When will it be permissible to buy in Manhattan?

No you may *not* buy in March 2009. Verboten, unacceptable, bad.

You need to wait a little over two years from the calamitous event for coop-sublet limits to kick in, at which point it's 100% negative cash flow (except for the tax-deductibility!!!), and sellers will all click "Sell at Market" at the same time. That's the way it works.

Then the Martians return to start buying up all the apartments, and prices take off again.

At least the Martians will be back.

Look in Spring in 2010. Bullshit aside. This trough should play out in two years. It took three years last time. Figure in the information age it's gonna be a little faster. 10x annual rents would be nice.... Like a $5000/mo 2bed for $600-something-k. Ummm, but rentals will fall too.

Simply trying to 'bottom tick' the market, but not considering any other issues, is a we bit disingenuous.

For instance, time horizon should also be a consideration as well.

But I do agree that in general, I would think of waiting until at least around this time next year - then, you'll really be able to see the NEXT (09/10) bonus period and have a feel for things on a local micro level.

When you can get an UWS classic 6 for 1M or less. OTOH, when that happens, you might be trading for it in canned goods and ammo.

Personally, if the DOW hit 7500 and I had a down payment I was sitting on in cash, I'd throw it all into stocks, wait for the stock recovery (much faster than RE) and be in a much better position to buy when things turn around.

There's nothing crazy about getting a 1500 sqft classic six for $600-700/ft (down from 1200), so what....? Why do people think that equals the end of the world? That's just a good purchase...like 1972, 1981, 1992... It's really annoying that people like hsw9001 have to equate it to the end of the world.

Malraux, bottom ticking is impossible, but I mean a reasoned guess at when to shop is what a person has to do... A reasonable person, not like many of the maniacs we read on this blog.... You, steve, etc. are the people I number as reasonable.

7500 DOW is equal to 800 or so on the SPX...and yes, I'd buy that. Because real estate is slower. I like tech_guys trade.....He's basically buying the S&P on Black Monday in 1987, getting the bounce and then buying real estate in 1992.

thrinald - I agree with you. Silly to equate 2002 prices to the end of the world. Or even if it was 1998 prices, still very different than the end of the world.

As for tech_guy's trade, it's a great idea in theory, but SO difficult to time, especially on the stocks.

I am thinking a more conservative version of the same thing though. Put half of downpayment money into safe investments, half into risky investments (stocks mostly), and buy RE when the place you really want, and can live in for a long time, becomes comfortable affordable, whenever that is.

thrinald - right back atcha'....

newbuyer99... I didn't say put your whole downpayment into stocks. I wouldn't put ANY of my downpayment in stocks if I planned to buy in 2010. However, on a total financial picture, I would be putting the money the coop wants to see in liquid assets, I would put a portion of that money in stocks. The distinction may be semantic. I think 800 S&P is a decent buy... But I mean you can't rule out a 600 S&P, which is the 7x P/E trough in the early 1980s. I don't want to open up ANY chance of a 20% hit to my downpayment money. I want to keep my $ buying power intact to buy that bigger place in 2010....assuming I can hold down a job in my contracting field.

"Personally, if the DOW hit 7500 and I had a down payment I was sitting on in cash, I'd throw it all into stocks, wait for the stock recovery (much faster than RE)"

I'm sure you would. A lot of people who called themselves "Tech_guy" did this with the nasdaq in 2000. It declined from 5,000 to 3,500 and they said they'd "wait for the stock recovery (much faster than xyz)"

Nearly 9 yrs later, the nasdaq is at 1,643. How much faster is that recovery gonna get??

"I like tech_guys trade"

First bear market for both of you then, eh?

Nasdaq trading at 30x EPS at 3,500 is a frig of a lot different than the Dow trading at 9x EPS at the 7500 level.

Admiral, clarify who you are, what you think, and what you add to this conversation.

Oct 11, 2014.

