If You Invest Expecting A Greater Fool To Come Along, Guess What. You're The Fool.

I’m a big fan of conspiracy theories; an aficionado of sorts. It’s the scientist in me. I love seeing things that others can’t. I unfortunately am also doomed to be right most of the time. Sometimes I get this terrible gut feeling that something is wrong and I’m the only one who sees it. It’s not paranoia. It’s more insidious. For years I’ve said that Gold is the best investment. Gold at $340 an ounce was, adjusted for inflation, at a 5000 year low when measured against a field of wheat in Samaria or an animal pelt in the Louisiana Purchase. Gold at $590 an ounce is still cheap when you consider a three bedroom home with an attached two car garage on 10,000 square feet is selling for $650,000. I don’t think Gold has peaked. New construction orders have slowed and there’s an upswing in cancellations for unfulfilled contracts. Additionally, the inventory of unsold homes is at a record high. This doesn’t bode well for the speculator with an ARM (adjustable rate mortgage). This is doubly true for those with interest only mortgages. When the balloon payment is due there may be no equity left in the home.

Investment Real Estate has the unfortunate stigma of being fungible without having a spot market. Houses are shelter. For the consumer there is little difference between one house and another. For the speculator there is even less. Sure you can say this house has two bedrooms, a wine cellar, is in a town with a nice school, antique marble bath fixtures, gingerbread moldings, a ham radio antenna and a view of the mountains. Someone might be looking for exactly that and nothing else will satisfy. Most buyers are satisfied with something affordable with enough bedrooms for the kids and a decent school nearby. Any house will do as long as the commute to work isn’t hellish. So for the greater part of the market, houses are fungible, interchangeable. Buyers know this.

Buyers don’t care what sellers have done to justify an asking price higher then the other 1100 square foot two bedroom ranch down the street. A new roof, great, $5000 spent on something that should be regular maintenance anyway. So why is the asking price $30,000 more then the neighbors house? Oh, a fresh coat of exterior paint and in colors I wouldn’t have chosen, again that’s maintenance. It should be done regularly, not just to get ready to sell the house. $3,000 there. New carpets? Carpets do wear out, maintenance again. OK that’s $3,000 more. You’re up to 11 grand. I’ll offer 20 grand less then I’d pay for the house down the street. No takers? OK have fun spending another 230 days on the market.

Sellers on the other hand are absolutely convinced the house is unique, irreplaceable and one of a kind. Their heads are full of stories about rising house prices, a half decade worth of stories. My advice is to get over it. The bubble has popped but since houses aren’t sold via spot market it will take months even years to fully see the trend. It’s easy to point at a bad day trading pig bellies to know when the market has turned against commodities. So the big news is that your house isn’t worth three times what you paid in 1989 simply because it’s a great house. You may have had an equity position that suggested your home tripled in value because outrageous speculation drove up the price of every house in New England. Good luck getting that price now. The fool has left the market place. The greater fool isn’t coming along. Your neighbors who got out last year lost all that equity buying their new house. Take what you can get for your house now. It will still beat riding the equity curve down when all those short term interest only ARMs that fueled most of the speculation call in the balloon payment. Unsold inventory will turn into foreclosures. You think the banks are going to want to sit on unsold inventory? They make their money on interest. Not owning houses. In some cases, their charter or local regulations forbid them from holding inventory too long.

We have high inventory and very soon some extremely motivated sellers. In the mean time, Gold is cheap. Shotguns are cheap too. You’ll need both when hordes of suddenly homeless Real Estate speculators figure out they’ve been made a fool of.