what will trigger declines?

On the TIPS thing, nyc10023, take a look at Figure 2 here and compare it to 10-year treasury yields from another data source:

http://www.clevelandfed.org/research/commentary/2009/0809.cfm

In 1984, we had the 10-yr was yielding 12-14% against inflation expectations of 5-6%, so a real expected yield of call it 7%. In 1995, it was 7%-ish 10-yr yield against inflation expectations of 3%-ish, so real expected yields of 4%. As of Sept 1 2009 (the last point in the link), 10-yr yields are at 3.3% with inflation expectations in the range of 2%, so real expected yields of 1.2%.

No one can predict the future, but to me it seems like a large portion of the risk is in that 1.2% number going up, and TIPS are not protected against that as far as I understand. Very little upside for a whole lot of risk.

Inonada I misspoke earlier. I basically meant that every 'long term bull' uses purchases from the 1990s at 8-12x rent....or even from the 1989 peak at 14x rent....as an argument to buy now at 18x+ rent. And its basically the same logic people probably used to buy stocks in the early innings of the 2000-2003 downturn...Its because whatever way people 'got rich' over the prior 10 years is the way they will argue will make you rich over the next 10 years.

inonada, very interesting. I've always thought a little money (~5%) in TIPS was wise, but maybe not? Little upside isn't always a bad thing, but paired with so much risk...

Rhino, I largely agree. Recycling strategies rarely works as well the second (and third, and fourth, etc.) time around. I know you're tied to that 8x-12x number, but I'd argue that's not as set in stone as you seem to be implying. That "golden" ratio too can fluctuate, in either direction.

On "where to invest", nyc10023, I'm still partial to equities even after last year's run-up. On a normalized, inflation adjusted basis (e.g., 10-year past earnings), S&P earnings are 50-60 on a price of 1070. That translates to an earnings yield of 5% or so. Add to that the fact that earnings track inflation long-term (2-3%) as well as GDP growth (2-3%), and the present-value equivalent yield becomes 10%, or 7-8% over expected inflation and 6-7% over 10-yr yields.

Yes, stocks are much higher risk, but I like to be paid for my risk. With 10-yrs, and TIPS to a significant extent, the premium for the risk is negligible IMO.

Things were certainly better last year on stocks, with present-value yields hitting 13% at the ever-elusive and short-lived bottom. You gotta realize that value-guru Buffett, who had spent more than a decade with a $50B hoard in treasuries, went all-in at prices not too different than what you're seeing now. He's the first to admit that he could be wrong, risks are real, if he was "smart" he could have timed the bottom perfectly for the full $50B, etc., but at the end of the day, he's gotten a price that is yielding a favorable amount even accounting for the risks.

I'm not set to it at all... Interest rates are the biggest factor that skew it. What I am set to is that buying at 18x+ is not conducive to good returns. What would make me care a little less would be if honest carry costs were less then rent. In that way, I could make up for a bad entry a little bit at a time each month. I could listen to the 'long term' argument a little easier if we were at the long term median of 15x.

Inonada, a 20x multiple of normalized earnings is not consistent with a good return. You should read Unexpected Returns by Ed Easterling. Stocks are priced to return 7% long term...which is okay but calls for an underweight.

bjw2103, risking a little money (~5%) on a low-risk investment never did nothing to nobody. I'm not sure if my analysis of TIPS is right -- I never studied the asset hard enough to be really knowledgeable -- so you might want to read up a little more yourself. After all, I'm just some anonymous schmo typing away on the Internet at noon in the middle of the week.

PS: Buffett picked stocks and bought at 900...900 is fair value....15x your $60.

Rhino86, I think Burlington North was announced at 1050, although you're right that he did much of his buying at 900. No argument that 900 is better than 1050 from me. But at the end, we're talking about a 5.6% yields vs. a 6.6% yield, and when you add ~5% to account for inflation and earnings growth, you get it's the difference between 10.6% an 11.6%. Maybe I'm wrong about that 5%, and it should be 3%, but the point is that it's in the right ballpark.

