Sell US Real Estate, Buy Physical Gold and Physical Silver

Reality is the great antidote of hope. Whenever my
colleagues and friends ask me for my global economic outlook, by the time I’m
done, they always provide a cheeky response about the depressing nature of my outlook. However, the outlook doesn't have to be depressing at all for those willing to face reality and take a proactive stance. As a realist, if the outlook calls for
great pessimism, then great pessimism is what I will necessarily convey, even if it is not what the people want to hear. Though I’m an
optimist at heart (as any entrepreneur will tell you, one has to be an optimist
to survive as an entrepreneur), I separate this inherent personality trait of
mine from the realism of my wealth-consulting persona. When providing wealth
management consultations, anything but realism will harm your clients. The
wealth management industry is full of optimists, not realists. An optimist will
tell you that the market outlook is the best in a decade (in any market) when reality calls for a
mildly optimistic outlook, and that the market outlook is recovering and provides great
value when reality calls for a pessimistic, or even a strongly pessimistic,
outlook. A pessimist will tell you that the market is long overdue for a
correction in the middle of a long rally when fundamentals point to
sustainability, and that a crash is around the corner when fundamentals are
slightly negative. However, a realist will be pessimistic when conditions
justify pessimism and optimistic when conditions justify optimism.

Hope is a dangerous drug to willingly ingest in the
investment world or any type of world for that matter. Remember the below wildly popular
2008 campaign ad? What has hope done for Americans since then?

Given that hope is the most counter-productive emotion of
all next to greed and fear when it comes to investing, I’m amazed by how many people are
still clinging to the fragile, umbilical cord of hope, rather than facing
reality, when it comes to real estate markets in the United States. Since 2008,
economists and politicians in the US have been injecting false hope into the
veins of both residential and commercial real estate investors with nary a single
dose of realism. As recently as just last month, I’ve spoken to real estate
investors that refuse to sell their residential and/or commercial real estate
properties now in the hope that the US real estate market has bottomed and will
now rebound strongly. When I’ve probed the reasons that RE investors refuse to
sell out of their investment properties now, I seem to receive the same two
answers:

(1) Their properties have declined so much in price now that they can’t bear to sell into a depressed market now; and

(2) An unyielding HOPE the US real estate market has bottomed and will now begin to rise
in price.

However, as you can see from the chart above, courtesy of housingstory.net, the last three months yielded the lowest three
months of demand in nine years of residential housing sales dating back to 2001
despite the Federal Reserve’s QE measures. This is not a good sign. The reality
of the situation points to the strong possibility that we are still perhaps
several years away from the housing bottom. Furthermore, even if we are not
several years away from the housing bottom as I suspect we are, the recovery
mode in the US housing market will likely be very sluggish, contributing to the very real possibility that RE investors will not recoup their lost
equity for a decade or longer.  If we look at the US commercial real estate
industry, provided that we look at the industry through the lens of realism,
the outlook is just as bleak if not bleaker. According to debt-analysis company
Trep LLC, more than half of the $1.4 trillion US commercial real estate
mortgages coming due by 2014 are under water.

Consequently, some of the largest US commercial real estate
companies have finally come to terms with the reality of the market and have
started to walk away from properties in their portfolio. Vornado, one of the
largest owners of offices and malls, stopped payments on, and walked away from an
$18 million mortgage on the Cannery at Del Monte Square mixed-use development
in San Francisco; Simon Property Group stopped payments on the Palm Beach Mall mortgage
in the wealthy community of West Palm Beach, Florida; and Macerich stopped
payments on a $135 million mortgage on Dallas's Valley View Center mall. Deutsche
Bank AG's RREEF, which manages $56 billion in real-estate investments, explained
the decision of these large US commercial real estate companies as follows:
Better to divert payments away from losing projects with dismal outlooks into
more lucrative projects or other uses with better returns on the investment. Though
commercial mortgages are easier to walk away from than residential mortgages
because they are typically nonrecourse, perhaps individual investors can learn
from the behavior of these large US commercial real estate companies by also diverting
money away from their private real estate portfolios into more productive
assets.

The psychological pain of a loss is often an enormous barrier
to overcome when convincing an investor to sell a losing asset. Thus, if I
encountered a US RE investor that purchased a portfolio of $6 million RE
properties that was now worth $4 million, the following are the two questions I
would ask him or her to get her to move in the right direction:

(1) If you had $4 million in cash in your bank account instead
of a $4 million RE property, would you go out today and buy the exact same
portfolio of properties that you own today?

The only way they could honestly answer yes to the above
question is if they believe that the investment will be profitable in the
near future. If they answered yes to this first question, then I would ask the
follow-up question:

(2) Do you believe that there is no other investment today that
will provide a better return in less amount of time than your current RE
portfolio?

If they answer no to either question, the task of convincing
such a person that selling today, even at a loss, is the best possible choice, becomes exponentially easier. 

 

In the chart above, I’ve shown that in 2002, 3,952 troy ounces of
gold could buy a single $1,000,000 home. By August of 2010, with the rise in the price of gold, that EXACT same 3,952 troy
ounces of gold could buy FOUR $1,000,000 homes and ONE $500,000 home. This trend of the appreciation in gold outpacing the depreciation/appreciation in US real estate by leaps and bounds will likely
accelerate over the next ten years. Even if someone believes that the US real
estate market has bottomed, if he or she believes that another asset class will
rise more quickly than the rebound in real estate, then it makes zero sense to
remain invested in real estate today. Simply put, though the gold market will
likely experience another short-term very moderate dip again soon, sell your US
real estate and accept your lumps. And with the proceeds, I recommend you buy physical gold and silver.

About the author: JS Kim is the President and Chief Investment Strategist for SmartKnowledgeU, a fiercely independent wealth management company that also produces the monthly newsletter, Crisis Investment Opportunities.

Comments

[NoBull1994]

The problem with real estate is that it is an asset class propped up by leverage.  With rates as close to 0% as they can get, the only thing that can make prices rise is significant growth in wealth through employment.

Not happenin' soon.

No Bull