Posted by Robert M. Campbell on April 18, 2000 at 14:29:09:
Ed ~
Aside from our different approaches to making sound real estate decisions, it takes a BIG man to say I’m sorry.
I ~ too ~ owe you an apology for my less than professional manners.
Robert M. Campbell
What caused the poor RE market in Phoenix in the early 90’s? - Posted by Frank
Posted by Frank on April 17, 2000 at 22:32:14:
I read Rich Dad/Poor Dad, and the author states that the real estate market in Phoenix was terrible in the early 90’s. I was wondering why that was? It seems like Phoenix would be a hot spot for retired people or those looking to escape the cold winters in the northern states.
Re: What caused the poor RE market in Phoenix in the early 90’s? - Posted by Mark (SDCA)
Posted by Mark (SDCA) on April 18, 2000 at 11:15:30:
The economy was weak and not diverse. Quite a few major companies have moved or set up operations in Phoenix within the last decade. Offer them jobs and they will come…
Mark
Re: What was different about Phoenix in the early 90’s? - Posted by Eric C
Posted by Eric C on April 18, 2000 at 01:50:24:
Hi Guys -
The answer is nothing. In the early 90’s, the situation in Phoenix was not unique. You could include Dallas/Ft Worth, San Antonio, Austin, Denver,and other places too numerous to mention in the same list. Even NYC and Southern California were not untouched. (I know about these 'cuz I was there)
My own interpretation is more complicated than I can easily express in the forum here, but suffice it to say that I do (somewhat)agree with Ray’s earlier post(I did say somewhat,didn’t I? Well, only a little) about the money supply and it’s effects.
If you check out loan statistics at many of the national, local and regional banks during that period you will find almost NO RE (or other) loans made during that period.
Why not? Because at that time, most banks didn’t need to loan money to make a consistent (and effortless) profit. They did so by investing in government securities and pocketing a spread (which ranged between 3 to 6 percent) over their deposit rates. With those kind of numbers, FEW PEOPLE got loans. Simply put, the banks didn’t need to grow their asset base by making loans in the normal manner. Many banks were purchased at this time at tremendous discounts – try pennies on the dollar! One example of an institution that profited from the policies in place at that time was was North Carolina National Bank (NCNB). It has since merged with other banks to become one of the largest financial institutions in the country. During this period, NCNB was able to purchase other banks, often at much less (read this as almost nothing)than book value.
Real Estate Developers, investors, and businessmen called the bank, NCNB - “No Cash for NoBody”, and it was certainly true in many parts of the country.
It wasn’t until late 1992 and early 1993 that the “spread” began to narrow and interest rates fell dramatically. There was an explosion in the RE mortgage market and new players seemed to appear every day. Pent-up loan demand became evident in every segment of the economy. New housing starts jumped up, as did hotel construction and multi-family residential. Investment money once again became available.
There was more to it, of course. We won’t talk about the “penalties” put in place by the gov’t to discourage lenders in those days. There isn’t time for us to play “good bank - bad bank”; that story will have to wait until another time.
Where are we today? In almost exactly the OPPOSITE situation. Loan requirements have been loosened so much that recent BK’s can once again easily get investment and home loans. Banks, credit unions, and S&L’s (what’s left of them) plead with their customers to “take the money”. Reported bank profits are at all time highs, but then so are charge-offs, BK’s and bank closures.
What does this all mean for me? Opportunities exist everywhere. The economy can go up, down or sideways, it doesn’t matter. There is always money to be made.
Yours,
Eric C
PS - “history must repeat itself because we pay so little attention to it the first time” – Blackie Sherrod.
This is ALWAYS the reason real estate prices fall . . . - Posted by Robert M. Campbell
Posted by Robert M. Campbell on April 17, 2000 at 23:14:26:
The answer reminds me of a story that J. Pierpont Morgan, who was one of the most successful financiers in the United States, told a Senate Finance Sub-Committee during a formal hearing in 1930:
Question from a Senate leader: “Why did prices collapse during the 1929 stock market crash?”
Answer from JP Morgan: “There were more sellers than buyers.”
While this may seem to be a casual, off-the-cuff remark, there is actually much wisdom in this answer.