I think I've brought this up before, but I like looking at the yield minus the 10-year rate since the latter is a good metric for the market's price of capital. Comparing 8x earnings in 1984 to 20x earnings now is not a fair comparison given that during the former 10-yr yields were at 14% vs. 3.6% now. Pretty much the entire past 50 years was during much higher interest rate times than the present, and I think you have to adjust P/E comparisons for that.

By the same token, Rhino, stock valuations are subject to the "real yield" risk I was talking about above.

inonada, you'll have to excuse me for not being used to humility on the StreetEasy board, but your analysis is much appreciated. I found the Cleveland Fed research to be quite helpful. Thanks!

You're welcome, bjw. I'll try to be more certain in my future proclamations, so as not to stick out. Unfortunately, the market beats humility into anyone who overestimates their ability to predict the future, and I'd just as well rather avoid having the hubris beat into me.

Even if you make your adjustments for interest rate....Multiple = 1 / (risk free + equity risk premium). If you look at a risk free of 14% vs. 3.6%...you'll find that the equivalent of 8x is the 12x we bottomed at. Besides, interest rate is not to be factored away (unless you plan to short treasuries against your stock positions)... The reality is this is just not all that good a historic entry point for the stock market. Interest rates being so low is one of the reasons, not something to be factored away. People who bought in lower need to realize they enjoyed their next number years of excess returns vs. bonds. I would rather get 5% in bonds right now than take the volatility of the market is size for an expected 20-year return of 7%. Thats nominal, not just real.

inonada, amen. I'm fully on board with that philosophy.

bloomberg news highest number of stock market letters writers looking for a crash in 26 years... the consensus is always wrong.

All this said I'd rather average into stock than put a down payment to work. Even the biggest bear would say -50% to 550 would be a dead buy...so put into the market as much as you would be willing to eat 50% on. 20%....? 30%?

Consensus can be right for a long time.... And the measure of sentiment is the bull/bear ratio...and there are more bulls by every survey imaginable...tho not as extreme as when the S&P was at 1150. Get your facts straight please.

Rhino, can you give an argument for the summary of 7%. I am curious to understand.

"All this said I'd rather average into stock than put a down payment to work."

I'm in a similar situation with the amount of additional capital I get to put to work each year being significant compared to my net worth. As such, I have a love-hate relationship with any and all stock movements. It goes up, I make money but have to pay more to buy in. It goes down, I lose money but can pay less to buy in.

I cant say that I've crunched the numbers... But I went to something at the NYSSA where Abby Cohen pegged it there. Also John Hussman of Hussman Funds goes good work....he puts it there. Ed Easterling of Crestmont Research - same thing. I think in summary, when interest rates are this low, it calls for a high cash position. Of course most regret not loading up in the panic. To me that was more of a trade...which you highlighted...the normalized earnings yield was out of whack with treasuries. I'd argue that was a pair trade.... But money is money... I would not argue with a good trade. It was no 1982...again because the high rates are what made that opportunity....cant factor them out.

Re Tips -- I'm no bond trader but I think 1) buying normal bonds more than short/med term is very risky given the inflation outlook; 2) TIPS are less risky than med/long term nominal bonds because of the inflation risk that would kill normal bonds; 3) TIPS real yields are so low that they do not make a decent investment return, and are only attractive now in a relative sense when compared to nominal yields on regular bonds; if you assume that you need to live off the real yield, for example, or only spend the real yield income from an investment, TIPS are lousy; it would seem there is great risk that TIPS real yields could increase to something closer to historic real yields on treasuries (not sure what they number is, but i don't think it is as low as 1%) ;

4) as awful as they are, personally I think it makes sense to stay on short end of the yield curve in either normal bonds or TIPS (maybe going out a little to benefit some from flight to safety bounces as a kind of hedge to riskier investments you might have);.....the investing environment in fixed income sucks because of the inflation spector...but it's not worth it to take too much credit or duration risk to enhance yield...i hope being short term now will allow me to benefit from higher short term rates if inflatoin actually starts kicking in, and eventually buy further out bonds when it appears rates are more appropriately reflecting inflation risk...

