Real Estate a bargain when priced vs equities

That's shitastic! So short equities, go double long on nyc coops with increased leverage by laddering options to take advantage of negative duration risk in currencies while at the same time hedging the position with commodities, preferably cream cheese with chives. Fktastic. Double dongle left 67 degree penis curve right awesometastic position. Where r u hiding your massive wealth? How so you not bang 30 chicks in a day? How do you find the time to trade all day, post on se, and then make your cream cheese so happy? Goddaaammmmmit, I kowtow to you oh cream cheese hoarder.

Can't wait for the markets to open.

Obtw, there's a $1 off Philly cream cheese on 6 ounce, fairways will match it. Meaning it'll cost you $.40. Iz that inflationary if only retards can't use coupons? Retartionary if you will.

What's up with this serie of posts shilling Real Estate, RS? You afraid your virtual gains evaporate or what?
So you basically want people to make an unsound financial move so YOU can hope to preserve your wealth! You're such a selfish bastard, man!

The stock market is about 50% overvalued right now, on a historical basis. We have QEII to thank for that. Housing in many parts of the country is becoming affordable again, but there is still plenty of room to the downside - without even mentioning the vastly overpriced Manhattan.

Direct government intervention like this never works in the long-term. 0% interest rates are fine, and will work over time, but flooding the economy with $600 billion in cash with nowhere to go just made everything too damned expensive - just like housing once was. These are failed Milton Friedman models - Reaganomics is dead.

Actually, it never worked to begin with, and if House Republicans succeed in cutting back federal spending - deficit spending though it may be - the economy will enter into the double-dip that I think is happening. It's not a good time to be looking for a job.

Time to fire Bernanke and put Hoenig in place!:
http://www.bloomberg.com/news/2011-05-28/hoenig-calls-for-raising-interest-rates-to-boost-saving-avoid-new-bubbles.html?source=patrick.net#related_categories_tags_top
Sooner or later rates will rise and Housing prices will crash even further!
Sell now or be doomed!

Hoenig is correct. 0% interest rates help no one, except Wall Street, and Wall Street does not help anyone but itself.

stevejhx, you've mentioned that it, in South Florida, it might be a favorable time to buy rather than rent.

Putting aside distance/management considerations and specific siting, would you say now is a good time to buy a small low-end apartment complex in that area, if the current cap rate is appealing, and the purpose is to hold long-term for income, not appreciation?

With economic double-dips a real possibility, do you envision rents dropping substantially from their current level?

I actually looked at buying a small apartment complex in Broward to add to my Mini Industrial Empire, but I was not at all convinced that they prices they are asking are justified by the rent-rolls.

The big mystery in all of this is what New Stupid Idea Bernake comes up with. Flooding the economy is not working - it is destabilizing the world and causing inflation that the Fed doesn't count as inflation. Of course the Fed didn't count the astronomical rise in housing prices as "inflation" either, and we see where that has led us.

Should I mention the dot.com fiasco, a direct result of this same money-flood policy, as well?

That said, moving to Ft. Lauderdale and taking my business with me is very much in the cards. Housing there probably has a little bit more to fall, but it is down, overall, 50% from the peak and prices are now at about 2002 levels. The thought of living for $2,000 a month all-expenses-paid, and pocketing the rest, is very appealing.

It's not clear that stock market is overvalued. Prices may have gone up becuase of hidden inflation created by QE2 which doesn't show up in official inflation statistics because there's an oversupply of middle-class houses, and companies are able to reduce costs by outsourcing labor to China, India, and other places like that.

always need to factor in the high carrying costs (maintenance, taxes) and transaction costs (commission, lawyers), as well as liqudity when comparing RE to equities

B_D, the stock market is overvalued on a p/e ratio basis. Since it's a ratio, inflation doesn't matter.

You gotta put your money somewhere, and best not all in 'one basket'. I currently have my assets allocated roughly evenly in real estate, securities, cash and art. Nothing is ever a sure thing--cash loses value, securities and art fluctuate and real estate is a wild card these days.

"B_D, the stock market is overvalued on a p/e ratio basis. Since it's a ratio, inflation doesn't matter."

