Ignore the Headlines
I read an interesting article from TIME magazine last night. Here is a link to the article.
I am going to cut and paste the article below:
Famed Money Manager is perhaps best known for his timeless wisdom that you can beat the pros by focusing on stocks of companies where you either work or shop or have some other edge. But a more relevant Lynchism today is this gem: Ignore the headlines.
That's no easy thing. How do you tune out all the chatter and ink on recession, housing, subprime woes, the credit crunch, rogue traders, insolvent bond insurers, $100 oil and nukes in Iran? It's enough to make you sit on your thumbs and wait before making any big moves. But what, exactly, are you waiting for?
There has rarely been a moment in history when you couldn't scare yourself into doing nothing. And yet, as Lynch observed nearly 20 years ago, "in spite of all the great and minor calamities that have occurred ... all the thousands of reasons that the world might be coming to an end--owning stocks has continued to be twice as rewarding as owning bonds."
A top reason to not buy stocks, in Lynch's view, is if you don't already own a home--in which case, that should be your first investment, since an owner-occupied home is nearly always profitable. Through a spokesman, Lynch reaffirmed these views to me--housing debacle and all.
When prices are falling, few people have the discipline to buy stocks, a house, gold, art or any other asset. But those who do pull the trigger excel in the long run. As John D. Rockefeller famously said, "The way to make money is to buy when blood is running in the streets."
And the streets are stained crimson. Start with stocks. They have been pummeled this year. GDP braked sharply last quarter, and there has been plenty of panic about a recession. The Federal Reserve is slashing short-term interest rates at the fastest clip in decades. But if you stick to your steady, diversified plan while everyone else is retreating, you will be happy years from now. For one thing, Fed rate cuts always lift the economy eventually, and the stock market typically starts responding just as headlines get gloomiest. Sure, the market could fall again before recovering. But the recession may be half over already--or we may avoid one altogether. You just never know.
As for housing, certainly some skepticism is in order. Formerly sizzling markets in Florida, Nevada, Arizona and California probably haven't seen the worst headlines just yet, though they may well be close. And "jumbo" mortgages, those more than $417,000, are likely to remain artificially high for a few more months while banks work through their credit issues.
But let's say you are emotionally ready to be a homeowner. You have good credit, plan to stay put for five years and have been waiting for the perfect entry point. It's time to get serious--before an inevitable rise in interest rates wipes out your advantage. "The thing that will make home prices stop falling is the very same thing that will push mortgage rates higher," says Jim Svinth, chief economist at mortgage firm Lending Tree. So anything you gain by a further drop in prices might be offset by rising financing costs.
Consider a typical home that sells for $218,900. You put down 20% and get a 30-year fixed-rate mortgage at today's rate of 5.5%. Monthly principal and interest come to $994.31. Let's say that 12 months from now the same house goes for 10% less, or $197,010. But by then the recession is history and the Fed is jacking up rates to stem inflation. If mortgage costs rise just half a point, to 6%, your monthly payment would be $994.94 and you'd have saved nothing. Meanwhile, home prices might steady and sellers might become less willing to negotiate. And you have spent a year living someplace you'd rather not be.
It's more complicated if you must sell before you can buy. But that logjam won't persist forever--and if it appears you'll be trapped for a few years, try to refinance at today's lower rates. Risks always seem most acute when the headlines give you ulcers. But that's exactly when you should think long term--and get off your thumbs.
The Case Against Waiting to Buy
Today's Home Price - $218,900
Put 20% down and get a 30-year fixed-rate mortgage
5.5% Current rates after recent declines
Monthly payment $994.94
Cost in 12 months?
If prices drop an additional 10% home price will be $197,010
Recession ends, and the Fed starts to raise rates - Interest rate 6%
Monthly payment $994.94
CONCLUSION: If you waited a year to buy, you would have saved nothing and spent a year living someplace you'd rather not be.
I am going to cut and paste the article below:
Famed Money Manager is perhaps best known for his timeless wisdom that you can beat the pros by focusing on stocks of companies where you either work or shop or have some other edge. But a more relevant Lynchism today is this gem: Ignore the headlines.