I'd be open to a study that compares stocks to bonds right about now... I am curious whether volatility adjusted stock returns offer a compelling case over bonds right now.

Yeah, interesting. I couldn't bear the sustained whinings of "wealth" advisers and partner -> so we put a third in TIPs & shorter-term munis a few weeks ago. Given my propensity for bad timing, I am sure that it will have been better to stay in cash. Thing is, we've been in cash since '00 to '07 (when I bought nibbles of RMUNX) and '08 (when I bought nibbles of S&P right before TARP bailout passed) minus the downpayment so missed much of the Dow going from 9k to 13k and back down to 7k. Lost decade indeed.

Yeah, and what's a "high cash" position? 25%? 50%? 75%? And would you do USD given all the negative prognostications? Or move to a more commodity-based currency?

I dont really know. Its very personal. For me, I'd love to see real estate at 50% off peak price (another 30% down)...so in a sense I am saving for that...and in ultra short bonds to make like 3% in the meanwhile. I dont feel like there is a lot of upside to be missed in any asset over the next two years. Whatever we get in economic recovery will be mitigated by higher rates (lower govt support).

Back to Jim's first question. From what I've gleaned from the boards about your situation - don't buy! Don't buy! Don't buy! And I'm an owner, so I have a little own over rent bias in terms of comfort.

Rhino: I've been feeling that since the dot-com crash. So, except for the RE "investment"/primary residence, I've been ultra-risk averse up until now, getting burned here and there in doses with mini-ventures into various markets.

If you've been out of the market for the past decade more or less, nyc10023, then I think you underestimate yourabilities. You seem prone to hindsight bias: realize that even the beat market paticipant can predict but a small fraction of market movements.

I'm trying to fight my inherent RE bias here. My forays into the market have been quite disastrous - 30% down in a month ('coz I picked a very volatile month) v.s. say buying a cheap property outright somewhere for the same price, prices are still stickier but of course long-term, could equally go to zero.

Jim, short-duration TIPS are certainly low risk. The problem for me is that they're just not as pretty as of a portfolio of, say, 20% stocks and 80% cash if you're going to do 100% TIPS as the alternative. If it's part of a diversified portfolio, I can't argue with that.

What do you think of the "peak oil" theory, inonada? I'm thinking it's not a bad time to buy oil.

From a previous curbed article post
http://curbed.com/archives/2010/02/04/manhattan_housing_prices_doubled_over_past_decade.php

Prior decade average transaction $399K, at a rate of 7.38% (assuming 0% down, the monthly cost is 2,764)
Current average transaction is $850K at a rate of 5.05% (assuming 0% down that's 4,588/mo)

So to work out the numbers on a monthly basis, the transaction should come down to ~515K to pay the same per month as you would have in the 90's. That's 40% decline from current levels. If the typical economic cycle is 16 years, we have 2-3 years of declines to sit through. Pass the popcorn.

After my recent bid (I offered 10% below ask, an average discount according to curbed) where I didn't get the apartment because someone else offered ABOVE ask I am giving up.

Giving up is okay. Buffett gave up on trying to understand the valuations of tech stocks in the 90s. Buffett was in treasuries during the late stages of the 2004-2007 stock market cycle. You got it baby, sit and watch this real estate market until fall of 2011 at minimum.

No idea, nyc10023. For various reasons I don't trade on momentum, "noise trader" effects, etc., and I don't have a fundamental framework for valuing oil, gold, and commodities in general. As such, I don't invest in them personally. I'm not saying that there is no good models, I just don't understand them.

That being said, I have found various energy stocks, typically small-cap, that have earnings track records that shot up with the commodities boom, and now they trade at attractive earnings multiple compared to where earnings were a decade ago with pre-boom energy prices. That's the only way I've invested in energies personally.