It matters, Steve. Let me know if you'd like me to explain it to you.

It's not clear that stock market is overvalued. Prices may have gone up becuase of hidden inflation created by QE2
------------

Check the data Bob, Inflation is bad for stock prices.

RS, inflation is bad for everything.

ION: yes, please do explain it to me.

Interesting they only start with 1975.

Shiller's research shows long term real return on RE is 0... so S&P should be blowing it away and getting more "expensive".

Steve: it depends on how you view things, but P/E does not give the whole picture, and it doesn't fall out simply because P/E is a ratio. What you're really interested in is earnings and earnings growth.

Suppose a company has an earnings yield (E/Y) of 5%, and you think its earnings growth will be 5% forever. You can show that this is equivalent to (in a risk-neutral view) a fixed 10% earnings yield with no earnings growth.

In an inflation-free world, that 10% fixed earnings yield is giving you back 10% real yield. However if inflation is running at 5%, it's only giving you back 5% real yield.

So, if you bought thinking you were getting 5% earnings growth because of 5% real growth and 0% inflationary growth, and it changes to 0% real growth and 5% inflationary growth, you've got a problem. On the other hand, if it changes to 5% real growth plus 5% inflation, you don't: you're still getting the 5% earnings yield plus 5% real growth you were expecting.

So, inflation may matter depending on how you're viewing it affecting earnings growth. If it's coming on top of the real earnings growth, it doesn't. If it's coming in place of it, it does. Normally, you'd think of inflation changes coming on top of earnings growth, but it could be the case that what you thought was real earnings growth was just inflationary growth, in which case you'd change your view on price.

Normal caveats about how this is all theoretical and the real world doesn't behave theoretically...

I gotta say, that might be the most hilarious W67 post ever- nuanced and deep in the pocket for long term SE bloggers. It is a stunning poetic vernacular to enshrine the hopes and struggles of our RE dreams -- with a large dose of very creative obscenities. This one really made me laugh.

Too simplistic. This is all out of intro to finance. In the real world company earnings are based on assumptions like depreciation etc and then there's the economic cycle. If you do like earnings as opposed to an EBBS measure you are better off doing a running average of the last several years...

"Inflation is bad for stock prices."

Inflation means the value of the dollar decreases, which means the price of everythign goes up.

Inflation is horrible for people who hold bonds. Inflation can be good for equity investments because theoretically they will go up in price with inflation. Inflation is theoretically good for housing pricess too, except that there's still an oversupply and housing prices are sticky and should be a lot lower than they currently are. The Fed will try to create enough inflation in order to increase the value of houses to a nominal amount that makes owners psychologically OK with selling them.

Market is trading at a Schiller P.E. OF 24
If we assume as has been historically true earnings grow roughly 6% annually. Then we have some interesting math.
(1.06)*(24/7)^(1/18)-1 = 13.5% ---PE goes from to 7 to 24
(1.06)*(7/24)^(1/18)-1 = -1% ---pe drops from 24 to 7
(1.06)*(12/24)^(1/18)-1 = 1.99% ---pe drops from 24 to 12

Bottom Line--Don't ignore the power of p/e expansion when looking at market returns. It's highly unlikely we will continue to see mutliples expand. More Likely they retract and revert to the mean. Reasons might be higher interest rates, or simple a change in investor preference for equity risk, or a belief that earnings have peaked(which might be consistent with rising Treasury bond prices)

No bob, inflation is bad for stocks. Companies eventually have to replace plant and equipment. And in a period of high inflation the depreciated equipment/plant costs even more to replace. The idea that stocks hold up against inflation has been repeated so often that those that don't think it through believe it.
Additionally the discount rate by which one discounts earnings is also higher. Stock prices increase in periods when bond yield come down, not when rates(the discount rate) go up.