That's no easy thing. How do you tune out all the chatter and ink on recession, housing, subprime woes, the credit crunch, rogue traders, insolvent bond insurers, $100 oil and nukes in Iran? It's enough to make you sit on your thumbs and wait before making any big moves. But what, exactly, are you waiting for?
There has rarely been a moment in history when you couldn't scare yourself into doing nothing. And yet, as Lynch observed nearly 20 years ago, "in spite of all the great and minor calamities that have occurred ... all the thousands of reasons that the world might be coming to an end--owning stocks has continued to be twice as rewarding as owning bonds."
A top reason to not buy stocks, in Lynch's view, is if you don't already own a home--in which case, that should be your first investment, since an owner-occupied home is nearly always profitable. Through a spokesman, Lynch reaffirmed these views to me--housing debacle and all.
When prices are falling, few people have the discipline to buy stocks, a house, gold, art or any other asset. But those who do pull the trigger excel in the long run. As John D. Rockefeller famously said, "The way to make money is to buy when blood is running in the streets."
And the streets are stained crimson. Start with stocks. They have been pummeled this year. GDP braked sharply last quarter, and there has been plenty of panic about a recession. The Federal Reserve is slashing short-term interest rates at the fastest clip in decades. But if you stick to your steady, diversified plan while everyone else is retreating, you will be happy years from now. For one thing, Fed rate cuts always lift the economy eventually, and the stock market typically starts responding just as headlines get gloomiest. Sure, the market could fall again before recovering. But the recession may be half over already--or we may avoid one altogether. You just never know.
As for housing, certainly some skepticism is in order. Formerly sizzling markets in Florida, Nevada, Arizona and California probably haven't seen the worst headlines just yet, though they may well be close. And "jumbo" mortgages, those more than $417,000, are likely to remain artificially high for a few more months while banks work through their credit issues.
But let's say you are emotionally ready to be a homeowner. You have good credit, plan to stay put for five years and have been waiting for the perfect entry point. It's time to get serious--before an inevitable rise in interest rates wipes out your advantage. "The thing that will make home prices stop falling is the very same thing that will push mortgage rates higher," says Jim Svinth, chief economist at mortgage firm Lending Tree. So anything you gain by a further drop in prices might be offset by rising financing costs.
Consider a typical home that sells for $218,900. You put down 20% and get a 30-year fixed-rate mortgage at today's rate of 5.5%. Monthly principal and interest come to $994.31. Let's say that 12 months from now the same house goes for 10% less, or $197,010. But by then the recession is history and the Fed is jacking up rates to stem inflation. If mortgage costs rise just half a point, to 6%, your monthly payment would be $994.94 and you'd have saved nothing. Meanwhile, home prices might steady and sellers might become less willing to negotiate. And you have spent a year living someplace you'd rather not be.
It's more complicated if you must sell before you can buy. But that logjam won't persist forever--and if it appears you'll be trapped for a few years, try to refinance at today's lower rates. Risks always seem most acute when the headlines give you ulcers. But that's exactly when you should think long term--and get off your thumbs.
The Case Against Waiting to Buy
Today's Home Price - $218,900
Put 20% down and get a 30-year fixed-rate mortgage
5.5% Current rates after recent declines
Monthly payment $994.94
Cost in 12 months?
If prices drop an additional 10% home price will be $197,010
Recession ends, and the Fed starts to raise rates - Interest rate 6%
Monthly payment $994.94
CONCLUSION: If you waited a year to buy, you would have saved nothing and spent a year living someplace you'd rather not be.
Labels: Sarasota real estate news
posted by Marc Rasmussen at
7:15 AM
7 Comments:
Marc,
Another good post. You make some very valid points and your basic premise is correct.
The only fly in the ointment is if prices for stocks and houses fall more than 10%. In the case of a house, a fall of 20% would make it worthwhile to wait a little longer. And that's what the vulture funds are waiting for - for the absolute bottom to fall out.
When you see a headline in the SHT that an investment group has purchased a block of downtown condos for $150,000 per unit (or something to that effect) then we're likely at the bottom in prices. It hasn't happened yet but it will. And the prices that those premium condos go for will be astonishing to many.
In the case of stocks, they still haven't taken in to account the likely continued weakness in the housing sector - and the economy as a whole, IMO. When the Dow hits 9,500 to 10,000 it will be time to start buying the blue chips for a long term portfolio, IMO.
