August 2008 Charleston Market Report

8/9/2019 August 2008 Charleston Market Report

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www.charlestonmarketreport.com

August 2008

In This Issue:

Carter Real Estate Center

BanksCartoons

Scary Stat of the Month

Rules for Living from Nassim Taleb

Schizofrenic Stock Market

The Dollar, Oil and Commodities

Charleston Real Estate

Super Bubble

Tri-County Real Estate Stats

Hello everybody. I am in a good mood today because summer is almost over and that means college footballwill be starting soon. I love the fall and college football. Unfortunately I am a glutton for punishment growingup a Gamecock fan but our team is looking good this year....we hope. The only problem is we play in the SECEast with Georgia, Florida and Tennessee. The SEC West has Auburn, Alabama and LSU. The SEC is a toughconference but the competition is fierce and there is nothing better than drinking a cocktail while you watchsome college football on a Saturday afternoon. Just like the competition being tough in the SEC it is alsodifficult if you are a real estate or stock investor. If I use the analogy of a football game the real estatemarket has clearly been on defense for some time as home prices continue to drop in most areas of the countryand certain sectors of the stock market are on offense believe it or not. I will discuss this later in the newsletter.

Carter Real Estate Center at the College of Charleston

Speaking of college I had deja vu last week as I went back to my alma mater the College of Charleston to meetwith Dr. Tim Allen. Dr. Allen is the new Director of the Carter Real Estate Center at the College ofCharleston. He has a very impressive background in real estate and has experience as a real estate broker,author of real estate text books and appraiser. We had a great conversation and I am happy to announce theCharleston Market Report and the Carter Real Estate Center will be working together in the future oneducational issues related to real estate. Dr. Allen and his staff have some exciting speakers that will be visitingthe college and most important a very comprehensive educational format that will give students at the Collegeof Charleston an excellent foundation to enter the real estate world after graduation. The program at the CarterCenter is not a major but rather a concentration in real estate. This program is designed to give students theopportunity to have a future career in real estate which could include working for a Public REIT, lawfirm, research or consulting. As many of you know there is much more to a career in real estate than being a


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real estate agent and this program is designed to give the CofC students exposure and education to futureopportnities in this profession.

I know this newsletter goes to many local and out of town professionals who are involved in the real estateprofession. If you have a son or daughter preparing to go to college and looking to follow in your footsteps Iwould encourage you to check out the Carter Real Estate Center. There will be much more info in the futureregarding this new and exciting program.

If you are in Charleston and would like to get involved with the Carter Real Estate Center and see an excellentspeaker I would encourage you to attend the inaugural event on August 26th from 6 to 8pm. The information isbelow and I hope to see you at the College of Charleston later this month.


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Banks

Obviously many banks are having problems right now. I would recommend everyone double check theiraccounts and make sure you are clear about FDIC and SIPC insurance. There are going to be many banks thatfail BUT there are also banks that will survive the current "Credit Crunch" and take over market share becausethey used a more conservative business model over the past couple of years. If you have a large portion of yourmoney in broker accounts then read up on SIPC. IF your money is in a weak bank it will be safer in short termTreasuries. Be very careful with some of these money market accounts and make sure the firm that holds them

is not getting you a unusually high interest rate because they are probably investing in some riskier assets thanshort term Treasuries.

Dont think all your investments outside of banks are immune from all this turmoil. For example, money marketmutual funds, where Americans have invested $3 trillion, are notcovered by FDIC insurance (however, moneymarket accounts offered by banks are covered). Recent losses in some of these money market mutual fundshave caused some companies to rush to plug the losses. For example, Legg Mason Inc. and SunTrust BanksInc., recently pumped $1.4 billion each into its money market funds. Bank of America Corp. has injected $600million.

