My Philosophy

I believe in protecting one’s wealth.  Protecting wealth precedes growing wealth, which should be the main goal.  Appreciation of World economics is far more important then ever for homeowners.  We must ACT according to the signs.  Everything has a birth, a life, and a death, [even rocks and dirt] including bubbles. Bubbles are much like people… generated by people.  Financial bubbles are no different. Bubbles are born… living to attract the most capital from the most people and then deflate [some slowly and some rapidly] redistributing [some of] that capital.  The deflation usually occurs when speculators vacate the arena.  When bubbles burst, they wipe out fortunes… not just the fortunes of speculators but also the accumulated wealth of ordinary people. 

Ordinary people [you and me] need to prepare for the eventual bubble deflation; because the ending of the BuilderBubble has commenced ALREADY. If you allow it, this bubble will zap your home equity! Over the last few months, the residential real estate economy has transitioned from a sellers’ market to a buyers’ market.  Sellers are reducing their asking price and are accepting offers coming in lower.

Economic bubbles extend back in time to the 16^th century when the Dutch enjoyed and then endured Tulip Mania.

1650     Tulips
1890     Railroads
1910     Buggies
1920     Aircraft
1925     Radio
1960     Transistors
1995     Internet Technologies
2002     Residential BuilderBubble

The BuilderBubble is no different.  It was born in 2002 and grew up in 2003 maturing in 2005 aging into geriatrics in 2006 and will likely die miserably in 2007... perhaps before [or a little later].  We have precious little time to prepare for the protection of our fortunes.  The demise of the BuilderBubble without proactive stance will result in dwindling equity… a negative effect on our wealth.

The basis of our philosophy is the study of human behavior as measured by Technical Analysis. Let’s look back in time… just a few years.  The Internet bubble began in 1997... shortly after the creation of the World Wide Web. The Internet is 25 years old but it was the World Wide Web that empowered trading tech stocks online.  The online attraction precipitated by High Tech mania lived the high life only three years. That’s a real short time. Sure, there was a buildup over time… the early 90s; however, the mania didn’t catch on until the mid 90s when the World Wide Web made the scene.  Then, magically, in the spring of 2000, it all went... poof!  The BuilderBubble is likely headed toward the same demise. Do you want the home equity you enjoy today to go poof in the night… or, do you want to safeguard against the poof... and grow wealthier during the poof? Yes, you can make money during the decline WHILE you protect your home equity. I’ll explain it all later.

Below are two scenarios to help us to get on the same page and to analyze where we stand.  My examples may be over simplified, but let’s error in the interest of KISS. 

1. Think back to 1989, April, the top month of the last BuilderBubble, which was precipitated by the inflow of excess Japanese money into the U.S. and other spots around the world.  At the top of their game, the Japanese stock market index, the Nikkei, reached about 40,000 points that same year and then the Nikkei began to slide… rapidly slipping down, down, down to its low in March 2003 of 7,600. It was in March when all world markets began to climb immediately following the Iraqi invasion.  Yes, war is kind to financial markets.

The BuilderBubble phenomenon is international in scope.   Homes have increased in value everywhere... not just in the U.S.  Some would lay blame on China and India but that is a different topic for another time.... after we’ve prepared to protect our own personal home equity.

2.  What goes up must come down.   Oscillation!  Through time, the various financial markets enjoy a crest and suffer a trough.  Real estate is just one financial market. The last residential bubble was tame in comparison to the present BuilderBubble. The Japanese invested billions in all classes of U.S. real estate in 1987 and 1988.  They bought notable high rises and even a premier golf course. Their pullout from U.S. realty in 1989 is what precipitated the crest of the U.S. residential market in April of that year.  It took seven years to reach the bottom - 1996.  The trough occurred in late 1996 or early 1997, depending on where you live.  Residential prices started creeping up in the 2nd half of 1997.  By 1999, the bull market was in bloom.  My friends bought a new home in that year... paying top price in the subdivision because they chose a model home. The price was $407,000 and they still own it.  Homes in this community have been selling in the high $900s and some have closed at a cool million.  Now, the million-dollar question is, if prices retract, to what extent will they decline? Table 1.0. [All underlined terms are hyperlinks to be clicked for expanded information but we recommend you continue reading now and come back to view later.]

We can use Fibonacci analysis to help forecast estimates of future residential home value decline from the 2006 top to the [projected] 2010 bottom.  I use 2001 as the baseline, since the resurgence of real estate from 1997 through 2001 enjoyed a sustainable incline.   But in 2002 the market heated up so dramatically that by 2003 home prices in some communities doubled in price. I believe that speculators… many of whom were amateurs may have influenced this movement. The flippers, as some writers called them [modern day real estate speculators], created the mad race to the top… just like the amateurs precipitated ridiculous increases in tech stocks during late 1999 and early 2000. 

I believe the parabola of the 2003 – 2004 so overly states the true value of residential real estate in certain affected areas that a major correction will need to occur before normal, sustainable price growth may resume.

To illustrate my point, a chart using Fibonacci analysis displays the rapid run-up and typical correction of an example stock, which has run up at a significant rate of climb. I chose a builder stock, Toll Brothers (TOL), to illustrate an example of how parabola behaves in the stock market, a financial market, like real estate, another financial market.  By the way, do you know what they call a “flipper” who can’t sell the property?  Landlord! And typical landlords, if they can rent the property, rents will be far lower than needed to breakeven on monthly expenses because of the overly inflated prices.

Q:  Why not use 1999 as the base year?
A:  Because 1999 was still gently sloping upward at a sustainable incline. 

Gradually sloping trend appreciation at an attitude of about thirty degrees on a financial chart is indefinitely sustainable. Trends with a steeper incline, attitude, are much less likely to continue without substantial pullbacks on the way up the bull ladder.  Any incline steeper than 45 degrees is radical in viewing financial charts and will generally pull back radically like it climbed. In the last few months of 2002, following the World Trade Center disaster, nothing much happened in residential real estate.  We'd be hard pressed to find many contract closings not originated prior to the World Trade Center plane crashes.  But, "whammo", in March 2002, the market started moving at a steeper incline and that incline got even steeper in 2003 causing some communities to double existing residential homes. Late in 2004 the incline started to flatten and got closer to level in late, l2005.  Now we are in March 2006 and the speculators are starting to suffer. As I write, I suspect it won't be long before actual homeowners, those people who are raising families and living in their own personal residence, will start feeling pain.

Q:  Where do you believe the value of my friend's home will decline to?  For simplicity of calculation, let's mark it a cool million at the crest.  According to Fibonacci, the designer of modern day number theory [Fibonacci lived about a thousand years ago], the most likely pull back is to the 38% point.  OK, so, 38% = $380,000.  That theory puts the low for his home value at $620,000.  Next question:  When in time will that low be valid?  My forecast indicates about 2010-13, assuming residential real estate continues on its prior ebb and flow course of 14 to 17 years.

The important question:
How does one protect home equity?

A:  One could protect a home equity investment by trading the financial markets via a managed account.  But prior to considering a managed account advisor, he must show a proven track record of earning substantially higher annual results than is the published custom.  

Table 2.0 shows an example of probable residential real estate decline during the next 5 years.  So, using a 40% annual average return, wildly higher than would be normally expected [but well under the mid-point of documented historical return by the example trader], in three years would be valued at 2.5 times its original capital, very close to the potential home equity loss during a three-year decline. If I'm wrong, and I have been on timing before, your investment in a managed account may grow.

Table 3.0 illustrates the probability of how a managed account might behave during the same five-year period.