"To preserve the people's independence, we must not let our rulers load us with perpetual debt. We must make out election between economy and liberty or profusion and servitude." Thomas Jefferson.

check out this chart if you get a chance:
http://www.prudentbear.com/Charts/Commentary/CBB082006/homeinven0706.gif

I am suprised you found investors willing to place money in fund whose manager bases investment decisions on an olympics-orientied model. I now understand why it is a small firm and you haven't committed to solely to a career investment management.

I agree wiht the comments about the Bubble Bursting in real estate. I have been buying and selling properties, renting, making money, paying the mortgage and buying again for over 30 years. I have never lost in real estate what ever the scare were at any time.

It neverchanges, I have always heard the market is going down, the bubble is going to burst etc etc. you better sell now or you'll lose everything.
This same reaction / scare tactic / occurs oddly enough every 5-6 years. Rates go up housing goes down, Rates go down houses go up,,,but ususally higher prices to buy than they were when rates went up.

The cycle continues, this is just another scare that never seems to materialize. Real estate is the best market to make money out there today and for the last 50 years. Stocks go down and you have to lose interest, gains and sometimes lose everything.

In stocks everyone seems to wait to see there money go down in stocks and never know when to sell, they panic. In real estate you don't lose because you can always rent while your waiting for the prices to go back up. Where else can you do that.

Thanks John

blinky<
Instead of personal attacks why don't you share some of your wisdom as to why you think the demand that China is putting on global resources will not slow down at some point and why you think the post Olympic period might not be that time.

Why don't you share any of your self professed wisdom instead of immaturely playing hit and run without adding any value.
Peace to all.

Of course there will be a leveling. But I do not believe a decrease in market value/home prices is where we will see it.
The leveling comes when those who have the most to lose start to back out of the market and the new comers/aka.; bold, stay or stick to their beliefs.
Will you bury your talents or invest them?
So some of the younger/less wealthy people,with less to lose will increase their worth as those with the most to lose will be tempted to hide their assets. Hence the leveling.

Well I didn't think i exhibited any self-professed (or as you put it, "self profest") wisdom in my last comment.

You seem as adept at putting words in people's mouths as you are at concocting novel macro-economic models that link the probability of a global recession to the spending on Beijing Olympic infrastructure.

I was merely pointing out that you seem quite confident about knowing how things are going to play out in the world of global economics and international finance. In contrast, I have NO idea how things will play out.

The best money managers -- the ones that dedicate 100% of their time to their trade, make money in up and down markets, and average 20%+ a year -- typically use investment strategies that are a little more robust and tested than betting on the "olympic cycle".

I place OPM with investment managers. It's my job. If a manager came to me convinced that he (above all others) absolutely knew Beijing Olympic spending would stave off a global recession until 2008, i would immediately write that person off as delusional - which is what i am doing with you. In fact you may suffer from clinical narcissism.

Investing is about finding an edge and controlling risk, not about being a know-it-all, prognosticator, or the best or most common-sense theoretician. You will probably have to find out the hard way.

ps. I live in China and you really have no idea what you're talking about when it comes to what is happening here.

Sheldon, I know you consider yourself a deep value investor. So how would you value an investment in real estate? By the income it would generate right now?(like the positive cash flow from the rent you could charge). Or by speculating that it will surely sell for a much higher price during the next up cycle? I far as I'm concerned, nobody can predict the lenghts of these cycles, and speculative cycles do end and go bust. And at today's prices, try finding a property that will generate positive cash flow, so you don't lose while you're waiting for the market to turn.
Real estate used to be considered a concervative investment, and banks & other lenders followed some guide lines to protect themselves. Well, this last time around it seems that all the guide lines were thrown out the window. It sounds like they were doing some speculating themsevles, or maybe they just passed alot of the risk onto the backs of the tax payers. I would say that a bubble exists. Look at the signs during this last cycle....People selling their property in a matter of days, buyers having bidding wars offering more than the sellers asking price (when did that ever happen before), everybody & his brother became a real estate agent, 5% down, 0% down, house flipping!
And Sheldon, if you do continue to write about this subject , I would like to know your thoughts on who would lose if the real estate, or debt bubble goes bust. The banks? If they take the hit, what happens to their balance sheets? And then the price of their stocks? What about the loans that are guaranteed by the government? FannieMae? The tax payers? Does all this just add to the national debt?