All markets are driven by supply and demand.
Only the economists like to debate “why” something happened . . . usually AFTER the fact.
INTELLIGENT speculators ~ to the contrary ~ are always asking themselves “what” is happening . . . so they can buy (or sell) BEFORE the fact.
The market will give you “warning signs” as to what it’s going to do. It’s your job to listen to the market’s call . . . and then act accordingly.
Robert M. Campbell
Re: This is ALWAYS the reason real estate prices fall . . . - Posted by Ed Garcia
Posted by Ed Garcia on April 18, 2000 at 11:05:13:
Robert:
Indexes, Forecasters, Predictors, Fortune tellers, are all in the same league.
Don’t get me wrong, I’m not putting them down, I’m just saying you spend
To much time TALKING about something that you know nothing about.
If you can predict the DAY, I’ll listen.
If you can predict the WEEK, I’ll listen.
If you can predict the MONTH, I’ll listen.
Anything after those given time periods, we can all predict. It’s no secret that
Everything being relative works with in a cycle.
To just say that the trends show the changes, is redundant.
How about this? Lets talk about something we can CONTROL.
Let talk about something that’s PRODUCTIVE in which we all can relate.
Let’s talk about DEAL structuring, taking into consideration a good economy or a
change for the BAD.
Let’s talk about being a Devils advocate when structuring our deal, and dealing with
a worse case scenario. How our deal can survive a bad economy and be a great deal
in a good economy.
Then we don’t have to worry about something we have no control of.
Robert, to me your San Diego " Misery Index", and fifty cents, will by me a cup of coffee.
No pun, I just don’t feel that there’s any lesson here.
The only thing that I have learned with this string is, that J.P. Morgan died in 1913 and after
That, everything you had to say lost its creditability. You quoted him in Senate Finance
Sub-Committee during a formal hearing in 1930 as though it was gospel.
You went into a question and answer routine with a man who died 17 years prior.
How accurate is your Misery Index?
I think I’d rather teach people to develop their skills, instincts, and how to analyze and structure
Deals, in order to survive a bad economy.
Ed Garcia
Re: This is ALWAYS the reason real estate prices fall . . . - Posted by GWB
Posted by GWB on April 17, 2000 at 23:46:13:
Bob, how did the Senate Finance Sub-Committee obtain this miraculous verbal deposition… by seance?
J.P. passsed from this earth in 1913, well before the “crash” of 29. Your source of information is severely flawed.
Fortune telling? Hardly. - Posted by Robert M. Campbell
Posted by Robert M. Campbell on April 18, 2000 at 11:27:19:
Ed ~
These “Vital Sign” indicators have nothing to do with fortune telling . . . or watching the movement of the stars.
But they do ~ however ~ have everything to do with having your hand on the “pulse of the market” . . . and letting the “market itself” tell you what it is likely to do next.
We are dealing with “probabilities” here, Mr. Garcia, not “certainities.”
And all intelligent investors “play the odds” to the best of their ability.
The five “Vital Sign” indicators tell you what the “odds” are that the real estate prices will rise . . . and what the “odds” are that real estate prices will fall.
Simple stuff, Mr. Garcia.
If you want guarantees in life, I suggest you buy a toaster.
A real estate investor ~ in structuring his deals ~ that doesn’t have a feel for the “trend of the market” is like a sailor who doesn’t have any way of gauging the direction of the wind.
You do however, make a good point about CONTROL. While you can’t control the “market” . . . you can CONTROL how you react to changing “market conditions.”
Real estate deals are not structured in a vaccuum. It is smart to take the “prevailing winds” into account when you make your buying and selling decisions. Right?
Do you know what a “leading indicator” is?
If not, allow me to explain.
If you see a cloud getting more and more black . . . can you assume that rain is likely?
Or if you see the leaves falling from a tree . . . can you assume that winter is likely approaching.
Is this crystal ball gazing?
Hardly.
Again, that’s what these five “Vital Sign” indicators do. They give you strong “clues” about what’s ahead for real estate prices.
That’s valuable information to know, Ed. Even for a seasoned professional like yourself.