Admiral, how many bear markets have you been through where the stock market declines by more than 50%... At 800, that'll be 50%. Answer: not many. Why? Because there haven't been any since the Great Depression. Calling for that may be right, but it's a bad percentage bet.

"Admiral, clarify who you are, what you think, and what you add to this conversation."

1) Seasoned investor
2) Think real estate has been over-valued for 5 yrs (and said so in 2003), think NYC will catch up to the 40-50% declines in Miami, SoCal, etc, think tech_guy is an idiot.
3) I add charm, wit, and a willingness to bash pollyanna-ish newbie investors & real estate brokers alike, mercilessly

Ok we can be friends Admiral. I think the timing is more important than the level. This S&P at 800 I am buying with money I won't need for 10 or more years... I'll stand by that, only time will tell.

We may have 40% declines here by next summer! I think to actually sell an apartment TODAY, the seller would need to cut 20% from where he could have sold it in Q4 2007 or Q1 2008. Impossible to prove, but I believe it.

Buy when we are at 2002 levels - this will follow the same trajectory of the overall stock/bond markets.

Admiral thinks buyers in this market made such a drastic and irrecoverable mistake that they should commit suicide as their only way out. That comment (made twice) is what put him on my ignore list. His valuation model is, to put it mildly, flawed. Don't take anything he has to say seriously.

As to what you said, in terms of timing: that's why I don't market time. I stay 50/50 stocks/bonds rain or shine, rebalancing annually. I'm just saying, if someone did have a large cash down payment position, and Dow happened to be 7500, I'd buy stocks instead of real estate.

So if you have cash...now is not a good time to but a condo in NY...you all believe that in a year or two is plausible?

tech-geek: I was actually only limiting that suggestion to you. Admittedly, it was a bit selfish, indeed.

My "valuation model" is the same one suggested by Shiller and others: Real estate is a mean-reverting market w.r.t. growth rates over statistically valid periods of time, and it is further constrained by growth in personal incomes. Please "enlighten us" as to the flaw in that. Then, pls do what i suggested earlier...

tech-geek: I was actually only limiting that suggestion to you. Admittedly, it was a bit selfish, indeed.

My "valuation model" is the same one suggested by Shiller and others: Real estate is a mean-reverting market w.r.t. growth rates over statistically valid periods of time, and it is further constrained by growth in personal incomes. Please "enlighten us" as to the flaw in that. Then, pls do what i suggested earlier...

"I stay 50/50 stocks/bonds rain or shine, rebalancing annually. "

Tech_geek: I hold sev'l advanced professional degrees/charters in portfolio mgmt. i don't recall a 50/50 split btwn fixed income and equity EVER being the recommended allocation for anyone. if someone is young and has a long time horizon, 50% is WAY too much fixed income. Conversely, if someone has a shorter time horizon and has a significant amount of wealth to preserve, limiting the portfolio to two asset classes (while ignoring alternative investments such as REITS, commodities, etc) is contra-indicated. Finally, if the person has a short time horizon and DOESN'T have a great deal of wealth to preserve, 50% allocation to equities is too high.

Once again, you've demonstrated your "expertise" in all things having to do with investing...

Yeah, it's all a matter of balance.

I am definitely putting all of the money I intend to show as "liquid assets" into stocks. I also don't intend to actually touch it for 20+ years, which is why I think now is a good entry point. It may get better, who knows.

As for the downpayment, I'd like to put at least 30%+ down on something up to $2MM in 2010 or 2011. That's a lot of $$ to keep in cash, or cash-like riskless assets, especially if the stock market appears oversold (and especially if it keeps falling, say to 7500 Dow). So, with a bit more research, I may put some of that money into stocks. How much is the question.

I don't think tech_guy is an idiot at all, just either better at timing than I am, or has a higher risk tolerance.