Just do your due diligence so you do not get burned like the customers at Indy Mac. If your bank placed

to many bets on the real estate market there is a strong chance their finances are not looking to good

right now. You can use the following research site to investigate your own bank's financial picture:

Bankrate Safe and Sound Rating


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In fact in Charleston we just had our first bank shut down when the Feds seized the assets of Port Trust FederalCredit Union after it became insolvent. So you just never know ladies and gents.

The banks below are considered weak by TheStreet.com. There are a couple of banks on this list that have alocal presense in Charleston or maybe the area of the country where you live. I would recommend you do notcount on the government to bail you out of your uninsured deposits if your bank happens to go under.

Wachovia made it on this list because they purchased a horrible and aggressive lender from California namedGolden West which caused them to inherit a large amount of toxic debt. SunTrust is on the list because it haslarge exposure to construction loans and commercial mortgages in a region (Southeast) that's getting hit veryhard by the real estate crisis. I am not insinuating these banks are going to fail but they do have problems thatmay get worse. Do your due diligence and make the decision yourself. If a bank is rated a C it would be ayellow flag that needs to be monitored and a D or E rating is a red flag and I would get my money out of thatbank.

This is the ratings scale:A = ExcellentB = Good

C = FairD = WeakE = Very weak+ = the upper third of each grade range- = the lower third of each grade range

Source and Chart: Money and Markets


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Cartoons


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Scary Stat of the Month

According to Zillow.com one third of homeowners who have bought a house in the past five years now owemore on their mortgage than what their properties are worth. Yikes!!

Rules for Living from Nassim Taleb

I just recently finished reading a book by Nassim Taleb called Fooled By Randomness. He also wrote a bookcalled The Black Swan which I am going to read next. Yes, I read a great deal if you have not noticed. He feelsbanks should be more like restaurants. The restaurant business survives and thrives as the food gets better butmany restaurants come and go. Banks fail but bankers still get millions in bonuses for applying their uselessmodels. Amen! Anyway, this guy is brilliant and takes a very different view of the world that is very interestingfrom a risk perspective. Here are some notes I made from the book:* Lucky fools do not realize they are lucky fools. For instance many who made money in real estate during thego-go days just simply were in the right place at the right time.* Information can often be toxic. For example, a real estate agent using Active Listings as comps to a buyer.* Accept randomness, accept that the world is opaque, majestically unknown and unknowable. That is correctbecause none of us really know Jack shit.

* "You find peace by coming to terms with what you don't know."* Examples of Black Swans include 1987 Market Crash, Japan Meltdown of 1990, Russian Bond Blowup in1998, NASDAQ Meltdown in 2000. We can add the recent real estate meltdown, Bank implosions and LendingBubble. The main question is will we learn from these events. The answer is NO! Some people do not evenrealize what moment we are in much less how to handle it.* Many people on Wall St. are acute successful randomness fools. They tend to think they are good traders orbankers because they make a bunch of money BUT it is often randomness and they are benefitting from amarket cycle.

So many people you think are successful are nothing more than random fools. We will all find out in the yearsto come who the real successful real estate and stock investors are because it takes skill now. You can not just

ride the wave of the go-go days anymore. Many people out there claiming to be "experts" are nothing morethan dangerous idiots. They keep playing Russian Roulette and fortunately for them they keep winning buteventually they forget their is a bullet in the chamber and the randomess catches up to them. The best thing Ihave ever done was seperate myself from the Wall Street and Real Estate establishments and become anindependent thinker and not a mouthpiece for the random fools who walk around in their fancy suit and ties.The truth definitely sets you free! I would recommend the random fools try it sometime. The only problem ismany random fools do not even realize they are random fools yet.

Taleb's top life tips (These are great)

1. Scepticism is effortful and costly. It is better to be sceptical about matters of large consequences, and beimperfect, foolish and human in the small and the aesthetic.

