Rents Increase as Vacancies Dry Up

The Chart below from the WSJ says it all.  Rent prices are up while vacancies go down.  It is a simple supply and demand concept with the rental market right now.

I would suspect that even those who could qualify for the ultra low mortgage rates right now are still gun shy about entering into the housing market.  Prices can and likely will continue to fall as we try to find the bottom and stabilization.

Like anything in the housing market conditions are very local.  so what is up in one area may be down in another.  I'm sure that there is a correlation somewhere with housing and the job market.

I believe that data such as this support our strategy of shorting the home builders and going long a company such as Lowe's and Home Depot that would be a play on the renovation space.

Bull’s Eye Investing Ten Years Later

Here is the link to last week's John Mauldin's Thoughts From The Frontline.  Mauldin begins to assess the accuracy of his best selling book Bull’s Eye Investing that was released 10 years ago.

I've highlighted a few key passages below that I think investors will find prudent

• We will make the case that it is more useful to analyze stocks during secular bear markets in terms of value than in terms of price… These cycles generally take a generation to work their way through the investor public, have significant magnitudes of becoming undervalued and overvalued, and have significant implications for the way that investors should approach each of these periods.
• Further, we show that volatility and frequent large rallies are the norm and not the exception, thus giving the astute investor some terrific opportunities.  Finally, we will make a connection between inflation, interest rates, and stocks that will give us further indications of the direction of the stock and bond market in the coming decade.
• These periods in the past have been the result of market valuation cycles represented by the P/E ratio. The valuation cycles have resulted from generally longer-term trends in inflation toward or away from price stability. The short-term, somewhat random, market gyrations are the result of then-current circumstances and market forces wrestling stock prices around a gravity line of the broader cyclical trend.
• It is striking that overall volatility is relatively similar for secular bulls and bears. Note the frequency inside the 10% and 16% ranges. In both secular bulls and bears, nearly 30% and 50% of the years fall inside the respective ranges. The difference is that bulls predominantly have upside years, while bears have more downside years.
• In all cases, throughout the years, the level of returns correlates very highly to the trend in the market’s P/E ratio.  The P/E ratio is the measure of valuation as reflected by the relationship between the prices paid per share to the earnings per share (EPS).  Higher returns are associated with periods during which the P/E ratio increased and lower or negative returns resulted from periods during which the P/E ratio declined.
• This may be the single most important investment insight you will get from this book. When P/E ratios are rising, the saying that a “rising tide lifts all boats” has been historically true. When P/Es are dropping, stock market investing is tricky; index investing is an experiment in futility. As we will see in later chapters, in these secular bear market periods, successful stock market investing requires a far different (and sometimes opposite) set of skills and techniques than what is required in bull markets….
• Although P/E has declined over the past nine years, from 26 to near 20 (using the Shiller method), stock market valuation remains relatively high. Almost everything in chapters five and six of Bull’s Eye Investing remains true today. The market has chopped around with fairly typical volatility. P/E is in the lower end of the red zone rather than above it. Most importantly, currently high valuations portend low returns from here.

I would encourage everyone to check out the full PDF version which contains some really great charts that give a visual picture of where things currently stand.

Avoid the Student-Loan Debt Trap

Some times straight forward common sense advice is worth repeating.  Often times over and over again.

I came across this Kiplinger article which usually pumps out common sense investing and straight forward financial advice.

Ways to avoid heavy uses of student load debt:

• Double down on savings
• Pick a school you can afford, seems like an obvious point but you would be surprised
• Go a different route, see this WSJ article
• Know what you are getting into
• If you must borrow, use federal loans

Renting: The New American Dream

The "American Dream" has a differing meaning depending upon who you ask.  However, one building block that consistently made up someones "American Dream" typically involved owning their own home.  The asset that was seen as stable that could or should never go down in value.  Well the "great recession" put real doubt in people's mind that a house was the pillar of the "American Dream" that it used to be.

We have two pieces that cover this vary topic, the first by Mish Shedlock and the second by Dan Gross of the WSJ.  We have addressed this housing issue in Three Key Reasons Housing Not Coming Back and To buy or not to buy?.

Every one has their own view when it comes to this debate but it should really boil down to what your own personal needs and goals are.  I think that the perception of renting was associated with a negative connotation when it really shouldn't be.  If you are a person or family that wants or needs to be mobile for what ever reason then buying a house is probably not for you.

Remember that the primary purpose of a house is a place to live and provide shelter.  Not necessarily an asset that appreciates in value.

Renting: The New American Dream? by Mish Shedlock

This is how I have called the housing bubble and bust in real time over the years.

• March 26, 2005: It's a Totally New Paradigm
• June 07, 2005: It's time to shift the arrow
• April 10, 2006: US vs. Japan Land Prices Pictorial Update
• February 15, 2008: Housing Bottom Nowhere in Sight
• December 01, 2008: Housing Update - How Far To The Bottom?
• July 13, 2009: Housing Update - How Far To The Bottom?
• June 20, 2011: When was the Housing Peak and How Far to the Bottom?
• March 13, 2012: How Far Have Home Prices "Really" Fallen? HPI Upcoming Changes; HPI and the CPI

The first four links above are quite humorous. The denial from Bernanke and others is stunningly funny.

Bottoming Process

Some cities are further from the bottom than others, but it is likely some cities have now finally bottomed.

That said, I do not think home prices are going much of anywhere "in general" because there is still years of shadow inventory and years of foreclosures to work through.

Moreover boomer demographics suggest much downsizing is ahead (and who will boomers sell their mansions to?)

Finally, generation Y has far different attitudes than boomers regarding wealth, debt, and possessions and will carry those attitudes for a long time having seen firsthand the trouble their parents and grandparents got into with too much debt, and how they are in the same boat with student debt.

Renting Prosperity by Dan Gross

• In the American mind, renting has long symbolized striving—striving, that is, well short of achieving. But as we climb our way out of the Great Recession, it seems something has changed. Americans are getting over the idea of owning the American dream; increasingly, they're OK with renting it. Homeownership is on the decline, and home rentership is on the rise. But the trend isn't limited to the housing market. Across the board—for goods ranging from cars to books to clothes—Americans are increasingly acclimating to the idea of giving up the stability of being an owner for the flexibility of being a renter. This may sound like a decline in living standards. But the new realities of our increasingly mobile economy make it more likely that this transition from an Ownership Society to what might be called a Rentership Society, far from being a drag, will unleash a wave of economic efficiency that could fuel the next boom.
• The reaction to extended leverage and foolish borrowing isn't to stop consuming and buying; it is to consume and buy more intelligently. That's what the Rentership Society is all about. And it starts at home. Literally. Housing is the biggest single component of consumption in the U.S. economy and the source of much of our present misery. According to the Bureau of Labor Statistics, the typical consumer spends about 32% of his or her budget on shelter. In the last decade, that generally meant borrowing a lot of money to take "ownership" of a home.
• Home builders and property owners have caught on to the economic opportunity presented by the move toward rental. Fannie Mae and Freddie Mac have become reluctant owners of more than 200,000 properties thanks to the foreclosure crisis, working through the backlog, one painstaking foreclosure sale at a time. But in February, Fannie Mae said it would put up for sale some 2,490 homes as a package, asking for $321 million. The Wall Street Journal reported that an assortment of real estate companies and private-equity investors were considering making bids. The presumption was that these sophisticated investors would turn the homes into rental properties. No less a sage than Warren Buffett told CNBC in February that he'd love to buy "a couple hundred thousand" single-family homes for rentals.