To parrot Rhino, stating out of an investment category that pays for risk in typical times is good enough for most investors. I personally have zero exposure to RE and bonds despite generally having them is good. In terms of cross-asset diversification, I theoretically believe and have at least one big demonstration of handling the risk.

I did at some point in Dec 2008 consider shorting the 30-yr treasury when it was yielding 2.6%. However, I decided against it because of "other" issues beyond price prediction. Most problematic was finding a way to short. The easiest route would have been to short TLT, the long-term bond ETF. Guess what? No broker I checked had even a single share to lend out. Theoretically, I could have shorted bonds directly, but that's not really available at a retail level, and the entire bond market was f-ed up in terms of repo. Besides, they probably didn't have much borrow available, and they could have pulled your borrow or hit margin issues during a short squeeze. The only other option was bond futures, but ad mark-to-market instruments (like the rest) one would have to post potentially large margin if the market panicked further or squeezed.

You'll note that Buffett is very leverage-averse and margin-averse, preumably for these reasons. One example is the put options they sold in 2008 where they didn't have to post margin. When stocks dropped and their value plummeted, they had a credit risk on their hands that was growing. Rather than hedge this away and pay a cost for the BRK CDS, they lowered the strike price. This resulted in a small paper profit for BRK against their paper loss.

Apologies in the more-than-usual grammatical and spelli g mistakes; I have a good excuse..

" When stocks dropped and their value plummeted, they had a credit risk on their hands that was growing."

Thr buyers had the credit risk, not BRK. Oy vey on me today...

Ino...To be clear, I think all normal fixed income is rather risky due to the inflation risk (that seems like it has to happen sooner or later),unless you get some yield in the meantime but get out in time. TIPS might be an OK investment, certainly better than holding lt normal bonds, but...the real yield is so low they are risky too. Or put differently, the real yield on TIPS is so low I don't see how they can be a big part of a portfolio for the long term. Right now, it all sucks. And I personally don't feel comfortable going very much into stocks because the history is just too bad, too many risks...but I do have some exposure but not in the buy-and-hold no matter what sense,

TIPS aren't yielding much these days, so I'd avoid that. On the fixed income it doesn't pay to take duration risk eihter so my take would be short term high quality tax frees and wait it out. While the Fed wants to keep rates low for next year or two, something might change that, so you only need to ride out two years at most according to this analysis.

river..that is basically what I and i think lots of people are doing....

Funny thing about TIPS. Ten or so years ago when a lot of people like william berstein and swenson and others started saying "put a 1/4 of your portfolio in tips", or more, the real yield on tips was way higher than recently (except for weird blips during the crisis)...tip yields are so low they can hardly be considered the magic solution yet a lot of investment advisors still mention them often, and often as very high % recommended for a portfolio

Right now, I'd like to find out the money market Bill Gross has his mom in. Yields suck in this environment. It doesnt' seem like the administration has factored this in to consumption stats.. This is even worse on the elderly who depend on their savings to sustain them.

The R/E market is still trending down. It is a fact we are screwed. Job creation is the slowest process in a recovery and without a job you can not fix your credit that was broken during the bust. How many people out their are like that? Is there a statistic? And the bleeding on the street is not over. This time it is really GLOBAL and everyone is feeling it. NYC R/E is in decline and will be for some time, if interest rates go up it will not help the recovery.

http://curbed.com/archives/2010/02/04/manhattan_housing_prices_doubled_over_past_decade.php

Yeah but apartment prices are down 25%. That is a buy.

As a potential pied a terre purchaser (coop/condo in Park Slope), these discussions are "spot on". It would seem to me that such purchases, which are in no way necessary (we would live in our "full time" home 90% time, would be a good barometer of the market. We have held off because 1) prices seem to have more down side potential than up in the near term 2) expenses (maintenance, taxes, fees) are sure to go up 3)the market lacks a real range of quality units. Is there any objective measurement which ties "pied a terre" purchases to "the right time to buy"?