Blinky,
The self professed wisdom from my perspective is based on you finding fault with my commentary without out any rational of your own. You certainly implied you know better. You also criticized me for something I never said. Nowhere do I state that one should base their investment decisions on an Olympic-based model, that is something you either read into my post or fabricated because you simply wanted to ridicule me.

You continue in your immature vane in your second post by pointing out the spelling mistake (now corrected, thank you) because you are shallow and your style is one of ridicule.

It is true I am quite confident in my positions. Sometimes over confident to a fault and I freely admit it. It comes from success, but I also admit to making major blunders at times too. Perhaps you perceive me as a "know-it-all and it rubs you the wrong way. That would be understandable...but I also perceive you as mean in your approach, and that is uncalled for.

If you have followed my posts I have been quite candid about my mistakes when pertinent to the discussion. I have also been open to learning from others and publicly thanked those that set me straight; Vince, Mr.noitall, and a few others that regularly add something to my posts. I appreciate civilized debate and candid discussion.

BTW, where do you see me betting on the Olympic cycle? You are the only one on-line or off that interpreted what I wrote in this way.

You were also critcal of my investment firm being small and not taking 100% of my time. How you could make such judgements I have no idea. It is small by choice and small is a relative term. I did not want anyone to think I had any scale comparable to any investment house. Small could be quite substantial for all you know, but you don't know.

Since you stated you don't know how things will turn out, there is at least possibilty that my theory might be right.

You make so many assumptions about me, false statements about what I wrote and extend them to conclusions that are unsupported that I find it incredible that you would embarras yourself in public. Go back and compare what I wrote to what you said!

Finally, you being in China lends no more support to your credibility than investors here having one up on you for not being here. While having knowledge of China is relevant and helpful your investment prowess is independent of that fact.

Getting back to your not knowing me: When you were writing your comment I happen to be having coffee with an old friend from China that is involved with real estate development and banking in Honk Kong. In addition one of my lead designers is Chinese, just returned from Beijing last week and is working here under my sposorship. And lastly my finacial analyst is a graduate of the Beijing Econonomic University. After Graduation she worked for the Chinese Supreme Court until she immigrated to the USA.

Your comments are wrong headed, mean and outragious.

Mr. N,
As always I appreciate your well thought out challenging comments and questions. I apologize to you and others that had to read through my rant at blinky.

Responding in the order of your comments. Yes I remain a deep value investor and as stated in my comments yesterday we are doing well because of it. A measure of safety (per Ben Graham)is important because markets tend toward unpredictability. I would evaluate real estate first by the current return on invested capital and evaluate the potential for specifc markets and properties to move in my favor. This might be based on existing rents being under market, local employment and construction activity and other factors. That does not describe this market. I agree with most of your comments. We are finding it increasingly difficult to locate any value and we are looking nation wide.

That said we (investment group) closed yesterday on a large project in Plano, Texas, with an anticpated holding period of 5 to 6 years. I am not the principal on this project. We believe this market will be expanding and we purchased the property at a discount to replacement value. Our exising lease rates are competitive and there is some cash flow at the start. Our risk is that one of our major tenants moves out and disrupts cash-flow. It is a calulated risk in an area of the country that is expanding.

I think many readers have misinterpreted my reluctance to refer to the national market as a bubble, with me thinking we have a lot of upside, we don't. And there are many places that should and will see falling prices and some have already.

In retrospect using the word bubble at all seems to have distracted a majority of people from more important points. I feel it is used to freely and was used to early, at a minimum.

