Finally, after several years of denial, real estate stakeholders in the many hard-hit areas have finally come to the breaking point. Distressed sales continue to be the driving force in most regions, particularly, South Florida, California, Arizona,  and Nevada. Sellers of residential properties are trying desperately to remain competitive amid a flood of units for sale. According to Metrostudy, a national housing research firm, the inventory level of unsold condos in South Florida represent a 31 month supply. Many people think that a two to four month supply represents an equilibrium with demand. Even in the face of these extreme conditions, there are some signs of light.

Using data gathered from the multiple listing service focusing on key areas of Miami, I can report that sales have picked up considerably. By my rough estimate, the rate of monthly average rate of sales is up almost 70% from the severely depressed  levels I saw earlier this year. On the supply side nationally, we also see new construction projects falling dramatically in April to to a seasonally adjusted annual rate of 458,000, which is the lowest since record keeping began in 1959 and much lower than the peak rate of 2.27 million in January of 2006. Metrostudy found that housing starts in Miami are almost zero, which is in line with my own cursory observations. While most might see this as a negative, I see it as an essential step in reducing inventory glut. There have been meaningful pieces of legislation passed recently at both the federal and state level (Florida) that have the aim of encouraging buyers and supporting the real estate industry. Even though high inventory levels, impending foreclosures, and increasing unemployment will keep prices at bay in the near future, it seems that the ingredients are in place to slowly start forming a bottom in the residential real estate markets.

Unfortunately, there are almost no signs of life at all in the commercial market of Miami because most sellers are not budging. There is a trickle of sales activity for smaller multifamily properties with the yields are starting to look attractive in some areas. I expect the sellers and mortgage holders to cave in eventually. Condos will likely have a greater share of foreclosure problems, other supply issues, tougher lending standards, and increased maintenance fees; so one should require a greater discount in price and carefully consider the financial health and other characteristics of the condo association before jumping in. Also, even though property values are declining, one should not infer that tax bills will fall by an equal proportion (or at all) from these levels because the tax rates are likely to be raised in order to offset the lower assessed values and balance city budgets.

Central areas in Miami will likely present the better investment values. These areas the most high-end development in the recent years. These areas stand to continue to benefit from gentrification and the positive agglomeration effects that will likely occur as a result of the newly constructed luxury skyscrapers that are just now reaching high levels of occupancy. Even though the citywide economy might be contracting, there are specific areas that will continue to improve in quality and appearance even in the near term, albeit at a slower pace than otherwise would be the case.

In contrast, I expect more blight to set in the outskirts of the city, in areas that might not look so bad because they have a lot of new construction but still have a lot of vacancies. This is because of the increased congestion and travel time to the central business district, lack of comparable public utilities, prolonged property abandonment, and lack of maintenance. In southern Miami-Dade, the many new housing subdivisions within Homestead are almost ghost towns with low prices that are still not attracting buyers or renters. These areas may suffer from negative reinforcing conditions as more blight creates a less desirable living environment and more crime and, therefore, should be avoided even though pricing and potential income yields might appear to be attractive.

I wouldn’t say we are at a bottom but I would say that we are getting close. Within  a year or less the best opportunities will likely emerge. Individuals will increasingly need to protect their savings and investments with certain types of real estate, in part because it is a hard asset, which cannot be printed at will by a central bank.

At the current rate of government spending (even assuming normal GDP growth) the U.S. government debt will likely be over 100% of GDP in a couple of years. When one factors in the unfunded liabilities of Medicaid and Social Security it becomes clear that foreign central banks will not absorb all of that debt. With so much debt to finance, the situation could spiral out of control. While higher taxes are most probable, another likely event is that the mysterious Federal Reserve will buy up any excess treasuries in the market which will be significant. Isn’t that a neat trick? Not if you are expecting the dollar to retain its purchasing power. As I mentioned in my previous commentary, individuals need to stay away from long-term bonds denominated in U.S. dollars that are not indexed to some measure of inflation. While inflation might not be imminent, the recent steepening of the yield curve indicates that the markets seem to waking up to the fact that Uncle Sam is a drunken sailor that will not sober up before its too late.

The economic climate of 2009 will be very tough, especially for the average consumer. The U.S. and European consumers are officially tapped out. Retailers are barely clinging to life, fighting each other to be the last one standing. While 2008 hit the financial markets, 2009 will be much more visible and hit closer to home for most people. Instead of reading about toxic CDO’s and crooks such as Madoff, which most people have never heard of before, they will be seeing their communities afflicted with a lot more liquidation signs and then a lot of vacant commercial real estate. The job market will be brutal. This does not necessarily mean that asset prices will continue a perpetual downward spiral because much of this is already priced in.