There is no special rule for pied a terres. After looking at data ad nauseum it seems to me the closest thing to a rule of thumb is that cap rate should be > mortgage rate.

I know nanda.. excellent post on TIPS. Beware of what bankers and gov't try to sell you....

Aboutready.. as to my being too gloomy, and $500psf bringing chaos... doubt it very muchly. If you believe 70% of the mkt never traded hands and hopefully never took equity out to live large, then it'll be just a mental kick in the head. Net net, NYC will be NYC but a huge chunk of us won't be leveraging our azzes off to make lucky bubble timers a nice nest egg to travel around europe in 1st class. Don't you think you, your daughter and that fine husband "deserve" 1st class more than just a lucky bubble timer?

Back to OP. On an emotional level... I don't see how just signing up for a mortgage earlier should make one person "financially secure" vs. someone else? That to me is the great take-away from not drinking the lemming juice at the moment. You wanna put a ox yolk of a mortgage around your neck as the genius sellers bubble sell their way to financial freedom, thatz' your lemming call.

w67th, about your being too gloomy. i don't think you are at all. i agree. which makes me a bit gloomy. you may be right that i am overemphasizing the effects of $500 psf. this is a small market, and much of the US has already tanked, and here we are.

from a purely self-interested perspective, as someone who doesn't care if she rents or owns, having higher purchasing costs and more profits per partner would be much better. but that isn't in the cards.

as long as the employment remains secure, all is a-ok. but that isn't a given. so, i have mixed feelings.

The two most important phrases in investing, w67th.

First, whatever wall street is selling, I'm not buying.

Second, no matter what you do, never, ever short GS. Look at this poor yokle and his call on March 16, 2009:

http://seekingalpha.com/article/126152-why-i-m-short-selling-goldman-sachs

Pull up a chart, and you'll see the poor kid didn't even have one single day where he was in the money after his "call". Let's hope he got out at his 108-110 stop loss.

aboutready, interest rates were much higher 20 years ago, and when the bust occurred, they were rising, I think. Real estate became a great bargain when prices had plunged and interest rates then went down. Some of us have remembered that and expected a repeat. Instead we got an incredible lowering of interest rates after the dotcom crash and then the overall market crash the following year, then 9/11/01. This current downturn has still not been caused by rising mortgage rates for home buyers. But I don't see how all the empty towers in places like LIC can be filled up without help from lower prices, or sponsor financing, something like a developer offering their own financing with 0% down. Still keeping an open mind here, not necessarily convinced there will be a repeat of the crash of 20 years ago or just a dull thud followed by a long stagnation..........

lowery, we shall see. i think these prices are not sustainable. even if everything sells out. but we shall see. i've given my reasons so often i'm tired of them.

interesting inonada... I remember thinking ahhhhh.. it's my move after 9-11, then f'n greenspan came and f'ked us. Part of the reason for my $500psf call is that 2001 seemed like it was jonzying for a slight RE correction as would've been expected after 6 straight yrs of ups (1995 to 2001),.... better or for worse, 9-11... lowering of interest rate and basic feeling that Fed was gonna keep juicing asset appreciation.... kept the punch bowl way too spiked for way too long=> our greatest RE bubble in the last 500 yrs if not 1000.

So lemmings, ask me if I think 25% off greatest bubble is a "bargain" especially when they just spiked the punch with 100 proof. Who can drive home with the hangover is the key question my lemming buying friends... .

lowery, i think the bubble is still alive and well. and about to die. but i'm not so great on timing. so i don't know if it will die this year, next year, or the following year.

there are forces that are doing their best to ensure it never dies. won't work, at the end of the day.

Keep your shirts on:

"The government said Tuesday that foreign demand for U.S. Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion.

The reductions in holdings, if they continue, could force the government to make higher interest payments at a time that it is running record federal deficits."

interesting malthus...because today's WPost headline is all about how we're expecting foreign governments to buy mortgage securities to take up the slack when the govt stops....