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Thursday, November 11, 2004

My Views Are Confirmed By Professionals

I recently received an email from Diane Kennedy’s free e-mail list that confirms what I have been saying for a couple of months now. Diane is a CPA and founder and owner of DKA, a tax strategy and accounting firm in the Phoenix area. She is also a co-author of a couple books in the Rich Dad series of financial education books. Many of her clients are high net worth individuals. Her website can be found at www.taxloopholes.com (you can sign up for the free newsletter there as well).

In her newsletter, she talks at great length about the declining value of the dollar and how to position yourself to profit from it. One suggestion she makes is investing in real estate outside the U.S. This is beyond the means of most people reading this blog (and myself). However, she also states many of her clients are moving towards cash. Why? If the dollar is declining, this doesn’t make sense! They are doing it because they are expecting an increase in U.S. interest rates of around 2%. When this happens, the real estate market will become flooded with newly available properties for two major reasons:

Novice investors have been buying real estate like crazy for the last year or so. The low interest rates helped those properties be cashflow positive, despite the inflated prices paid for them. When rates rises, the investors will start losing money and will need to dump their properties quickly.

Homeowners have been encouraged by banks to get as big of a loan as they can qualify for and to buy an expensive house. Again, while interest rates were low, these homeowners could make the payments without any problems. With rates rising, more people are going to default on their mortgages, which will lead to more foreclosures.

These two situations have one thing in common – the end result of both will be a glut of cheap houses on the market for those ready to swoop in and snatch them up. That is why her clients are beginning to position themselves in cash.

It’s nice to hear a professional echo the same sentiments I wrote about here two months ago!

Remember, when there is a big change in the direction of a market, there is money to be made. When the predicted increase in foreclosures happens, expect newspapers and television news shows to be filled with doom and gloom stories of bursting real estate bubbles and how everyone is bailing out or losing money hand over fist. Ignore them! Smart money will go against the trend during this time and pick up properties at substantial discounts. Start positioning yourself now to take advantage of this opportunity!

5 comments:

misteropus said...

My wife and I researched properties in Brazil and we hope to look at some of them firsthand during our next trip to Brazil for Christmas and New Years. One of my Intel friends is a former Investment Banker for Morgan Stanley and he also mentioned the opportunities of the decling U.S. Dollar. Kind of scary to invest in real estate that is 18 hours away by airplane, but maybe the risk is worth it.

Anonymous said...

Shaun, how do rising interest rates force investors out of their real estate properties? Are you referring to investors who used tools like ARMs that are tied to interest rate changes? TIA.
SusanO in Portland

Shaun said...

Susan - Yes, I am referring to adjustable rate mortgages. The current low rates allow novice investors to be cashflow positive on mortgages with small down payments (i.e., very little of their own money). Many of these investors are getting a small positive cashflow. That's a pretty thin margin and, when rates rise and their mortgage payments rise, their cashflow will go negative pretty quickly. Hence, they will dump these properties quickly when they start losing money.

Andviv said...

Hey Shaun, check this article out http://moneycentral.msn.com/content/invest/extra/P87483.asp?GT1=5851

Interesting how the two points of view diverge on this topic.

Andres.

Shaun said...

Yeah, everyone has a different opinion :-) I take a dim view of Alan Greenspan and the Fed. I think they have had their heads in the sand for a very long time. The government also manipulates data to get the results they want to show - for examples regarding inflation see http://moneycentral.msn.com/content/P92951.asp, http://moneycentral.msn.com/content/P73981.asp, and http://moneycentral.msn.com/content/P72746.asp. As you can tell, I'm somewhat of a fan of contrarian Bill Fleckenstein. I tend to believe private companies more than government reports, so I'm with HSBC and Diane Kennedy on this one.

The wealth effect real estate causes, which was mentioned in the article you pointed out, causes people to spend more and this spending is the only thing keeping the economy from the disasterous effects of the Fed's actions. Is it any wonder then, that this article appeared today: http://www.msnbc.msn.com/id/6671737/ "Consumer credit rose $7.7 billion in Oct. Outstanding debt grew for 11th straight month"

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