the road, when you look back, 2008 will be like any other year. 5 to 10 years down the road, you might hear people say “I should have bought something in 2008 or 2009”. You can sit back and smile because when other people were strangled by their fear, you acted on your basic instinct. You are the one having the last laugh.