You are correct to say that no one really knows for sure how far things will fall; but then that's why they call it speculation. :)
ToddinFL
I know it is just an example but I don't think you will see a developer sell off a block of downtown condos at $150,000 a unit. I have been looking for such a developer. There are enough normal sales out there to prevent developers from being interested in such a transaction.
Since the beginning of 2007 we have had 436 condos sell in the downtown area. Today, in that same area, there are 497 condos for sale. That does not sound too bad to me. When you compare that to the numbers of south Florida we look much stronger.
Again, thanks for the comment Todd.
Marc
As you pointed out, waiting one year might net you the same result IF interest rates rise. However, interest rates may continue to fall. This is what happened in Japan in the 90s, after their property bubble. Even now, interest rates in Japan are only just above zero. The housing market has only barely recovered there after 17 years.
Also, headlines do actually reflect market sentiment. In an declining economy, most people wont invest in anything. Again, Japan is the example. Consumers stopped buying, which resulted in deflation, which depressed prices even more.
I don't know if the US market will follow the same trajectory as Japan's, but it is possible. 17 years with flat or declining prices is not a good investment.
The other point is that people have other choices for investing. In my case, I have decided to rent while prices are falling. The amount I will pay in rent is less than the amount prices are falling. In the meantime I am using the funds that I would have put down on a house to invest in other business. If I can get a reasonable return then I am much further ahead than investing in a stagnant home market.
That said, if I see a beautiful house at a bargain price I may still buy, but it would be as a place to live long-term rather than an investment. With the huge amount of inventory avaialble there will still be many bargains for a long, long time.
sigh, lets debunk this myth...
"The Case Against Waiting to Buy
Today's Home Price - $218,900
Put 20% down and get a 30-year fixed-rate mortgage
5.5% Current rates after recent declines
Monthly payment $994.94
Cost in 12 months?
If prices drop an additional 10% home price will be $197,010
Recession ends, and the Fed starts to raise rates - Interest rate 6%
Monthly payment $994.94
CONCLUSION: If you waited a year to buy, you would have saved nothing and spent a year living someplace you'd rather not be."
1. I guess you will live in a church (tax free) otherwise add a few hundred per month to your numbers. Also, which company offers free insurance? or add another hundred or so per month.
2. When home prices drop 20-30% (10 % is optimistic for sarasota area)
run the numbers in any rent vs buy calculator. much different result.
3. Why "live someplace you'd rather not be?" Biggest realtor myth. Apartments aren't everywhere? and you can always rent homes from upside down desperate home owners. The bigger issue is why tie yourself down to a currently depreciating asset?
I'd add more, but I just saw you approve/disapprove comments. If you won't post this I wont waste my time.
p.s. I live in manatee county, so hi neighbor.
Thanks for the comment Bringiton.
This is an argument for those who want to own, not rent.
The article is not making the comparison between renting and buying. I agree that it is cheaper to rent versus own. Even though I know this I would still rather own my home.
You don't know for sure that prices will drop another 20%-30%. No one does. Prices could bottom out in the next 18 months and then rise 5% over the 12 months after that. I don't know that will happen anymore than you know prices will drop another 30%.
If you are certain that real estate prices will drop go trade some of the real estate futures contracts and make a bundle of money.
You have to remember that homes are more than just investments. Everyone needs a roof over their head. In the long run Sarasota, Florida is great place to live and own. If you want to own and plan to own for 5 years or more this is a good time to buy. Buyers have the leverage and there is plenty to choose from.
For those who continually knock Sarasota and Florida - Leave. If you aren't happy here - Move. It's that simple. The serial complainers will complain everywhere they go. Don't listen to them.
Well I am from the UK have been to Sarasota and am looking to come over to your beautiful town again this year. There are many Europeans eyeing the US market, especially in the UK as our market after years of unsustainable growth will dive like yours in about 12 months so some of us are looking to sell up now. Frankly I think your prices relative to the rest of Europe are now looking cheap especially as $ remains weak so I think Mark's 10% reducation is if anything a bit cautious. I'll wager a good meal that I am right.
Nick B England
Post a Comment
Subscribe to Post Comments [Atom]
<< Home