Residential real estate prices in many parts of the United States will probably start to bottom out. During this period, which is likely to take some time, investors should be able to find very good deals if they look hard enough. Other areas such as NYC and Chicago will likely have significant downside left. In the case of New York and Chicago, this will be because the financial services industry will be undergoing dramatic consolidation. Most of the rest of the country should show signs of recovery as prices are considerably lower and the federal programs will begin to help set a floor on prices. Some areas that have seen the most dramatic price declines are beginning to present tremendous opportunities. In particular, Miami seems to be one great place to look for good value and upside potential.

There are several reasons why Miami real estate is beginning to be very appealing. Price declines have been much steeper relative to most other U.S. cities which will likely attract more buyers looking for a bargain. Strong buyers have significant leverage over sellers in this market. About six months ago, banks were still not willing to reduce mortgage principals by much in order to close a sale. Now, I am finally seeing huge write-downs on mortgage principals to facilitate short sales. I have observed recent closed sales where the final price is approximately 50% of the original mortgage balance. Over the longer term, another potential upside to Miami is improved relations with Cuba. Obama is much more likely to change US trade policy towards Cuba, which would most likely be initiated by removing travel restrictions. With Fidel Castro’s health being very fragile, it seems more likely now than ever that we will soon see some fundamental changes in U.S.-Cuba trade relations. Some people question whether or not this would be good for Miami. However, I think it would clearly be a strong positive growth factor for both Miami and Cuba.  Miami will benefit by being the natural staging point for trade between the United States and Cuba. Another reason why I am leaning towards Miami is that if dollar declines resume, Miami’s tourism industry should benefit somewhat. Although I see a lot of upside potential, It is still a little too early for me to be bold enough to declare a bottom because selling pressure and lack of buyers will likely cause prices to decline further over the next couple of months.

Commercial real estate may take longer to find a bottom than residential real estate, in large part, due to a lack of financing. Commercial real estate is slightly behind the curve because investors had incorrectly assumed that cash flows would not be significantly impaired by the economic downturn. With high-grade fixed income securities offering enticing yields, commercial real estate will not become attractive until sellers get realistic about the relative value of their properties and market them at higher cap rates. The U.S. government and Federal Reserve are unlikely to offer the same type of direct backstops they have been offering to the residential market through their support of the GSE’s, Fannie Mae and Freddie Mac and purchase of their mortgage backed securities. Many commercial property owners will not be able to refinance loans made over the past three to five years, which will have balloon payments coming due. Those with some equity will be forced to sell which will create more downward pressure on the market. Mortgage lenders will have to accept lower principal payments if we are to reach the bottom more quickly.

The economy is and will continue to be in a deep recession the likes of which the MTV generation has never seen. The most difficult question to answer is how long will the deflationary tendencies of this recession last. If I had to make a call on that, I would say probably less than a year. This is how long I think it would take for many inventories to be cleared and for many bankruptcy liquidations to take their course. Once the excess supply and competition is thinned out considerably the survivors will regain some pricing power. The market seems to be pricing a much longer deflationary period based on the relatively high yields offered by Treasury Inflation Protected Securities (TIPS).  I believe TIPS offer much better capital preservation than any other U.S. Government bonds.

The Obama administration will likely succeed in restarting inflation. Many emerging markets that were at one point trying to support their currencies in face of the downturn are now trying to cheapen their currencies in order to revive exports. The interesting thing now is that so many countries are debasing their currencies at the same time that it will have very little impact on their balance of trade. In the short run this will provide some support to dollar. However, in the end it will only hurt global sentiment for paper currencies as a store of value. Currency debasement will likely encourage speculation in commodities once again as they are relatively cheap. I expect this to happen sooner rather than later. Oil at less than $40 is very cheap will force severe supply contraction if it stays this low for much longer. Even the industrial metals have gotten so low that it seems a depression is already priced in.

The Democratic Party came just short of the 60 senate seats required to block filibusters. However, the terrible shape of the real economy will give the Obama administration the ability to rubber stamp almost any legislation it wants. While I do expect significant stimulus programs, it is unclear to me which promises, if any, will Obama have to sacrifice. It seems that Obama will try to incorporate his promises for green initiatives into various stimulus packages. However, it is likely that in many instances he will have to settle for simply trying to keep the titanic from sinking.

From my perspective, it seems as if there are finally some signs that the worst of the asset deflation is over. One of these being that there is so much forced liquidation, the type of condition you need to reach a bottom. Volatility and corporate bond spreads over government securities show just how intense the fear is. These spreads have come in a little but are still very wide. I think that it is time to shift gears from extremely defensive to more offensive. I would still focus on companies with quality earnings and strong balance sheets. High-grade corporate bonds also offer very good yields currently and the impending wave of bankruptcies has already been priced in. I would still stick to shorter maturities because of the risk that inflation accelerates rapidly in the coming years. Things remain very unpredictable but I am more optimistic than I was last year. The biggest concern I have going forward is the expansion of the Fed’s balance sheet and what the longer term impact of trying to keep interest rates so low will have on the economy. Considering all of these government bailouts and impending obligations it is a wonder to me that the 30-year treasury currently yields less than 2.9%. As Marc Faber puts it in a recent Barron’s panel discussion, “This was the last bubble the Fed was able to inflate, aside from their egos.”

