I recently moved from San Francisco to Sacramento.
Chief among the reasons, was the imminent realization of an investment hypothesis I had been awaiting for quite some time. In fact, since the housing market began its devastating ascent into bubble territory in the early 2000's.
The home I purchased this summer last sold for $200,000 in the year 2005. I purchased it for $50,000. (values are not actual, but proportional for this post)
This would then appear to be a 75% percentage discount relative to peak price (and a good deal!)
But this discount calculation is wrong.
This is because the percentage is being measured in dollars. I don't believe that is the correct denominator to use for these kinds of calculations.
In my Sept 2010 post on the Faith-Based Currency I concluded with a statement regarding how to evaluate investment opportunities between investment media:
Back in the late 1990's and early 2000's I regarded bullion as severely undervalued, especially silver. It was more of a casual finding but I grew more interested in the asset class:
By way of reminding the reader, global interest in the US housing price bubble had reached a frenzied, mob-like pitch that eventually hit maximum overdrive by the middle of the last decade. When prices had peaked it was too late, for by this time truly surreal finance mechanisms had ensnared not just the upside down mortgage holder, but most of the worlds' banking system, hedge funds, pension funds, and government agencies from DC to Peoria. The net effect of the collapse was a massive global recession that is still ricocheting throughout the global system, seven years later. Among many bad results was the catastrophic issuance of paper fiat currency (and more sovereign debt) in clumsy, ill-advised attempts to mitigate the collapse. The architects of the bubble for the most part kept their jobs, and their bonus packages, courtesy of Joe Taxpayer (and Joe's children, grand-children etc.)
But all that is another story.
What also happened was a rebalancing of value of real stuff, in this case silver bullion. Not because silver became scarce (though it has, modestly). Not because the world woke up to the investment thesis (though maybe a few percent of people did, grudgingly). And not because the financial system started pumping the asset class broadly (status quo, that).
No, what happened was that all that extra paper fiat currency that was conjured into existence drove up the exchange value of real stuff, in the time-honored tradition of currency debasement schemes everywhere, all the time.
In 2005 the average price of silver was about $7.50 per troy ounce. This summer the price of silver was about $34 per ounce.
That is an appreciation of ~353% in just seven years, or ~50% return per year (in paper fiat).
Not bad.
Now, let's pretend that home transactions happen not in dollars, but in silver ounces. In order to buy a house, one must exchange dollars for silver and use the silver to make the home purchase. In order to sell a house, one acquires the ounces of silver and then must go and exchange them for dollars.
This may seem cumbersome but there is a point which will become clear shortly, so please bear with me.
Go back to my home. In the year 2005 the dollar trade price for my home in that year (when it sold) was $200,000. In order to make the home trade in silver it would have required $200,000 / $7.50/oz = ~26,667 ounces of silver.
This summer my home price of $50,000 would have required ($50,000 / $34/oz) = 1,470 oz of silver.
By just waiting for 7 years I saved 25,197 ounces of silver, or the better part of a metric ton of bullion.
Put another way, the valuation discount in bullion (1,470 / 26,667) - 1 = ~ -94.5%, meaning my property was acquired for a ~95% silver value discount.
A translation of this into dollar terms yields the same results.
Say I had purchased 1,470 ounces of silver in 2005, at $7.50 per ounce. This would have required $11,025 in fiat currency.
This summer those 1,470 ounces of silver would net (at $34 per ounce) $49,980, enough for my property purchase.
Remember, this was the same property that traded for $200,000 in the year 2005, which in effect could have been acquired for a net equivalent spend of $11,025 in silver at that same time.
$11,025 / $200,000 - 1 = ~ -94.5%
*********
I have no idea how long I will remain in Sacto, but so far so good! I'm about 1-2 hours drive from San Francisco, Napa, the Sierras, etc. The space to roam is a welcome change from the City, where I lived for over a decade, and the cost of living has effectively fallen to near zilch.
In essence though this was a trade I could *not* pass up. Had I stayed in the City and watch it fly by I know I would have regretted it for years. This was the buy-low valuation scenario I knew would come one day, be fleeting when it hit.. but I just didn't know when/where it would strike.
Since acquiring valuations have been rising markedly and inventory plunging. In the past 6 months (from Oct 2012) housing inventory for sale has fallen by ~55% and median home asking prices have risen by around 47%.
In just six months.
I don't believe this portends a new bubble, inasmuch as it does a market that overshot fair values in the plunge southwards.
There is also the echo chamber effect of the Bay Area, where cash-rich investors are pooling funds and buying properties to convert into rentals and/or flip in a few months' time... but these are all natural corrective forces in the market place, and soon I expect the rates of growth to stabilize into a more historic oscillation relative to rents, local income, etc.
I hope this was helpful. In most of my posts I offer my opinions and perspective in a general way. The sole reason I am sharing this here is to let you know that I do practice what I preach!
I understand my style is not for everyone. But perhaps there might be elements of what I do/how I think that might help you diversify. Hopefully, at minimum give you new ways to view investment scenarios in new ways and with methods beyond the almighty dollar.
Chief among the reasons, was the imminent realization of an investment hypothesis I had been awaiting for quite some time. In fact, since the housing market began its devastating ascent into bubble territory in the early 2000's.