Robert M. Campbell
Ooops! You are right . . . JP Morgan was dead! - Posted by Robert M. Campbell
Posted by Robert M. Campbell on April 18, 2000 at 24:19:30:
Gov ~
You are absolutely right . . . it couldn’t have been JP Morgan.
That said, I believe it was actually Roger Babson.
Nevertheless, the message is clear . . . and makes an important point . . . don’t you agree?
Thanks for the correction. You are quite the historian!
Robert M. Campbell
Re: This is ALWAYS the reason real estate prices fall . . . - Posted by Abe Froman
Posted by Abe Froman on April 18, 2000 at 24:05:26:
You have to remeber that Robert’s research is limited strictly to San Diego. The application of his model, or his answers, elsewhere has not been proven.
A more specific answer to Frank’s question would have been to say that the Pheonix market was over built.
Abe - The Sausage King
The Vital Sign Indicators - Posted by Robert(CA)
Posted by Robert(CA) on April 19, 2000 at 24:58:45:
Robert, Ed and Jim are of course right, in that, if you buy low enough and structure your deal prudently, you probably won’t lose money even in market where prices are falling.
However, you are also correct: It is very helpful in to know whether the trend in your market is up, down, or staying flat. A deal that makes perfect sense in rising market might not work in a falling market.
I am very interested in your Vital Sign Indicators. I use economic indicators (among other metrics) to successfully time the stock market.
Robert, what do you find is the quickest and easiest way to collect the data? Where do you go to get the numbers?
Re: Fortune telling? Hardly. - Posted by Ed Garcia
Posted by Ed Garcia on April 18, 2000 at 14:20:50:
Bob:
Your analogies are excellent although they’re misleading.
Yes, I, like others, take into consideration many of the financial reports available in
today’s market. But Bob, after over 30 years of experience, I take it with a grain
of salt. It’s an hors d’oeuvre, not the main course.
Bob, I think sound business practices and principles are the key.
I think that if you’re always prepared for rain, you don’t have to worry what season it is.
Now come on Bob, of course you want to know what season it is. But that shouldn’t be
a focal point, I think it’s a given. I think if its summer, we know what kind of weather to
expect. I think that if you’ve prepared yourself for a storm, you can survive it
when it hits.
I think you bringing up this topic is good, because it makes us realize that we must have
an awareness of the economy.
However, I think at the same time we must put things in their proper prospective.
That being, to learn your business, and how to make it bullet proof.
There is no question that the economy is going to go through its ups and downs.
But I’d much rather prepare them for a storm, than to tell them one’s coming, and
then it may not get here.
Bob, I realize that they’re no guarantees in life. That’s why (it’s a must) to learn how to
structure deals that can survive any market.
Bob, one more thing. I went back and looked at my original responding post to you,
and realized it was a little more aggressive than it should have been.
I’d like to apologize to you for coming on so strong.
Ed Garcia
Re: Fortune telling? Hardly. - Posted by JPiper
Posted by JPiper on April 18, 2000 at 13:05:18:
Robert:
My understanding of your technique is that it revolves around trend-following. More power to you if you believe this is the best way to approach the real estate market?.but perhaps a few of the following comments would serve you well.
Trend-following methods typically all have one thing in common. They don?t get you out at the high?.nor do they get you in at the low. Their strength is that they identify the trend?.but by the very essence of the technique they miss the high and the low. In other words, the trend has to have established itself, before you can recognize it. The reason this fact is important is to understand that you will miss some portion of a particular move in prices. Let?s say, as an example that you miss 10% of a move up, and then 10% of a move down. You still catch 80% of the trend in question?and therefore most observes would regard this as a successful ?system?.
The problem with trend-following however is that one never knows in advance how long or far a trend will last. For example, let?s assume an ?average price? of $100K. Let?s assume that we are about to embark on a trend that will take the price from $100K to $110K before it starts to dip. That means the move was $10K. Further, we may get in at $101K and out at $109K for a $8K profit. Here?s the problem though?by the time you paid commissions and closing costs?you?ve made 0?.in fact, you may have lost money (unless you made some on cashflow in the interim).
