Yesterday’s message outlined how 40 years ago Merri and I began adventures that have led us to live, work in and visit over 70 countries….plus how it led us to a 6,514 miles drive around the United States and left us dashing off Mount Hood headed to Lakeview, Oregon. If you missed it, see that message www.garyscott.com/international_investments/international_investments_97.html
Lakeview is flat and dry as you can see from this picture at http://www.lakevieworegon.us/Tour/Tour10.html
The country looked quite poor except where there was water. By the lakes the land shifted from poor to rich. In the dry areas there did not seem to be much utility in the land at all.
This made me think about two golden rules of property investing. “Buy near water” and “Look for utility change.” I’ll deepen these thoughts as we go.
As we rolled along I thought first about the changing utility of land. One of several reasons for our journey was to look at a batch of condos in Portland. A good friend who has been building houses for nearly 40 years had built them and told me that the market suddenly dried. Our reason for looking was to ask, will buyers come or not? At what price will they come?
We were thinking about buying the condos to rent and hold.
The burning question to me was will the US housing market drop further or not? There are a number of reasons I think not.
One reason is America’s population growth. As mentioned yesterday this was a significant journey in part because while we drove the US population hit 300 million people. America trails only China and India in population and is the fastest growing industrialized nation!
A USA Today article “Where will everybody live?” By Haya El Nasser outlines three significant facts about this.
First, the American population has risen from 200 million to 300 million in 39 years. At present growth rates the next hundred million will come in only 34 years!
Second, today each American owns 20% more developed land (housing, schools, stores, roads) than 20 years ago. By the 1990s 1.7 acres of land was developed for each additional person.
Third, these 100 million additional people will need 70 million new homes and 100 billion square feet of non residential space.
In addition to this I thought construction costs are not going to fall! Normal inflation and increased demand from emerging markets for cement, steel, timber and other basics assure this. Plus environmental concerns will continue to slow acceleration of supplies as well.
Another reason is that a lot of US real estate is changing utility. For example my mom’s home which was once the bastion of suburban WASPs is now filled with Mexicans, Chinese and Ukrainians. Our builder friend tells me that at least half his home buyers are first time immigrants who use a family plan (the whole family comes over pitches in and buys a house). This means that a single house is once again becoming more popular as a place for two, three or even four generations to live together rather than just one.
House lots used to be 5,000 square feet minimum. Now they can be 2,500 square feet. That’s a big change in utility.
Technology is altering the concepts of time and space so…property (like the farm we live on) that was once pretty useless, or land in the desert like the dry part of the land in southeast Oregon suddenly has a new utility. This is especially true for tens of millions of boomers who will be highly mobile when they retire.
Next, we need to compare US property prices in global terms. Sometimes the forest is hard to see because of the trees and real estate values are hard to see because of local comparables.
Prices of housing in the US may seem high, when you compare them with US house prices of five or ten years ago.
What happens when we compare US real estate prices to those in other industrialized countries like France, England, Denmark and such instead? The thought. “We ain’t seen nothing yet” may arise!
Let’s do a comparison. The condos (my friend built) that I was looking at in Portland were three bedroom, two bath homes of about 1,500 square foot. The asking price for each unit is $229,000. Plus they have a special tax abatement feature for ten years (essentially no property tax on the building for a decade). I looked around Portland in other areas at older house of about the same size, but with yards. Prices rose a bit up to $299,000 and even $359,000 for places that had been built 40 and 50 years ago.
Wow! I bought my first house, albeit only two bedrooms and one bath for $12,500. Are people willing to pay so much for a house?
Let’s compare this with some homes of about the same size that we may have passed on our drive. These prices come from local multiple listing services.
I started with Lake Tahoe. This area is nice!
The first listing I found in this area for a three bedroom, two bathroom house of about 1,500 square feet reads:
Bijou – 3 bedrooms, 2 baths, 1508 square feet. Do you want to be close to everything? There’s No Substitute for Time. Minutes from skiing, the beach, shopping, golf, LTCC, this is the place for vacation rental or second home!!! Don’t wait. $399,000
Then I looked nearby but away from the water in Nevada and saw that prices drop.
