[June 2008]

"The secret of success in life...is to be ready for opportunity when it comes." --Benjamin Disraeli

The phrase "Dead-Cat Bounce" is finance industry term derived from the notion that "even a dead cat will bounce at least once if it falls from a great enough height," and describes a pattern wherein a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise--before resuming its downward movement.

The connotation is that the rise is not an indication of improving fundamentals of the stock. A "bounce" is often the result of speculation. Traders buy into what they hope is the bottom of the market, expecting a "bounce" and making a quick profit.

Thus, the very act of anticipating a bounce can create and magnify it.

There is evidence of a "Dead-Cat Bounce" happening in the current real estate markets in several parts of the country. Investors are rushing headlong into some of the worst markets (Stockton, CA is one such example) and actually bidding up prices against retail buyers for REO listings--on homes listed at prices still higher than the affordability levels for the areas where they are located!

Many investors have been brainwashed by Wall Street and the media to think that "buying low" is always a winning approach. But "buying low" all by itself, is a very speculative strategy--and more so in times like these.

The biggest challenge is that turnarounds are often difficult to spot because deflation in the housing markets typically runs about 18 quarters (4.5 years), and false bottoms in housing sales and starts are common.

It is imperative to stay focused on ways to navigate the foreclosure and pre-foreclosure markets right now because the real opportunity will only come in 2009-2011, depending on the region. So--buying for value is the optimal strategy.

Find news to use--avoid noise!

Booms are always set up by Wall Street and publicized by the media. When the inevitable bust occurs, Wall Street uses the media as their partner for denying the truth, while they take their profits and run. That is why most people suffer during periods of crisis.

Investors would be wise to ignore everything Wall Street, Washington, bank, and real estate industry shills state about the real estate and banking crisis, the economy, and the capital markets.

The few who make out big during busts are extremely selective about paying attention to only the most credible resources because their time is better spent doing their own analysis.

Success is never an accident. It is the result of high intention, sincere effort, intelligent direction, and skillful execution. It represents the wise choice of many alternatives.

For us as creative real estate investors and note investors, the biggest challenge we face TODAY is knowing WHEN and HOW to jump back into the marketplace--and avoiding the "noise" until that point.

Whether your believe the news these days is good news or bad news, if you are going to be successful as an investor, you have to take it upon yourself to analyze the entire scope of what is reported. Form your own studied opinion, explore your options, and make your moves.

Being static, without a well-conceived plan for when and under what conditions you will take action, generally leads to the same poor results as charging headlong into battle without a vision of the outcome.

Housing market declines are steep and accelerating

The current recession will most likely turn out to be the worst in decades. There are many more problems ahead. My forecast for the next 5 to 7 years includes the following economic scenarios.

• Deleveraging (the process of taking leverage out of the financial system) is the dominant theme in the markets in 2008 and going forward for at least a year, as the capital markets recoil from the massive losses in structured finance and the housing bubble. This process will transform the banking industry, putting an increasing drag on economic growth and corporate profits.





• Due to the weakness in the economy, the next trend in the housing correction will be a crisis in prime mortgages, and...





• A likelihood of a meltdown in the $40 trillion global credit CDO market for the same reasons that crashed real estate securitizations, as a massive credit card crunch is looming right around the corner;





• Many more hedge fund blowups, corporate bankruptcies, bank failures;





• The inherent rise or interest rates that has to come with bank deleveraging--only now in its early stages. After 2010, you should expect inflation and interest rates to really begin soaring, which will put an increasing drag on economic growth and corporate profits.





• From their peak in 2006, home prices will ultimately decline to pre-1999 levels between now and 2012. Commercial real estate market will also suffer.





• The rental market is set to heat up, and will provide good investment opportunities for patient and prudent investors.

What price glory?

One banana, two banana, three banana, four. I'd wish I had 12 bananas, but I can't pay no more. The best guide for real estate investing in TODAY's market is nothing more complicated than simple Monkey Math! I've covered the basics in previous articles:

Beware the Blue Sky--The Current Housing Market

Priced to Own--Probabilities Producing Profits

The data is in, and it's pretty conclusive. As of May 2008, prices are down some 30% in the past 12-months--no surveyed city stayed above water. Prices in cities in the index have now pulled back to a level not seen since August 2004. But most middle-income workers still don't earn enough to buy a median-priced home in their home towns.

A quick update from recent reports includes The Center for Housing Policy's recent study comparing housing costs in 201 metro areas, with the median wages in those areas for 60 major vocations, such as police, firemen, nurses, teachers, customer service reps, officer workers, and food service personnel.

For typical working people in most markets home ownership remains far out of reach, although home prices fell in 161 of those markets in the 12 months ending September 30, 2007!

More recently, the well-publicized 2008 Harvard Housing study discussed the fact that the median wage-earner is unable to afford the median priced home and forecasts a drop in real estate prices to the 1999 level.

Affordability rules the day

Buy to deliver affordability to the retail real estate market, and you won't miss the bottom--you'll establish it! No hype. No Ju-Ju. No "Come-Bets." Use basic common-sense metrics, applied to the income/affordability specifics of a given area.

[Editor's Note: For further discussion on different solutions and strategies you can use today--in this market, visit the CRE Online Cash Flow Forum, hosted by real estate paper experts, David Butler, Michael Morrongiello, and John Behle.]

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