Which is better historically speaking:

A slow, drawn-out leak into a deep recession or a somewhat rapid advance into a recession? I think that, even though we have seen much of this coming, I don't think we saw it all, nor expected it to be as fast. For my question, I would consider that we are in a recession that has advanced rather rapidly (please correct me if I am wrong).

I am asking all this leading up to the recovery out of the recession. Which is quicker (historically speaking)?

"I don't think tech_guy is an idiot at all, just either better at timing than I am, or has a higher risk tolerance."

- if he's 50% in fixed income, he has a lower risk tolerance than you. It's prolly all treasuries, too...

let's see if tech_geek really has me on ignore: Hey TG, i passed the kennell on my way to work today; your mother is doign fine...

Admiral, what do you think the right cash allocation is TODAY? I have all the degrees and CFA, and whatnot. I've read it all. The stock market has barely ever been cheap since I graduated college in 1995. And 2002 was a "weak" trough, it never not that cheap (although the earnings were depressed, much more than we have seen yet in this go around). Whoever buys and holds anything is fooling. The data doesn't support it at all. You buy and hold when things are cheap. 1992, 1982... These are times things have been cheap. It's only in the last two trading sessions that the stock market cut through the top end of what is "cheap", call it 7-12x EPS, and I am working from 2009 S&P estimate of about $85. People should buy some stock now, that is if they were smart enough to be selling down in 2006 and 2007. Cutting past all the bullshit, you buy assets when interest rates are high, and sell assets when the are low. It makes all the sense in the world. You buy when money is tight.

All this said, I still don't think you put your downpayment in stocks, because I think real estate troughs in 18 months or so, and the stock market could bottom at 600 on the S&P, at 7x EPS, as it did in 1982....but then it was a 15-bag over the next 10 years. Hooo Ha!

Just for a little perspective.

In the seventies the S&P peaked at 120.24 on 1/11/73. It bottomed at 62.28 on 10/3/74. That was a 48.2% decline.

This time around the S&P peaked at 1565.15 on 10/9/07. It closed today at 909.92. That has been a 41.9% decline.

Early this decade the S&P peaked at 1527.46 on 3/24/00. It bottomed at 776.76 on 10/9/02. That was a 49.1% decline.

The % declines are less important than the valuations. We're at about 11x times. We can bottom here, or 25% lower. Big difference. And with the magic of compounding, 25% lower would be 55% off the top, which we can find examples of in the 20th century.

The S&P is trading at 17.39 times trailing GAAP earnings. It is selling at 9.01 times 2009 consensus earnings. The problem with PEs is no one really knows what next year's earnings will be.

All in all, I expect you will see big revisions to next year's earnings estimates as the economy drops into a significant recession with unemployment approaching 8%.

The history of the accuracy of consensus earnings forecasts is pretty poor.

That said, I certainly wouldn't be a seller at these levels. I see solid "long term" value at these levels. The yield on the S&P is now over 3%. And the yield on REITs is over 8%.

I simplify. There are methods of normalization of earnings for historical comparisons that guys like Shiller use. Most of them right now are using a number for the S&P like $80-85. So we're 11x on that. I am not sure about your numbers though. You imply that sellside consensus is projecting a doubling of EPS (because you are quoting 1/2 the multiple on forward vs. trailing). I don't think that's right.

The references to prior crashes seems invalid to me. People did not access to the same amount of leverage in 1929, or 1973....

thrinald: I'm a CFA, too. Great program. As you've correctly observed, the issue is valuation, not % decline. Valuation is an iterative process, because we don't know what earnings will do the next 3 yrs. We could be in a deflationary spiral like Japan in the 90's, or we could rebound strongly.

So, to answer your question about the right cash allocation, I'd suggest about 70% cash right now, 20% gold, and 10% equity. I wouldn't hold any treasuries (because there's little visibility as to whether we'll have deflation or inflation next yr), and I wouldn't hold corporates because who KNOWS where credit spreads may wind up in 3 months.