Nevada – Home Sweet Home! Rambling Rancher on Quiet cul-de-sac. 1501 square feet Roomy & comfortable 3 bdrm., 2 ba., sunroom/atrium leading to delightful fenced yard. .16 acre, oversized garage (small garage door) with storage! $299,000.
So maybe people are willing to pay around $300,000 for such an average home and even more in nice areas.
Can they pay more? Let’s look abroad.
I began in my old stomping grounds, London. Here’s the first listing I found there.
Central London – 3 bedrooms , 2 baths, 1803 square feet. An immaculate apartment set over the ground and lower ground floor of this popular garden square. Ennismore Gardens is one of London’s most sought after residences with a gated communal garden for residents, and located just a short walk from Hyde Park and the excellent amenities of Knightsbridge. $3,600,000
Another place I lived for years is Hong Kong and in a quick search I could not find an exact 1,500 square footer most were double the size (at double the price of the little apartment below). I found one little apartment that’s close. The listing reads:
Hong Kong, St. George Apartment, 3 Bedrooms including 1 Ensuite, 2 baths, 1,398 sq. ft. Price: HK$11,000,000. That works out to about US$1,415,701.40. Perhaps you could negotiate down the 40 cents!
Paris left me confused for a bit. Perhaps it’s my very bad French. The listing read:
Near Paris. Relax and rejuvenate in elegant surrounds. 40 acres of safe and walled private garden estate near Paris. Beautiful Chateau views and golden sunsets. Charming spacious 3 bedroom 2 bathroom home of 1206 square feet. Elegant sunny living. The price was a mere $115,200.
I was ready to catch a plane until I noticed the small print. That’s for an interval ownership and that price buys 6.5 weeks a year.
Though US real estate may seem high when viewed from the ground, you need a Birds Eye Vue! With broader horizons you see what good value American property still represents.
Consider one more fact. The US dollar is likely to fall versus most of the currencies above which will make US real estate even cheaper in global terms.
I was reminded of 1980 when I bought a beautiful five bedroom house in London for $34,000. Prices there had been depressed for six or seven years (as they may be depressed here now). They didn’t fall a lot but during inflationary times did not rise either. Suddenly they exploded. I sold that house a couple years later for over $200,000. See https://www.garyascott.com/archives/2001/12/20/455/
That profit was made in part by property price catch up and partly by currency parity fluctuations.
Add to this the fact that industrialized governments have shown a total willingness to keep interest rates low and print money as fast as it is needed. Plus the 100 new people will create (according to USA Today) 73 million new jobs.
This looks like a formula for higher property costs. Demand is growing at an accelerated pace. Supply cannot keep pace.
If this is correct, dips in real estate prices, as we are seeing now create special opportunity…especially when interest rates are low.
All these thoughts were randomly bouncing round in my mind as we crossed the Oregon border into California and sped down Highway 395. I emphasize the word sped. Perhaps my mind was dwelling too much on property values and not enough on the speedometer. Or perhaps I should blame the Japanese. After having owned four Chrysler minivans in a row this last fifteen years we switched to a Honda Odyssey. This is a great car, but though the engine is no bigger than in the Chrysler, it packs a lot more horse power and all too easily sneaks to 80 without interrupting a really smooth ride.
Nah, it was my fault. I was not paying attention. The land around Highway 395 is remote stuff! Almost all is ranch land, some rich, some not. Long straight roads, a 65 miles an hour speed limit, and no one around but the rabbits and deer all lull one to ignore the speed…except the one officer of the California Highway Patrol in his Ford Expedition.
He very politely reminded me about driving safely. Since this was my first citation in 13 years and it really did make me think about my speed for the rest of the trip, I am thankful. I also commend the patrolman. He was very friendly and most courteous. Just in case you drive through there, take care. Patrolman Schmidt may be watching for you.
We cut off the highway long enough to skirt Lake Tahoe and lunch in a park there. As glorious as Coeur d’Alene Lake, both are must have picnics.
From there we hugged the mountain chain that is home for King’s Canyon, Sequoia, Yosemite and numerous other National Parks. We did not have time to drive up through the passes and visit but the lack of traffic suggested that October’s a good month to visit these places.