2. Go to parties. You cant even start to know what you may find on the envelope of serendipity. If you sufferfrom agoraphobia, send colleagues.3. Its not a good idea to take a forecast from someone wearing a tie. If possible, tease people who takethemselves and their knowledge too seriously.4. Wear your best for your execution and stand dignified. Your last recourse against randomness is how you act if you cant control outcomes, you can control the elegance of your behaviour. You will always have the lastword.5. Dont disturb complicated systems that have been around for a very long time. We dont understand theirlogic. Dont pollute the planet. Leave it the way we found it, regardless of scientific evidence.6. Learn to fail with pride and do so fast and cleanly. Maximise trial and error by mastering the error part.


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7. Avoid losers. If you hear someone use the words impossible, never, too difficult too often, drop him orher from your social network. Never take no for an answer (conversely, take most yeses as most probably).8. Dont read newspapers for the news (just for the gossip and, of course, profiles of authors). The best filter toknow if the news matters is if you hear it in cafes, restaurants... or (again) parties.9. Hard work will get you a professorship or a BMW. You need both work and luck for a Booker, a Nobel or aprivate jet.10. Answer e-mails from junior people before more senior ones. Junior people have further to go and tend toremember who slighted them.

"Schizo" Stock Market

I would best describe the current stock market as Schizophrenic. It really is not making any sense when youlook at all the problems in the economy, housing industry, mortgage markets and banks. If you are currentlyconfused about the markets actions you are NOT alone. Many of the experts on TV are confused as well.Based on my experience over the past ten years in this stock market it is often the case that movements in themarket do not make sense which is what led me to studying technical analysis. TA allows me to see trends inthe economy, real estate market, interest rates, bond market and stock market which helps me make better andnon emotional decisions from a risk management perspective.

What we are witnessing right now in this "Schizo" Stock Market is what appears to be some major trendchanges. I can tell you the best thing you can do to become a better investor is to mute CNBC and quit readingand listening to the financial media. It is generally smoke and mirrors that will lead you nowhere but poorinvestment decisions.

This is a major reason I want to set up an RIA and/or offer a subscription to Model Porfolios where you canprotect your portfolio against the downside and reap the rewards when the market goes on offense. I aminvestigating right now the best way to set up this future investment service and eager to get it rolling. Pleasedo not fall for the "Buy and Hold" crap. If you have an advisor showing you pie charts, discusses Modern


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Portfolio Theory and "Buy and Hope" then your account will underperform in what is a Structural Bear Market.What I will be offering can be best described as Dynamic Asset Allocation. This strategy will put you in thestrongest market areas, sectors and stocks according to market conditions but will also shift to defense or shortthe market when the market goes down.

I can tell you the same philosophy (Top Down Approach) I use to analyze real estate was developed becausethis is how I learned to manage risk in the stock market. If you watch the news and read the financial

magazines often what you think will happen in the market does not. It is very similar to golf. The harder youswing the tougher it is to hit that little white ball. I know many of you are negative on the economy and maybethe stock market. Actually the stock market went back on offense on July 22, 2008 according to my mainindicator I use which is the NYSE Bullish Percent. I could blow your mind if I showed you what some of thefavored sectors are in the stock market right now. Many of you may be sitting in cash right now because youare nervous about the stock market. I can tell you that over the next few years the stock market will offer youbetter returns than real estate IF you have a disciplined game plan to manage risk. Most who are going to makethe big bucks in real estate are the large institutions who have the ability to buy distressed real estate at theright price. This is much easier said than done especially when you have to deal with some of these banks whoare slower than snails when it comes to making decisions.

The Dollar, Oil and CommoditiesSpeaking of a major trend changing before our eyes lets look at oil and the dollar. I know The Fed has been printing money like it isgoing out of style and you would think the dollar would continue to weaken BUT what now appears to be happening is the US Dollaris getting stronger after years of a negative trend. In my opinion, this is one of the main reasons we have seen the price of oil dropdramatically from recent highs. What about the Russians invading Georgia and that big pipeline that they are bombing? This is why Iplace less emphasis on fundamental analysis and use technical analysis. Folks, it takes billions upon billions of dollars, pesos, eurosor whatever currency the traders are using to make these trends change. Once they change they usually last a while.

