What does it mean when this huge housing bear decides to buy a house?

I am buying a house.

This is way sooner than I expected to buy (I was thinking early next year or even later), but a fantastic deal on a bank owned property came up and my wife and I have decided to jump on it.

Why did I decide to buy?

The biggest reason is my wife is expecting and she is in major nesting mode right now. However, I was not about to buy an overpriced house and she knows that. According to my calculations, homes in our area should be in the $130 - $150/sqare foot range and that is the target I've been looking for. I calculated this by taking the pre-bubble value of my first home in 1998 ($96 square foot) and adding 3% - 4% inflation over the next 10 years. Most homes on the market right now are still priced $190 square foot and higher.

The home we are purchasing is for sale at the rate of $112/square foot! That is well below my target rate and, adjusted for inflation, is cheaper than the house I bought in 1998! The nominal purchase price is $30,000 lower (with about 40% more square footage) than what we sold our house for in 2006 and it sits on 3.5 acres!

This house also has some nice features we were looking for including straw bale construction (very well insulated), radiant heat, and a separate 800 square foot studio on the property.

On the negative side, this house is close to the highway, so there is some noise from that. I also wanted to move closer into town and this is about the same distance to Santa Fe (about 14 miles each way). So it's not an exurb, but it is farther out than I'd like.

Does this mean the housing market has bottomed out?

Not in your life, the resale market is still way too high. As I said before, most homes in my area are still over $190 square foot (and that is down from previous years). On the positive side, I have seen two houses in good condition being sold by motivated owners at $139/square foot this summer. Now that the summer selling season is over, I expect home sales to fall dramatically and only those people that are pricing their homes competitively will be able to move them in this market.

Nationally, the Case Schiller home index is down about 15% in the past year. I expect at least another 15% decline nationally in the next two years and it could overshoot that. Just as homes overshot on the high side, they will overshoot on the low side.

Am I concerned about my house value declining?

Absolutely. But I am buying this house a such a discount below the market that it would take a decline on the order of 40% from today's market to break below what I am paying for this house. I can live with that cushion and I still stick with my fair valuation of $130 - $150/square foot for this area.

The most important thing to know if you are buying in this market is to not overpay for real estate. There is such a dearth of qualified buyers that you can dictate the terms and the seller will probably capitulate (if he's smart). I recommend you look at the value of comparable homes pre bubble (2000 or earlier), then inflate that number by 3% to 4%/year to get your target. Only offer at or below that number.

I actually got the bank to agree to drop their price by $10k because I was paying cash for the property and promised a quick close! REO properties almost never drop their price so you can sense some desperation on their part as they are trying to unload their foreclosed properties.

Tread carefully in this market, there are bargains out there but you have to be patient and diligent.

MSM Headline: Commodities, Gold and Oil Plunging! Dollar rallying! Jim Cramer calls it "Economic Nirvana"

I'm just assuming Jim Cramer was talking about the rock band "Nirvana" with the suicidal heroin addicted lead singer, but maybe he was talking about something else.

The truth is, if you bothered to actually look at the charts is that all of these commodities are still much higher than they were 1 year ago - right before Ben Bernake started cutting interest rates.

Please note: I am not giving investment advice. You need to do your own due diligence when it comes to any investment. I am an idiot and if you do what I say and lose money, it's your own dumb fault!

Let's look at some charts:

First gold (ticker: GLD):

Shares of the SPDR Gold shares went for 65.07/share (1 share = 1/10 oz. of gold) on August 21, 2007. Seven months later the shares surged to $99.17/share on March 17th, that's a 52.4% return! Since that time the direction has been basically down and it now sits at $82.30/share - but that is still a 26.4% return in 1 year!

Compare that to the Dow, Nasdaq and S&P since last August and it's no comparison. There's also wierd things happening in the gold market. Gold has sold off about 20% from its peak, but the US Mint just announced they were stopping production of their American Eagle gold coins (they did the same thing back in March with the American Eagle silver coins).

If the price of something goes down, its usually because demand is crashing (example: housing). How can prices be declining at the same time that physical supplies are disappearing?