The home I purchased this summer last sold for $200,000 in the year 2005. I purchased it for $50,000. (values are not actual, but proportional for this post)
This would then appear to be a 75% percentage discount relative to peak price (and a good deal!)
But this discount calculation is wrong.
This is because the percentage is being measured in dollars. I don't believe that is the correct denominator to use for these kinds of calculations.
In my Sept 2010 post on the Faith-Based Currency I concluded with a statement regarding how to evaluate investment opportunities between investment media:
The way to advance personal wealth interests is to advantageously switch among asset classes at the height of their valuation cycle before the mathematical underpinnings fail.
Back in the late 1990's and early 2000's I regarded bullion as severely undervalued, especially silver. It was more of a casual finding but I grew more interested in the asset class:
- The more I learned about its history as a monetary metal,
- The 30-year depletion of world reserves for industrial purposes, and
- The complete lack of interest by the vast majority of people (and/or the ridicule/fear factor heaped on it by mainstream financial/investor media).
By way of reminding the reader, global interest in the US housing price bubble had reached a frenzied, mob-like pitch that eventually hit maximum overdrive by the middle of the last decade. When prices had peaked it was too late, for by this time truly surreal finance mechanisms had ensnared not just the upside down mortgage holder, but most of the worlds' banking system, hedge funds, pension funds, and government agencies from DC to Peoria. The net effect of the collapse was a massive global recession that is still ricocheting throughout the global system, seven years later. Among many bad results was the catastrophic issuance of paper fiat currency (and more sovereign debt) in clumsy, ill-advised attempts to mitigate the collapse. The architects of the bubble for the most part kept their jobs, and their bonus packages, courtesy of Joe Taxpayer (and Joe's children, grand-children etc.)
But all that is another story.
What also happened was a rebalancing of value of real stuff, in this case silver bullion. Not because silver became scarce (though it has, modestly). Not because the world woke up to the investment thesis (though maybe a few percent of people did, grudgingly). And not because the financial system started pumping the asset class broadly (status quo, that).
No, what happened was that all that extra paper fiat currency that was conjured into existence drove up the exchange value of real stuff, in the time-honored tradition of currency debasement schemes everywhere, all the time.
In 2005 the average price of silver was about $7.50 per troy ounce. This summer the price of silver was about $34 per ounce.
That is an appreciation of ~353% in just seven years, or ~50% return per year (in paper fiat).
Not bad.
Now, let's pretend that home transactions happen not in dollars, but in silver ounces. In order to buy a house, one must exchange dollars for silver and use the silver to make the home purchase. In order to sell a house, one acquires the ounces of silver and then must go and exchange them for dollars.
This may seem cumbersome but there is a point which will become clear shortly, so please bear with me.
Go back to my home. In the year 2005 the dollar trade price for my home in that year (when it sold) was $200,000. In order to make the home trade in silver it would have required $200,000 / $7.50/oz = ~26,667 ounces of silver.
This summer my home price of $50,000 would have required ($50,000 / $34/oz) = 1,470 oz of silver.
By just waiting for 7 years I saved 25,197 ounces of silver, or the better part of a metric ton of bullion.
Put another way, the valuation discount in bullion (1,470 / 26,667) - 1 = ~ -94.5%, meaning my property was acquired for a ~95% silver value discount.
A translation of this into dollar terms yields the same results.
Say I had purchased 1,470 ounces of silver in 2005, at $7.50 per ounce. This would have required $11,025 in fiat currency.
This summer those 1,470 ounces of silver would net (at $34 per ounce) $49,980, enough for my property purchase.
Remember, this was the same property that traded for $200,000 in the year 2005, which in effect could have been acquired for a net equivalent spend of $11,025 in silver at that same time.
$11,025 / $200,000 - 1 = ~ -94.5%
*********
I have no idea how long I will remain in Sacto, but so far so good! I'm about 1-2 hours drive from San Francisco, Napa, the Sierras, etc. The space to roam is a welcome change from the City, where I lived for over a decade, and the cost of living has effectively fallen to near zilch.
In essence though this was a trade I could *not* pass up. Had I stayed in the City and watch it fly by I know I would have regretted it for years. This was the buy-low valuation scenario I knew would come one day, be fleeting when it hit.. but I just didn't know when/where it would strike.
Since acquiring valuations have been rising markedly and inventory plunging. In the past 6 months (from Oct 2012) housing inventory for sale has fallen by ~55% and median home asking prices have risen by around 47%.
In just six months.
I don't believe this portends a new bubble, inasmuch as it does a market that overshot fair values in the plunge southwards.
There is also the echo chamber effect of the Bay Area, where cash-rich investors are pooling funds and buying properties to convert into rentals and/or flip in a few months' time... but these are all natural corrective forces in the market place, and soon I expect the rates of growth to stabilize into a more historic oscillation relative to rents, local income, etc.
I hope this was helpful. In most of my posts I offer my opinions and perspective in a general way. The sole reason I am sharing this here is to let you know that I do practice what I preach!
I understand my style is not for everyone. But perhaps there might be elements of what I do/how I think that might help you diversify. Hopefully, at minimum give you new ways to view investment scenarios in new ways and with methods beyond the almighty dollar.