We left 385 at Inyokem, dropped southeast to Barstow in the Mojave Desert and spent the night before getting serious about shifting some miles.
From there joined I-40 and stayed there adding nearly 2,000 miles in two days. We raced through New Mexico, Texas, Oklahoma, Arkansas and into Tennessee in one day (while observing the speed limits). I’ll make some bold observations about farm houses and Oklahoma based on this part of the trip in tomorrow’s message.
Until then great journeys to you, wherever you go and wherever you are.
P.S. Learn how we turned $10,000 into $21,416.98 in 2006…with one of the world’s safest banks….during the worst market downturn in a decade. Join Merri me and Jyske Bank in Ecuador November 10-11 and 12 (we have four spaces left). See https://www.garyascott.com/catalog/IBEZec/
And learn why we (and you too) might do even better next year.
The MultiCurrency Sandwich has been a phenomenal way to invest for over three decades. Since the end of the US dollar’s link to gold the fluctuations between currencies have created some of the world’s greatest (such as George Soro”s) fortunes.
Our final analysis for our last year’s MultiCurrency sandwiches is in and one portfolio is up 114.16% in the last 12 months. You can see it below.
Another great, very exciting Sandwich has lasted nearly two decades. Back at the end of 1988, the yen hit dizzy heights in the 120 Yen per U.S Dollar range. Yen interest rates dropped into the low 4% range. This created a classic sandwich opportunity. The yen was a strong currency at an all time high with a low interest rate. This is the formula that MultiCurrency sandwich investors always looks for.
Now, twenty years later the yen is still in the 120 per dollar range and the interest rate has fallen as low as 1.62%!
This is why we and Jyske Bank have been helping readers learn how to borrow yen at low rates and redeposit the loans in other currencies at much higher rates (without forex loss) for 17 years!
This has helped many of my readers become rich. One such reader just sent me this note which I have reproduced unchanged in any way.
“Gary, I am a long time subscriber in various media, and while cleaning out my files today I found some old “Gary A. Scotts World Reports”. In particular the April 1988 issue provided the info that made me over a million dollars. Just wanted to say a belated ‘thank you’ and please continue the excellent work. Warm regards,”
So Borrow Low Deposit High really works and believe it or not can be used with some of the world’s safest banks. This is not some fast moving trading technique. In fact most Borrow Low positions are aimed with a five year horizons….pretty sleepy compared to people who trade currencies (an entirely different approach).
This is good. For most of us, slow and sleepy mean SAFE!
However as you have seen the Borrow Low Deposit High tactic can be really profitable.
How sleepy and safe can it be?
Imagine this. Over the past 17 years, the cost of a Japanese yen loan has averaged about 2%. The US dollar interest rate has averaged 4% over this same period. If one invested $100,000 in safe US dollar bonds or CDS held in huge, safe banks for this period and used this loan as collateral to borrow $400,000 worth of yen to reinvest in safe US dollar CDs or bonds, they have earned an average $12,000 a year and turned a safe 4% investment into a safe 12% investment. They added an extra $144,000 of income (on a $100,000 investment) over the 17 years!
Investing for 17 years in US dollar bonds or CDs is about as sleepy and safe as one can get.
Now imagine how safe this would be if you could hold these bonds at one of the safest banks in the world? I’ll introduce such an institution in a moment. First let’s look at potential profit.
Many smart Multicurrency Sandwich investors have done much, much better than the returned gained above with bonds.
How much better?
Take for example last year. Our email Borrow Low Deposit High Portfolio Learning Service developed and tracked five model portfolios beginning October 21, 2005. We reviewed them bi-weekly through the year.
During mid 2006 we had to cope with the second worst emerging market crash of the decade from March through July 2006. Despite this we have came through the year satisfied with the results of these real time, case studies.
The performances of the five portfolios from October 21, 2005 to October 21, 2006 were:
|Emerging Asia Portfolio||+ 114.16%|
|Emerging Currencies||+ 43.08%|
|US Dollar Hedge||+ 11.11%|
|US Dollar Long||+ 8.72%|
|US Dollar Short||+ 10.23%|
$10,000 invested in the Emerging Asian portfolio grew to $21,416.98.