If there are wide spread forclosures everyone is hurt. The closer to the foreclosure activity one is located the more they will feel it. I'm sure there are also investors that will take advantage of this as well and build up capital to buy things in a fire sale. My investment company started this way with our first investment being a bank REO industrial building in 1994. It was not our original intention to buy an REO but it worked out that way.

I have spoken with several of the banks we work with and their exposure varies greatly. Some banks will be just fine others will depend on how much paper they keep. Only the housing market has extended the leverage. I'm sure you are aware every other type of real estate loan has tightened up since the last fiasco 16 years ago.

I do not see doom and gloom in the near term. Longer term I do, since the Feds are doing nothing in this regard and the citizens do not actually want to face the pain either.

Any bail outs by the Federal Government will absolutely add to the national debt. But I will assume you posed this as a rhetorical question and leave it at that.

Once again thanks for your insight raising important issues to consider and the civility in which you make your presentation.

Peace to all.

Oh please, spare me the woe. So I've used tough talk to offend an arrogant twit. That's called karma. The purpose of this site is to inform investors, and when you, my friend, write this and that about how a global recession is going to be avoided, many visitors to this blog will perceive it as investment advice whether you like it or not. The "Olympic Cycle" was a satire of the reasoning you put forth in this statement:

"I think that global recession will be postponed at least until the Chinese have their BIG OLYMPIC SHOW in Beijing, regardless of any other factors. I believe the Chinese government has been postponing numerous "pipers they have to pay" because of the upcoming Summer Olympics."

When the average bumblehead who buys an emerging market mutual fund reads this sort of drivel they tell themselves, "yeah, i guess this IS a good reason to hold my international stocks. Sheldon Liber has given us his unique reason why a global recession won't hit until 2008!”

Hallelujah.

I agree that smaller funds can be great. The jab at your, ahem, small size was because your comments addressed a very large macro issue, and typically the guys that have proven year after year to have some decent insight into global-macro investment strategies end up managing a lot of money. It sounds like you've achieved some success through the years, but you're writing about and creating theories for issues which you're just not an expert. It's sort of like an Upper-Level manager at the Twinky factor writing a blog entry that describes a novel Angioplasty procedure he just sorta thought up. If you don't like when your comments are exposed as fluff and ridiculed, there is a simple way to stop it: don't write fluff.

I agree, I am mean-spirited. I can be downright sadistic in fact. But you elect to engage in this back-and-forth with me. This says volumes about your role as a masochist in search of a whipping. Also, I am very glad you edited your spelling error. Here are a few more words from your last post that you can edit:

outragious
Honk Kong (man, that one's a doozy)
rational (you need an "e" at the end)
based on you finding (you should be "your")
critcal

Blinky,
Please let us know who these great investors are that are earning over 20% return each year for any length of time. This is highly unusual and would be good to know. There can't be many. It sure is not public knowledge.

The Chinese economy has been steaming ahead at a fantastic pace to the degree that their banking system has been open to question and their environmental controls open to none, they are in trouble here and it is well documented. The economy will slow down and it will not happen until after the Olympics. If you have any ideas about macro-economics share them. If you have business associates that have any because you don't, share those. If you have neither and are dealing with large amounts of other peoples money with no thoughts regarding these issues than it is not the bumbleheads in well diversified international mutual funds that are at serious risk but people following your lead. Good luck to them...you seem lost.

Well, let me use Reno NV as an example. There are 6k houses for sale, and only 350 sold last month (July 06). We have over a year supply, without the resets in adjustables hitting at full force. This is a disaster, and it will get worse.

As for the poster, John, scare tactics is not the point. Fear on the part of speculators and investors should be necessary to protect one's investments. Reno is like San Diego. A desirable place to live, with kudos from many publications.