Market is trading at a Schiller P.E. OF 24
If we assume as has been historically true earnings grow roughly 6% annually. Then we have some interesting math.
(1.06)*(24/7)^(1/18)-1 = 13.5% ---PE goes from to 7 to 24
(1.06)*(7/24)^(1/18)-1 = -1% ---pe drops from 24 to 7
(1.06)*(12/24)^(1/18)-1 = 1.99% ---pe drops from 24 to 12

Bottom Line--Don't ignore the power of p/e expansion when looking at market returns. It's highly unlikely we will continue to see mutliples expand. More Likely they retract and revert to the mean. Reasons might be higher interest rates, or simple a change in investor preference for equity risk, or a belief that earnings have peaked(which might be consistent with rising Treasury bond prices)

--
This assumes an 18 year time horizon of course.

You're only remembering the 1970s when inflation was accompanied by economic malaise.

Usually, inflation stimulates the economy and causes stocks to go up in price. Futheremore, publicly traded companies are reducing costs by outsourcing labor and manufacturing the other countries, so companies see lower expenses simultaneously with inflation.

The people who will screwed by future inflation are (1) middle-class wage earners; (2) people invested in cash and bonds.

It is no longer a secret that stocks, like bonds, do poorly in an inflationary environment. We have been in such an environment for most of the past decade, and it has indeed been a time of troubles for stocks. But the reasons for the stock market's problems in this period are still imperfectly understood.

There is no mystery at all about the problems of bondholders in an era of inflation. When the value of the dollar deteriorates month after month, a security with income and principal payments denominated in those dollars isn't going to be a big winner. You hardly need a Ph.D. in economics to figure that one out.

It was long assumed that stocks were something else. For many years, the conventional wisdom insisted that stocks were a hedge against inflation. The proposition was rooted in the fact that stocks are not claims against dollars, as bonds are, but represent ownership of companies with productive facilities. These, investors believed, would retain their Value in real terms, let the politicians print money as they might.

And why didn't it turn but that way? The main reason, I believe, is that stocks, in economic substance, are really very similar to bonds.

I know that this belief will seem eccentric to many investors. Thay will immediately observe that the return on a bond (the coupon) is fixed, while the return on an equity investment (the company's earnings) can vary substantially from one year to another. True enough. But anyone who examines the aggregate returns that have been earned by compa-nies during the postwar years will dis-cover something extraordinary: the returns on equity have in fact not varied much at all.

In the first ten years after the war - the decade ending in 1955 -the Dow Jones industrials had an average annual return on year-end equity of 12.8 percent. In the second decade, the figure was 10.1 percent. In the third decade it was 10.9 percent. Data for a larger universe, the FORTUNE 500 (whose history goes back only to the mid-1950's), indicate somewhat similar results: 11.2 percent in the decade ending in 1965, 11.8 percent in the decade through 1975. The figures for a few exceptional years have been substantially higher (the high for the 500 was 14.1 percent in 1974) or lower (9.5 percent in 1958 and 1970), but over the years, and in the aggregate, the return on book value tends to keep coming back to a level around 12 percent. It shows no signs of exceeding that level significantly in inflationary years (or in years of stable prices, for that matter).

For the moment, let's think of those companies, not as listed stocks, but as productive enterprises. Let's also assume that the owners of those enterprises had acquired them at book value. In that case, their own return would have been around 12 percent too. And because the return has been so consistent, it seems reasonable to think of it as an "equity coupon".

Stocks, on the other hand, are perpetual. They have a maturity date of infinity. Investors in stocks are stuck with whatever return corporate America happens to earn. If corporate America is destined to earn 12 percent, then that is the level investors must learn to live with. As a group, stock investors can neither opt out nor renegotiate. In the aggregate, their commitment is actually increasing. Individual companies can be sold or liquidated and corporations can repurchase their own shares; on balance, however, new equity flotations and retained earnings guarantee that the equity capital locked up in the corporate system will increase.

So, score one for the bond form. Bond coupons eventually will be renegotiated; equity "coupons" won't. It is true, of course, that for a long time a 12 percent coupon did not appear in need of a whole lot of correction.

http://www.valueinvesting.de/en/inflation-equity-investor-by-warren-buffett.htm

Thank you for writing up such an interesting analysis, Riversider. Now please discuss in similarly elaborate detail the performance of residential investment real estate in the same environment.