It has been about one and a half years since I posted my first commentary and since then I have added many new people to the email list. I am proud of my public predictions up until this point. Risking your reputation is one of the most difficult things one can do. For those of you that are new to my commentaries, I would like to recap some of the documented predictions I have made to date. Continue reading »

It is certainly feels like the panic selling typical of capitulation at this point, at least for the financial industry. However, I foresee more pain in the horizon. When you have financial institutions using so much leverage to support depreciating and overvalued assets, it is difficult to see the light at the end of the tunnel. This is especially true when you know that some of them are just now being forced to liquidate these assets in distressed sales which will force more asset writedowns at “healthier” financial institutions. Continue reading »

With oil seemingly headed straight for Goldman Sachs’ $150 new price target, there is lively debate going on right now whether or not commodities as a whole are in a speculative bubble. We may very well be at the beginning stages of a bubble much like the U.S. housing market was in a bubble during the early 2000’s but that is still open for debate. If so, who is responsible? Is it the greedy speculators? Is it the billions of consumers in Asia? Is it those corrupt OPEC ministers? While it might be overly simplistic to point the finger in any one direction, in this case, I find it much more logical to blame the past and present actions of government officials. More often than not they try to correct things only to exacerbate the problem or create an entirely new “problem.” A majority of the time, governments overspend, ignore the long term implications of their actions, and generally do not have the slightest clue about economics. As an investor, what I do like about them is that they are predictably foolish. The current debate should not be whether the commodities market is in a speculative bubble but rather, if it is in a bubble, how much and how long will government officials expand it. Continue reading »

“Inflation is back!” that’s what the headlines are starting to say and what I have been predicting for some time. Why is it back? The all mighty U.S. economy is slowing and the E.U. is also so how could we be in an inflationary environment? First of all, this should not be a shock to anyone. Stagflation (high inflation with a stagnating economy) has happened before and there is no reason to think that it cannot happen again. In fact, the pieces are in place for just that scenario. The aggressive easing of monetary policy is doing very little to improve the credit crunch but it is putting downward pressure on the dollar and other soft currencies. How can you make money in this environment? As Mad Money’s Jim Cramer loves to say, “There is always a bull market somewhere.” Right now, that bull market is in commodities. Continue reading »

What is going on with the real estate market in the U.S.? How bad will it get? When is it time to jump back in? Should sellers wait it out? These are questions frequently posed to me. My answers often disappoint people, which is no fun but I am not one to say what I do not believe. Obviously, different regions have their own set of circumstances. As a general rule, any markets that experienced phenomenal appreciation in the past couple of years are getting slammed. Manhattan is an exception to this because it was a direct beneficiary of Wall Street’s leveraged buyout mania. 2008 will be a different story for Manhattan as well. It is always ultimately a question of supply and demand so let us explore this balance in order to make an informed assessment. Continue reading »

When I first heard the term Web 2.0 about two years ago, I thought, “maybe that’s some kind of faster Internet technology.” I have to admit my ignorance and that I truly believed it was just a gimmick to promote Internet companies. I could not have been more wrong. Being a person that is fascinated with growing trends, I am currently mesmerized by the very real and significant impact that the so called Web 2.0 is having on our lives. Continue reading »

The Federal Reserve is one of the the most influential financial institutions. Its mandates are to maintain price stability, ensure the smooth flow of money, and act as lender of last resort in face of severe financial crisis. In order to understand the financial markets, it is important to understand the tendencies of this institution. It seems that the the Federal Reserve has an inflationary bias although not always a large one. If it were not for the integration of the global economy and the use of the dollar as the worlds reserve currency, inflation would be a much bigger problem. With the growing support for protectionism and dollar weakness, it seems that some of our saving graces may be coming to an end and we must question how we can protect our wealth. The fact that U.S. government does not seem to have any real desire to balance the budget does not make the Fed’s job any easier. Continue reading »

Clearly, we are at the early stages of a very significant credit crunch that will need to naturally work itself out if we are to emerge on more stable economic footing. Despite the Federal Reserve and the ECB having significant ammunition to help improve liquidity, such measures will be rather superficial in light of how pervasive the problems are. It would be unfortunate if central banks and federal governments extend the current credit bubble because the repercussions would be even greater in the future. Instead, would be better to save the big guns for when things get worse. Continue reading »