So is gold down? Yes, from it's peak, but year over year its still up huge.

Next we've got oil:

ONE YEAR AGO OIL WAS AT $67/BARREL! Even with the recent pullback, oil is still 80% higher than it was last year! Sorry if I'm not happy that gas prices have come down about $0.50/gallon since it peaked in June. I'm still paying about $15 more per fillup on my vehicles than I was last year at this time.

How's the dollar doing?

One year ago the dollar index was at 81. After the most recent dramatic rally, the dollar now sits at 76, down 6% in one year.

It is true that all of these items have reversed course pretty dramatically this past month, but I'm thinking that the original trends will start to assert themselves strongly very soon.

How much lower can gold go when physical supplies of gold coins are almost non-existant right now?

How much higher can the dollar go when the government is getting ready to issue hundreds of billions of dollars in additional debt in order to bailout or nationalize Fannie Mae and Freddie Mac? BTW - Fannie and Freddie shares have crashed below their share price when the bailout was announced last month.

How much lower can oil go with all this crap happening between Russia and Georgia? Not to mention the continuing problems with Iran, Iraq and Nigeria constantly popping up in the news?

My thousand yard stare (http://financialjudo.blogspot.com/2008/07/1000-yard-stare.html) says that we are not done. The market was falling apart until March when Bear Stearns was bailed out, but that rally failed and the market plunged even further until Fannie Mae and Freddie Mac were bailed out. Now we look to be at the beginning of another dramatic leg down that could smash through the July lows in the market.

The past month hasn't been kind to my portfolio. In Mid July I was kicking ass and was up more than 5% on the year. However, over the past month I have faced a dramatic reversal and am now down about 6% on the year. That hurt, as I thought I had stress tested my portfolio pretty well.

However, compared to how the market has done this year. I'm still in good shape, even with the loss.

The next month should be interesting.

FJ Challenges the Conventional Wisdom: Who Really Benefits From Lower Interest Rates?

If you ask your average economist, it will be taken as gospel that lower interest rates are a good thing. Lower interest rates lowers the cost of money for consumers, businesses and governments. When money is cheap, people and institutions spend more of it and that helps the economy.

It sounds like a pretty good arguement, and it sounds so benign. However, my argument is that lower interest rates benefit the banks much more than people and businesses.

It's clear that savers are being brutalized by the Federal Reserve keeping short term interest rates substantially below the inflation rate. The discount rate is at 2% right now and inflation is at 4% or more (depending on who is calculating it). That means the savings you can earn at your local bank causes you to lose purchasing power every year.

Contrast that to last year, before Ben Bernake started drastically cutting interest rates, when you could easily earn 4% or more in a money market account. At least last year you could keep up with inflation, not so this year.

But look at the banks. Because of these artifically low interest rates (that can only happen because the Federal Reserve manipulates interest rates to serve their members) one of their biggest expenses has been lowered. The interest rates they pay their depositers is substantially reduced.

This is very important when banks are as capital impaired as they are right now. They are capital impaired because they made reckless loans to people who couldn't afford them and now they need to be bailed out of their own bad decisions!

Keeping short term interest rates artifically low also spurs inflation. Remember, low interest rates means there is more money chasing the same amount of goods - that causes inflation. In response to inflation, bond investors start demanding higher interest rates for longer term bonds.

This causes the spread between short term interest rates and long term interest rates to widen. That is very profitable, especially when you borrow money with low short term interest rates and lend it out at higher interest rates like banks do. When spreads narrow, it becomes very difficult to make money.

So, the banks benefit from lower short term rates because it lowers their expenses. They also benefit as longer term rates rise because they can make more on the money they lend out.

That's Win-Win for the banks. Unfortunately savers get screwed in the process and debtors only end up getting a little relief.

It's quite ingenious how the debate around interest rates revolves around should the Fed cut interest rates or raise interest rates? Unfortunately, nobody ever asks why the market isn't allowed to set short term interest rates. After all, if the market can set long term interest rates fairly and efficiently, why would it be any different with short term rates?

Just something to think about the next time you get your bank statement and they've paid you $0.10 on your $100 deposit.