Real Estate goes up

gooooodammmit! I fking lost 10% in ONE FKING day. my 2% loss on the day was increased 5 fold by my currency duration leverage hedged by my cream cheese, with fking chives! My borker tells me therez 100% causation with my nyc coop to equities... and I got 20x leverage on that.... so I'm down 20% in my COOP....

FK, I gotta eat cat chow for 20 years. Thks RIVERSIDER, I should've just listened to the w67. I'd be in cash and renting and be up 40% on my net worth basis than following you around SE all day.

And my wife didn't come last nite, cause just at the climax I brought in the cream cheese.... itz not doing anything for her.

GOOOOODAMMMMMMMMit u riversider.

I mean specifically the net rental income in the Port Everglades miniplex recently bought by a fictitious landlord called stevejhx, but kindly please elaborate if you will even more than that about both rental income and resale value.

look down here... i'll show you what goes up consistently and regularly

w67th, tell us about the 20x leverage on that

Am I a landlord, & missed it?

No, not you, a fictitious recent purchaser of a low-end miniplex in Broward County who plans to hold until death and only cares about net income. Riversider is going to explain in the same great detail that he puts into his other analyses why inflation, hyperinflation and/or stagflation will impact stevejhx's investment, and how.

@Sjhx... the confusion comes from so many LL, not understanding that the yin to their yang is that they are also RENTERS.... you are both lord and servant.... master and servant... Depeche Mode.. .awesome band.... .... what was the point again? OH yeah, Riversider just told me to go long on equities 3 hours bf an azz kicking in the equity mkt. Nice nice ....

I've found viagra will get you 4x duration, but nothin on earth will get you 20x... sorry just ain't possible.... unless you mix with chives!

> If we assume as has been historically true earnings grow roughly 6% annually.

Not after recessions...

I agree about Depeche Mode.

AH, I am just fictitious. Remember, that Riversider HAS HIS MBS HEDGE ON! Things, therefore, will be fine, until Andromeda collides with the Milky Way.

Did I ever mention that I hate the name of our galaxy?

Riversider has a long post which doesn't really say anything specific.

A company is valuable because of its assets plus its future earnings.

Inflation causes the assets to increase in price.

Inflation causes revenues to increase by the same percentage as it causes expenses to increase, resulting in a corresponding increase in income.

Therefore, stocks are a hedge against inflation.

"Therefore, stocks are a hedge against inflation."

That is one of the most illogical things ever written.

There is no hedge against inflation because there is no guarantee that companies can pass their inflated costs onto consumers. You must be a stock borker.

According to posts here, real estate is a hedge against inflation, and now stocks are a hedge against inflation. Hmm. What's left that's not a hedge against inflation?

Please refrain from using borker for anything beside real estate. Thnks

And yes, for eons it used to be assumed if you became a doctor, you'd be in the higher income bracket and 'more' finically successful member of society..... Until a borker based on re bubble collected $60k for 4 hours of work.

I'm waiting for the crash to clear out about 30% of the yacht club membership. God, I can't stand talking to re borkers. Talk about a halyard, a wax, a 671 diesel,.......,,, but stfu about re. It ain't coming back, you ain't hanging with me, you ain't buying that new mclaren. Just Fking air biscuits that comes out of your mouth.

> According to posts here, real estate is a hedge against inflation, and now stocks are a hedge against inflation. Hmm. What's left that's not a hedge against inflation?

Money. Are you serious?

Stocks rise when rates decline. When rates go up Companies are forced to pay higher rates for debt. Equity is last in the capital structure. While all stocks are not the same, I would not think stocks are the best hedge against rising prices.

what about cream cheese?

when is it appropriate?

when is it not?

yo apt23... :) amazing what a little guinness and a good nite sleep will do for a twisted mind. I'm firing back at all 16 cylinders.. count em 16!

Riversider states=> when you've come off of the greatest credit bubble in the history of modern finance all centered on REAL ESTATE, you go back to finance 101, capital structure.

WTF? That's like buying the last buggy whip maker in 1910.... cause your entire family fortune made in selling horse carriages went kaput! Cause let's go back to your family roots of buggy whip. Look down here, I'll show you expanding P/E ratio