High-end house flipping is soaring
High-end flipping, however, is heating up. Flips with a sale price of $750,000 or more rose 21 percent from a year ago, while homes priced below $400,000 declined as a share of all flips from a year ago, according to RealtyTrac. Homes priced between $750,000 and $1 million had a 41 percent return, which explains why flippers are heading to higher-priced neighborhoods.
Flipping is definitely getting harder, as there are fewer distressed properties for sale. Prices may be easing, but they're still rising because supplies are low.
"The secret to flipping houses is getting the property to be at a great price, and there's just very, very few properties in our area at low prices," said David Fogg, a real estate agent in Burbank, California.DYI Comment: Buying properties at a great price and/or stocks, bonds, gold etc. is the name of the game. You would not know it from the MPT (Modern Portfolio Theory) crowd who believes that your rate of return is bake in the cake by the very nature of the asset you are buying. Price matters and price matters BIG TIME. Currently U.S. stocks and junk bonds are priced to the heavens that will deliver poor returns over the next 10 years and losses for those holding less than 8 years.
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John P. Hussman, Ph.D.
“During the latter stage of the bull market culminating in 1929, the public acquired a completely different attitude towards the investment merits of common stocks… Why did the investing public turn its attention from dividends, from asset values, and from average earnings to transfer it almost exclusively to the earnings trend, i.e. to the changes in earnings expected in the future? The answer was, first, that the records of the past were proving an undependable guide to investment; and, second, that the rewards offered by the future had become irresistibly alluring."
Benjamin Graham & David L. Dodd, Security Analysis, 1934
While investors presently dismiss the potential for valuations to remain well-correlated with actual subsequent market returns, and there’s no assurance that they will, the foregoing rule-of-thumb has historically had a nearly 90% correlation with S&P 500 nominal total returns over the following decade. The chart of this relationship (from the April 21 comment) is shown below. Note that secular valuation lows as we saw in 1949 and 1982 have generally occurred at levels that have implied near-20% annual 10-year total returns for the S&P 500. The 2009 low was certainly a great improvement from the 2000 extreme, bringing prospective 10-year returns to about 10% annually (and slightly higher on several other reliable valuation measures), but current valuations are no longer consistent with prospective 10-year returns anywhere near those levels.
Based on a broader set of historically reliable valuation methods, our consensus estimate is closer to 1.5% annually. Given a dividend yield of 2% for the S&P 500, it follows that we expect the S&P 500 Index to be lower a decade from now than it is today.
A legendary value investor, Benjamin Graham insisted that "operations for profit should be based not on optimism but on arithmetic." Careful arithmetic is important in order to resist the temptation to rely on what Graham called "some generalized statement, sound enough within its proper field, but twisted to fit the speculative mania." For example, many investors casually dismiss valuations today by parroting "lower interest rates justify higher valuations." But they do so without doing the associated arithmetic, and without recognizing that even those higher "justified" valuations willstill be associated with poor subsequent equity returns. As I detailed in Optimism versus Arithmetic, if we assume that short-term interest rates will remain at zero for another 3-4 years instead of a more normal 4%, one can justify stock valuations 12-16% above where they otherwise might be. That 12-16% elevation would in turn shave about 4% annually from equity returns over that same 3-4 year perod. Unfortunately, the most reliable valuation measures we identify are more than double pre-bubble historical norms, so the "justified valuation" argument is exactly the sort of twisted statement that Graham warned about.
DYI Comments: This is one very pricey stock and long term bond market as future returns will be poor at best and losses at worst. My aggressive portfolio remains the same with zero stocks and only 2% in long term bonds. For the speculator who is bearish time will appear to have stood still but for the truly long term investor nothing more than a blink of an eye waiting for better values to arrive. Markets will regress back to their mean and in this case down to the mean then overshoot as they invariably do!
Price to dividends are now 117% above their average. Unless one believes that we are now at some new permanent high (then returns will be permanently low as well) stocks are now at a speculative high.
J. Paul Getty Quote!
Stock Market - "For as long as I can remember, veteran businessmen and investors - I among them - have been warning about the dangers of irrational stock speculation and hammering away at the theme that stock certificates are deeds of ownership and not betting slips.
The professional investor has no choice but to sit by quietly while the mob has its day, until enthusiasm or panic of the speculators and non-professionals has been spent. He is not impatient, nor is he even in a very great hurry, for he is an investor, not a gambler or a speculator. There are no safeguards that can protect the emotional investor from himself."
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 09/1/14
DYI
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