The NAR affordability stats are bogus because they assume that people can afford the 20 percent down on fixed loans. Problem is, people cannot afford the 20 percent. The savings rate in the US is negative. The adjustables are hitting as well. Fundamental value based upon rent is gone. Rents are far cheaper than the mortgage on the very same house. In Australia, this is causing a bust. It will happen here as well.

The problem of low interest rates for two long coupled with supply side economics coupled with flat wages has caused this problem. The benefitiaries of supply side put their tax windfall into real estate and not the stock market. Therefore, we have a huge oversupply of big homes. This crash will be severe as we see college grads living with their parents, etc. Believe me, the crash will be huge!!!

I agree %100 percent that what we have is primarily a debt bubble. However, the entry on the ledger that is the debt's equal and opposite has to go somewhere. It is into housing that this has gone.

Ironically, the phrase 'this time it is different' holds true for this macro-economy. Typically, housing markets are local, not regional, national, or global. However, this debt market is global. Because over the last decade or longer, depending on how you measure, all local markets have been able to benefit from low national and global lending rates, all local markets are synchronised to the degree that debt has caused a global housing bubble.

How would this affect Australia,
since my house is now worth 300%
more than it was 5 years ago?

Of course there is no bubble... nothing unusual about housing prices at all. History shows us that recent housing prices are perfectly in line with the trend line:

http://graphics8.nytimes.com/images/2006/08/26/weekinreview/27leon_graph2.large.gif

There's nothing to see here. Just move along now!

you are all idiots. I agree with sheldon. funny how all you smart guys cannot even spell, yet you all make fun of each other for not being able to spell. the coming crash will be huge, get out now while the getting's good. note that i can spell, but not capitalize. it is a sad commentary on current society how stupid you all are. i pity you all. you are doomed. the pirates have taken over the white house and the UN.....open your eyes before it is too late fools......

The difference between this housing bubble and previous ones is the fact that many people have taken out second mortgages on their homes, eating up all their equity. Didn't happen too often 10 years ago but today its common among most middle class and upper middle.

In california, florida etc.. they have seen 25-40% price drops in 8 months. What about all those people who are now overleveraged on their home? What about all those equities that were loaned on a FALSE VALUE of the home? What about all those homes that were bought 30% higher than their now worth?

I live in Upstate, NY where the RE took a pretty good jump in value over the last 3 years. Now I see double digit drops across the board. RE listings have doubled and in some places trippled. I did a loan the other day on a home that was listed for 119k six months ago and now sold for $85k... This is all happening during the MOST ACTIVE time of year for real estate sales. My loan sales were higher in February of this year than they were in July.. Unheard of.

Lets also remember that foreclosures are at an all time high and my guess they will continue. If thats not a sign, I don't know what is.

WAIT TIL AFTER SEPTEMBER.. IF YOU THINK ITS BAD NOW, THE TRAIN WILL REALLY START ROLLING DOWN HILL THEN.

The one saving grace I can see for America's current predicament is the huge generational shift about to take place. Baby boomers will retire, die, and downsize in large numbers in the next several years. There will likely be movement away from large cities and toward more traditional retirement scenarios. The need for this kind of reallocation of real estate holdings should provide some bouyancy and the impact of the housing regression will be market by market.

You are all wrong about absolutely everything! If you want to know something, ask me. I know everything and I am always right. A course of leeches will set you all straight.

Your math (and the original poster's) on the max potential loss based on a 2% down payment is not realistic in my opinion.

The real loss is accounted when you factor for all the costs up to the "jump ship" moment. That occurs after the people have paid a down payment, transaction costs, moving costs, new furniture costs and improvements, some property taxes and then paid into the mortage for some period of time before being totally under water and forced out. For non-specuvestors, that could be 1 - 2 years. That total can easily be in the 50 - 100k range.

In addition, after being suckered into that ARM in the first place, they get suckered into a desperate re-fi, at which point the no-deficiency laws in some states usually no longer protect them. If housing prices are falling, they potentially lose even more.