Another problem: let?s assume you catch a bigger move?let?s say this one (we don?t know in advance of course) is a $15K move. So let?s assume we buy at $101.5K and sell at $113.5K?.for a $12K profit. Now we pay commissions and closing costs of perhaps $8K?.hopefully we?re able to sell without having to carry anything. This leaves us $4K?.which after we pay the taxes may net us $$2.5K or so. Now you?ve had two successful transaction?one made you nothing, the next made you $2.5K. Now your indicators flash their signal?you buy at $101K?.and the price goes nowhere?.in fact, it goes down to $100K before your indicators say to sell. Now you sell for $100K?pay commissions and closing costs of $8K?thereby losing $9K. Assuming you have the ability to write this off?.perhaps your net loss is $6K. So the bottomline is, after results that most people would acknowledge were successful (2 out of 3 correct), and a very small wrong signal?.you have lost money.
This technique is speculative at best. It?s an attempt to say that the way things worked in the past, will be the way they work in the future. While that prospect may be tantalizing?.I know of no case where any system of this type has ever worked over any significant period of time. Perhaps yours is the first.
As an investor though, not a speculator?.my idea is acknowledge that there are many things I might not be able to predict. And therefore, when I structure my deal I?m going to structure it understanding that things can and do go wrong. Wars break out, interest rates rise, unemployment rises?..things change over time. So I?m going to structure my deal with a large margin in it?.so that when things go wrong, I can live with it. Make your profit going in is the whole idea. Every day someone in every market dumps a property for much less than market value?.because of their personal circumstances, and having absolutely nothing to do with the trend. These are the situations I?m interested in?.the ones that I can structure my deal to compensate for all the unknown risks that I face down the road somewhere.
Harry Helmsley, at one time the owner of the Empire State Building, and other vast real estate holdings, at one time was interviewed on 60 Minutes. He bragged at the time that he had NEVER sold a piece of real estate?he only bought. I?m not suggesting this is the only way, but here?s a guy who made a huge fortune in real estate. Warren Buffet, one of the worlds richest men?.is a long term holder of stocks (he regards his holdings as a piece of a business). One of his reasons for holding (but not the only reason), is the idea that taxes on profits are a HUGE cost, plus the idea that markets are largely unpredictable on a consistent basis.
Finally, I would remind you that for every buyer of a property there is a seller. So monitoring volume of sales as a measure of ?demand? is really a misnomer?.every transaction has both a buyer and seller. Increasing building permits simple tells you that builders are optimistic about the market. I understand that you back-tested your model for 25 years. I think it goes without saying that in the scheme of things, this is a VERY short period. Index builders are famous for making a system fit the data?and therefore when the data inevitably changes the system no longer works.
In any case, I?ve managed to survive a variety of markets, both up and down, by focusing on my risks?and attempting to address them in advance. While I might be interested in knowing the trend, trends change?so I?m going to focus on the things that are more directly within my control?..deal structure, risk avoidance, legal issues, cashflow, people skills, etc etc etc.
One last thought. I recall an old story about the stock market. A father had 3 sons, each of whom he gave $1000 to in 1910. One of the sons bought stocks in the Dow Jones Average?and held. A second son learned perfect timing?and therefore bought at EVERY low, and sold at EVERY high. His results exceeded by a wide margin that of the first son. The third son stayed fully invested?however he always had his money in the right industry?.through every drop and every rise. This son?s results vastly exceeded the results of the other sons. Wish I could remember the numbers?.they were staggering. Something to think about.
JPiper
Re: The Vital Sign Indicators - Posted by Robert M. Campbell
Posted by Robert M. Campbell on April 19, 2000 at 12:45:31:
If you are interested in the sources for my indicators . . . go to www.SanDiegoRealEstateReport.com . . .
CLICK on “Vital Sign” indicators . . . and read about my sources from the “Vital Sign” table.
Any time you spend on learning how to identify the “trend of the market” and ~ more importantly ~ when the “trend is changing” ~ the better informed you will be to make the correct buying and selling decision.
And if you are also able to “buy right” . . . you will have little trouble making ~ and hanging on to ~ a lot of money in real estate.
Robert M. Campbell