Real Estate Danger Signs

By Dr. Steve Sjuggerud, President, Investment U
Monday, April 5, 2004: Issue #326

“Real estate on this here island is only goin’ up,” my dental hygienist told me last week. She’s probably 19 years old, but she was certain about getting rich in real estate. You’d have thought that the Lord had whispered “Buy Florida real estate” in her ears.

Quite frankly, everybody where I live believes that real estate prices can only rise. There is nobody here that believes that real estate prices can fall which is exactly my cause for concern.

Longtime readers of mine know that I don’t think U.S. real estate is wildly overpriced yet. But I think it’s about to be. Everybody sees real estate as a “sure thing.” I’m concerned that people now think real estate is even more of a sure path to wealth than the Internet stocks of the late 1990s. And we all know what happened to that “sure thing.”

What History Tells Us About Popular Prognostications

“In no nation are the fruits of accomplishment more secure,” President Herbert Hoover said in his Inaugural Address. “I have no fears for the future of our country.” Hoover, you may recall, was inaugurated in 1929. Then, seemingly out of nowhere, the Great Depression set in. At the moment an investment seems the least risky, it is often the riskiest.

Based on the cheery economic outlook in 1929, people were happy to invest. And why not? Even the most astute prognosticators of the day believed that asset prices could only go up.

In October of 1929, just before the Crash, legendary Yale economist and investor Irving Fisher proclaimed: “Stock prices have reached what looks like a permanently high plateau. I do not feel there will be soon if ever a 50 or 60 point break from present levels, such as (bears) have predicted. I expect to see the stock market a good deal higher within a few months.”

Interview with the Best in the Biz

I decided to write about this today because Barron’s magazine featured an interview with Mike Kirby, who I consider to be the best in the business in real estate stocks.

Kirby started Green Street Advisors 20 years ago. Green Street simply analyzes real estate investment trusts (REITs). REITs are a great way for investors like you and me to own a professionally managed, diversified portfolio of real estate, simply by buying a stock (a REIT).

Green Street does not do investment-banking deals, and it is not affiliated with a major brokerage firm. I believe that makes this company pretty darn independent.

Cutting right to the chase, Kirby says, “Valuation levels are probably as rich as we’ve ever seen.” As an example, Equity Office Properties (NYSE: EOP), the largest real estate stock, “is trading at more than 20% over our estimate of net asset value.” In plain English, the stock is selling for 20% more than the liquidation value of EOP’s properties.

Finding Future Profits In the “Most Ludicrous Investments” Today

I stand by the advice I gave to my newsletter subscribers last week: “I expect real estate to continue higher, and we’ll continue to ride it. But I’ll have no problem exiting when the time comes, or when we hit our trailing stops on our real estate-related stocks (some of which are up over 150%). Enjoy it while it lasts. But be aware. Know that a speculative bubble is being created, on a pile of debt, and the end will likely be ugly.”

I’m not trying to be Chicken Little here. I’m just calling it as I see it.

So where are the good values to be found today, if not in real estate or stocks?

Well, first remember: “At the moment an investment seems the least risky, it is often the riskiest.” Remember too that people thought stocks were a risky, bad investment in 1981, after over a decade not making any money in them.

What sounds like a risky, ludicrous investment right now? What investment seems ridiculous to make, that nobody will ever make money on? That’s what you should be asking, as that’s where you’ll find the real bargains. (For example: I would say that 100-year old graded Mint State U.S. gold coins might just fit the bill.)

In the end, when folks fresh out of high school are certain that real estate is a sure thing, you can be sure that it isn’t.

Good investing,

Steve

Today’s Investment U Cribsheet

In today’s letter I mention a particular gold coin investment that could do well in coming months. For more on investing in coins, check out Investment U E-Letter #309 – Why High-End Coins Are Set to Ride Even Higher.

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