Wednesday, December 26, 2007

Looking for Signs

Thanks to Paul for the following thoughts on knowing when bottom is near:

I've been reading Contrarian Investing by Anthony Gallea and William Patalon. For those unfamiliar with the concept of contrarian investing, the idea is to buy when others are selling (at market troughs), and sell when others are buying (at market peaks). (It is one of the strategies utilized by Warren Buffett in his investment decisions.) One of the principles of contrarian investing requires the identification of market peaks or market bottoms, by sometimes subjective evidence. For example, when the likes of supermodel Gisele Bundchen demands to be paid in Euros and not dollars because of the declining dollar, this is an indication that its time to buy dollars and sell Euros, because the dollar has reached a bottom. Another measure of a market reversal is when the most bullish of bulls in the market, capitulates and admits the market is going south.

So the question came to me, "What will signal capitulation and the bottom of the decline in real estate prices?"

Saturday's Wall Street Journal gave me the answer. In a page 2 story talking about real estate price indexes and the scheduled December 26th release of the latest Case Shiller home price index, the writer mentioned the forthcoming NAR release of existing home sales data on December 31st. While not rendering a prediction as to the actual content of the December 31st NAR release, the author opined, "One prediction is safe: The Realtors will see signs of hope on the horizon."

Which, of course, led me to the answer of what will signal the bottom of the decline in real estate prices. When the NAR stops telling us "there has never been a better time to buy real estate" or "real estate is picking up," I will know that we are at the market bottom!

7 comments:

Buying Time said...

Given Paul's commentary...had to laugh when I read this bit today related to the Case Shiller Index results:

Lawrence Yun, chief economist for the National Association of Realtors and among the most optimistic of industry insiders, conceded that large inventories will mean further price declines. "Price growth during the boom was clearly unsustainable. This is the payback," he said.

But, according to Yun, the Case-Shiller index exaggerates declines because it covers many of the markets that have been hardest hit. He cites Realtors price data that show a majority of 150-plus markets recorded year-over-year price gains.

Gwynster said...

BT,

I saw the Yun comment and thought the same thing. CR has some great graphs comparing Case Schiller data today too. But you are off having fun without us >; )

big n rich said...

The only time I have ever made any money is buying low and selling high.As a rookie investor in 2000 i got my ass kicked by getting greedy in stocks.I learned a huge life lesson my friends.From that point i have learned to invest wisely.You have to buy when everyone is selling and sell when everyone is buying.The main theme is to be in the game before a boom starts.Have your assets diversified so you can take advantage of a boom in one area.I made my stock losses up in the real estate boom.I recognized there was a bubble and to not get greedy.I am actually looking at real estate now in other states that are highly pesimistic. California prices are beyond me right now for sure.

Patient Renter said...

Yea, that sounds about right to me. It almost seems impossible though.

G Spot1 said...

I think that's the right way to think about this. I plan to pay attention to people's reactions when I tell them we are waiting it out. Right now, everyone looks at me like I'm incredibly picky, or crazy, asking "I thought it was a great time to buy." When everyone starts saying how smart it is to wait, I'll buy....

Paul said...

G-Spot1--- Great insight. I'm going to add this "measure" to my list of contrarian indicators. When people start agreeing with me about waiting it out, I will know it's time to buy.

Anonymous said...

When builders stop building and leave the area (or go bankrupt), that would be the time to consider buying. At that point, there will be no more additional supply or competition from new houses, prices will be at or below the price of replacement, and the inventory of unbuilt development property will be eliminated. Another good sign would be when developed, but unbuilt upon, properties, get dumped on the market. Then the cost of the house would just be the cost of construction, not the cost of property. It's not happening yet.