Commodities has been a very stong play since early 2000 and as of July I am completely out of commodities right now. I am notsaying commodities are not coming back but there is a major correction going on right now and if I want to be long I would ratherwait until the commodity funds regroup at a lower price before I add money. This Dow Jones Commodity Index has been pummelledsince early July. Maybe this means a break from some inflation in our food and energy!

iPath Dow Jones AIG Commodity Index


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Why would I want to "Buy and Hope" as this is merely an example of another falling knife right now? Another trend I am seeing thatis confirmed by oil and the dollar is that international investments are going out of favor and US investments are coming into favor. Itmakes no sense but that is where the money is going. We are witnessing a global economic slowdown and many countries outside ofthe US are experiencing housing busts and inflation problems that may be worse than ours. Go figure!

The dollar has been in a downward trend since 2001-2002, which was when it was at its peak. The monthly momentum in the USDollar has been negative for 15 months and just turned positive.

PowerShares DB US Dollar Index Bullish Fund (UUP)

Chart courtesy of Dorsey Wright

A narrowing interest rate disadvantage between the dollar and euro or the dollar and the pound would be hugely supportive forthe greenback. The move in the US Dollar will continue to put downside pressure on commodity prices.

Ever since the dollar has begun to rally we have seen the price of oil deteriorate. It would appear that oil andcommodities are pulling back because of profit taking and a slowdown in the global economy. The

fundamental answer to the US Dollar getting stronger would be Stagflation (slower growth and higher inflation)in other countries such as the UK.

Below is a chart of the United States Oil Fund (USO). Although this fund is trading above its trend line it isshowing weakness and the Energy Sector we follow has turned to unfavorable status recently.


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Chart courtesy of Dorsey Wright


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The chart below shows a clear inverse relationship between the US Dollar and Oil. Kind of cool huh? Maybe only if you are a geeklike me. :)

Charleston Real Estate

Income growth in the Charleston region outpaced the national average last year, according to a report releasedThursday by the U.S. Bureau of Economic Analysis.

Per capita income here remains below the national average, however.

Nationally, per capita income grew 5.2% in 2007 to average $38,632 per person, compared with 5.6% growth in2006.

After an increase of 3.9% in 2006, per capita income in Charleston, North Charleston and Summerville grew ata faster clip in 2007 5.9%. But at $34,133, the average annual salary per person was more than $4,000 belowthe national average.Source: CRBJ Daily Journal

So the average couple in Charleston is making $77k. The average price of a home sold in Charleston in the 2ndQuarter is $317k. When you look closer at these numbers you can see how unaffordable housing has becomehere. The couple above is bringing home $6400 per month before taxes and approx. $4800 after taxes (Using25% tax bracket). The PITI (Principle + Interest + Taxes + Insurance) on a $285k loan (Assuming they put10%) down is going to be approx. $2000 per month. This PITI for an average priced home in Charleston on anaverage salary for a couple is 42% of their income after taxes. I have not factored in food, gas, expenses for the

kids, etc. This is simply too high. Now that the interest loans are out of favor and people are using moretraditional and conservative financing methods such as a 30yr fixed rate I just do not see how this average homesales price can hold up. Maybe that is why it has dropped 7% since the 2nd quarter of last year.

If you are looking to buy a home in Charleston compare rent of a similar home to your PITI. There are hugedislocations in price vs. rent right now. This is due to sellers and/or real estate agents being in denial. Please donot fall for this price trap. If you are not in a rush to buy and can not seem to get the right price on the homeyou want to buy then rent. I have seen places you can rent much cheaper than you can buy which would allowyou time to save up for a nice down payment as home prices are dropping. The honest real estate agent willagree with this statement and the ones just trying to make a commission will try to push you into a home just so


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they can get paid. There are no guarantees that homes will start appreciating again once we find a bottom.This real estate market will probably take years to get back to normal where you see reasonable appreciationbecause of the inventory and financing problems that have been created.