I don't believe in trying to "catch a falling knife". Wait until the markets turn around, and then start buying.

I'm not far off Admiral. I'm 10% gold, 20% in an equity fund where the manager is roughly 30% net long (so what 6%...maybe more after today if he was buying), 10% in a bond fund and 50% cash. Also on the equity fund I own (Hussman Growth, worth checking out), he layers a technical/momentum screen over valuation, so I am kinda counting on him to increase as the market bottoms and rounds out. I just think we're so extended below the 200-day here that I have to nibble. On the earnings, I think these trailing average methods are good enough for roughing with...Shiller I think says 'normalized' EPS here is around 85. As bad as things are...we don't yet have double digit interest rates and double digit unemployment like 1980-81, but we may get there...or not, who knows.

CFA love fest

"I don't think tech_guy is an idiot at all, just either better at timing than I am, or has a higher risk tolerance."

I'm certainly not better at timing than you! I called a bottom on equities 10-15% above where we're at now! Though like I keep saying, I don't put my money where my mouth is. 50/50 stocks/bonds, rain or shine. Even more stocks in my retirement plans, but that's a much smaller percentage of my net worth (pesky annual maximums). Whatever the Vanguard target retirement's for 20-something's do. 75 or 80% stocks there I think.

I probably am more risk tolerant than most. Despite my 50% stock position losing a significant amount this past year, I still believe I made the right choice. I still believe market timing is for suckers, and that the right choice is to be long stocks rain or shine. If my net worth went up by 10x, maybe I'd spend more time researching. Until then, any few percentage points I could squeeze out by active investing is certainly not worth the time I'd spend researching.

Here comes another CFA.

We normalize earnings a la Shiller - price / ten-year real average earnings per share.

Since we are looking at ten-year inflation-adjusted average earnings rather than last year's earnings the PEs are naturally higher in the series. Based upon last night's close "this" PE is at about 17, down from around 28 at the start of the year. This puts it just slightly ahead of its long term (data beginning 1926) average. It had peaked at about 45 in early 2000.

We got the idea from Shiller's excellent book Irrational Exuberance and now update it monthly.

Conclusion: about average long term valuation level - market is now fairly priced.

Topper, with earnings growth over time, a trailing average should be lower, and give a higher P/E...Shouldn't it. And even if we were average (I think we're below average), 'fair' is a function of debt cost and equity risk premium....which are a function of growth and inflation expectations... Yeah this is a CFA love fest.

10-year average inflation-adjusted earnings per share are inherently lower than trailing one-year earnings per share.

So the denominator is much smaller using this methodology. Hence, the higher PE.

That ten-year perspective is particularly useful for averaging out profit margins over a long cycle. Recent earnings per share have been way over-inflated due to "record" profit margins. But profit margins mean revert over time - as they are now doing big time. In addition, finance came to dominate S&P earnings per share. That anomaly is history and is not going to come back as we are headed for an extended period of deleveraging.

Off to work...lots of fun and games await!

Admiral - one question for you. You say:

"I'd suggest about 70% cash right now, 20% gold, and 10% equity. I wouldn't hold any treasuries (because there's little visibility as to whether we'll have deflation or inflation next yr),"

If you recommend 70% cash, but no treasuries (for fear of inflation), then what exactly do you mean by cash? Corporate money market (also in USD, but less safe than treasuries)? A low-interest rate CD (that is also in USD, also subject to $250K FDIC limit)? Mattress (same problem)? Cash in another currency? I don't follow, please explain.

Admiral, "cash", financially speaking, is an investment vehicle which allows you to do same day withdrawls without a fee. This sould mean a demand deposit (bank account), treasuries, money market funds, or stuffed into your mattress.

In any case, cash won't protect you from inflation. If a loaf of bread costs $150.00 in 2010, how does cash help? Gold is the traditional inflation hedge although all bets are off this go around. Too many people load up on gold it'll collapse too.