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Minyan Mailbag - Real Estate Reconnaissance



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.


Last week, I was in Los Angeles and Las Vegas on a business trip. I lived in LA for several years during the mid-90's, and this was my first trip back since 2000. What I saw stunned me. This was a city transformed; it seemed as if the entire city was under the spell of a real estate obsession. Friends of mine with young families and good jobs that pay mid six figures spoke about wanting to quit their jobs and work in real estate. At lunch, people at other tables spoke loudly and proudly about the prices of houses in their neighborhoods.

On the drive from LA to Las Vegas, vast tracts of identical housing developments with names like "Coyote Canyon" and "Rattlesnake Ridge" are being built right up to the base of the mountains and out into the desert. On the interstate leading out of LA to Vegas, billboards for Pulte (PHM), KB Homes (KBH) and other builders trying to sell new developments far outnumber those for fast-food joints and even casinos, which I found both interesting and appropriate.

In Las Vegas, which I had not visited in a few years, the situation was even more incredible. Massive new housing developments line the interstate for miles leading into and out of the city and into the previously-barren desert in all directions, right up to the mountain bases; many of these are ghost communities, rows of identical houses with no inhabitants yet. I met a casino blackjack dealer in her 20's, who told me that she recently bought a second home not to live in or even rent, but to flip in a few months. I met a showgirl who works as a real esate agent during the day. Just as real estate fever seemed to have surpassed interest in the entertainment industry in LA, it also seemed to have replaced interest in the gambling industry among Vegas residents.

My conclusion based on what I saw: There is a definite real estate bubble out there, at least in the two major markets that I visited. The only question is one of timing: In terms of profiting from this via the stock market, however, merely realizing that there is a bubble is not particularly useful; just like the stock mania of the late 90's, the important questions are when does it pop, how fast does it pop, and how far down does it fall? Anyone who is playing this situation via the stock market would do well to realize that it is not enough to sit at a computer screen thinking the charts are extended, or even analyzing earnings reports or SEC filings. Just like stocks in the 90's, there is a mass secular phenomenon out there, and large parts of our political, cultural, and economic institutions are financially, emotionally, and spiritually dependent upon its continuation. In the late 90's, Bill Fleckenstein was fond of watching anecdotal cultural evidence to indicate when everyone was "in" the stock market. I suspect that will be just as important with the housing bubble.

Minyan Stephen


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