Look at the matrixes below for Single Family homes and Condo/Townhouses. Discounts keep getting larger,which means the sellers are feeling the pressure and dropping prices, inventory is in the stratosphere and Dayson Market keeps getting higher. Folks, it is going to cost you 8% to make a transaction on a house betweencommission and closing costs. Do your homework before you pull the trigger!

**One other note to you buyers. If your agent is sending you Active Listings as comps then fire them. Activelistings are not meant to be used as comps when you are looking to buy a home. I had a call from a subscriberlooking to buy a million dollar home and their agent was sending them Active listings as comps. No way Josethis is not right and will cost you money. These active listings, especially in the luxury market, could be soldfor 25-50% less than list price so why would you use an active listing as a comp? The answer is you do not.Stick with sold listings (In the past 6 months) and if their are Pending listings you will need to confirm pricewith the agent. Also make your agent check what concessions were present in the transaction which could dropthe true sales price even further. For example, the seller may have included all the furniture worth $50k in thesale, which does NOT show up in the sale price unless it is noted in the MLS or you talk with the agent whomade the transaction.

Supper Bubble

Speaking of home prices dropping you have to check out part of this real estate agent's newsletter that was sentto me by a subscriber. It's about time somebody else stuck their neck out and started telling the truth in theirrespective market.


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"We are going to have to get back to prices that seem reasonable to buyers...and the prices we

have listed today will not work."

This is true all over Charleston right now not just the beaches but I appreciate someone else saying it.

I commend this agent for being honest about the current state of his market on the beaches of Charleston. I amnot sure he was singing this tune during 2005-07 when biz was better and he was selling many of theseoverpriced homes on the beach above "Super Bubble" prices. I would also caution him against using the term"bubble" because that can get you fired in Charleston. I believe he owns his own firm so he should be ok but

we know how much offense some of the "experts" in town take offense to people using the "bubble" word whenit comes to real estate in Charleston. So if you are looking for a deal on a beach house go check out IOP, WildDunes or Sullivans Island. I would be very very careful out there in "Super Bubble Land" because prices havemuch more room to go down. Isle of Palms(IOP) currently has 5 years worth of inventory and Jumbo loan ratesare all whacked out right now so you do the math and use common sense if you feel like this trend in luxury realestate land continues. There may be some good foreclosure deals out there in the future since many of theseowners may get underwater (No Pun Intended) as time goes by.


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Tri County Real Estate Stats

Single Family Residential < $499,999


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Single Family Residential > $500,000


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Condo/Townhomes < $499,999


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Condo/Townhomes > $500,000


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Disclaimer

The research done to gather the data in The Charleston Market Report involves examining thousands oflistings. With this much data inaccuracies will occur. Care is taken in gathering and processing the data andinformation within this report is deemed reliable. IT IS NOT GUARANTEED. The real estate market iscyclical and will have its ups and downs. Past performance cannot determine future performance. The purposeof the Charleston Market Report is to educate you on current and consistent market conditions by reportingleading market indicators with the support of traditional real estate data.

This information is offered with the understanding that the author is not engaged in rendering legal, tax or otherprofessional services. If legal, tax or other expert assistance is required, the services of a competentprofessional are recommended. This is a personal newsletter reflecting the opinions of its author. It is not aproduction of my employer. Statements on this site do not represent the views or policies of anyone other thanmyself.

Investing in real estate is not a get-rich-quick scheme nor is there any guarantee you will make a profit. Everyeffort has been made to make this report as complete and accurate as possible. However, there may bemistakes. Therefore, this report should be used only as a general guide and not as the ultimate source formaking money in real estate.

August 2008 Charleston Market Report

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