Is this enough better?
Let me hasten to add that this type of performance is easy to write about when looking back. I do not want you to ignore the fact that as sleepy and safe as Borrow Low Deposit High can be that there can also be risk. Had we invested in some of the portfolios above in March or April 2006, they would have lost money by October 2006.
Some financial writers promise guaranteed huge profits with no risk. There is no such thing!
This is why our report do not make investment recommendations but are used to learn so we better know how to profit and how we can also lose. We provide a badly needed objective educational service that helps us learn what to do as well as what to avoid.
For example our readers learned about risk in 2006 when the Emerging Asia and Emerging Currencies portfolios took off like rocket ships. We began late October 2005. All five portfolios strongly over performed their projections with the Asian portfolio jumping up over 80% in a matter of months!
Then in April 2006 the second worst emerging market collapse took place. All five portfolios plummeted for three months. We hung on and all the markets recovered. By year’s end the impressive perfomr4ance above was achieved. The three dollar portfolios gained less than projected, but still beat any US dollar, Euro or Western European currency bond yield or CD interest and few portfolios outperformed Emerging Asia or the Emerging Currencies.
The price for this extra performance was the volatility….the fee tenacity. These are valuable lessons.
This last year taught us other valuable lessons as well.
For example one interesting lesson is about the most profitable investment in all five portfolios. With the Asian portfolio doing so well, one would assume that the greatest profits came from the Chinese or Indian funds held.
Not true! One of the most profitable (in percentage terms) investments was in the Jyske Invest Eastern European Equity Fund. From October 21, 2005 to October 21, 2006 that fund rose from $51,000 to $76,138, a return of 49.29%. Had you leveraged this loan two times with a 2.75% Swiss franc loan, the return on a $10,000 investment would have been over $14,237 or 142.37% return in one year!
This Jyske Fund has also performed really well in the last five years, up from 110 euro to 500 euro since 2001. That’s an increase of 3.54 times. If you had invested $100,000 and borrowed $200,000 more in Czech koruna at 3.75% and invested in this fund for the past five years the initial $100,000 would now be worth over a million dollars! Your loan costs would be $37,500. Your profit on $100,000 after interest would be $1,024,500 on $100,000 of cash invested.
How much better can we ask than that?
Based on this we are adding several new portfolios to track and learn from over the next year. One of these portfolios will be an Eastern European Emerging Portfolio leveraged with a Czech Koruna loan.
The portfolio will borrow Czech koruna and invest the loan in the Jyske Invest Eastern European Equity Fund which is invested in Eastern European markets including Russia and Hungary as well as the Czech Republic. The Czech Koruna appears to be a good currency to borrow at this time. Its interest cost has dropped to a low 3.75% and has recently flirted with all time strength against the euro. Overly strong currency loans tend to fall and create extra forex profits (as they become cheaper to repay).
Another portfolio we’ll add is a Dollar Shorter Portfolio. This will differ from last year’s dollar short portfolio as it will be more aggressively anti the greenback! This will be the real thing with a 100% dollar loan and no USD investments. Investors who fear a US dollar collapse will want to follow this trend.
We’ll also add a Swiss Samba Portfolio. This will be a portfolio of Latin investments leveraged with a Swiss franc loan.
This Swiss Samba portfolio makes great sense now. Over the last year the region of Latin America outperformed the other two emerging regions. Latin America Morgan Stanley Capital Index is up 17.4 %. Asia is up 15.2 % and Europe/Middle East/Africa (EMEA) returned 4 %.
Our $50,000 model investment in the Jyske Invest Latin Equity Fund rose to $70,538, a return of over 40%. Should this region continue to boom the performance in 2006 could be even greater.
There are more important lessons we shared this last year. For example our Borrow Low Educational Service followed five different philosophies, one for investing in Asian, another for emerging markets and then three tactics
We will introduce these new portfolios at our International Business and Investing Made EZ course in Ecuador beginning November 10, 2006. To join us go to https://www.garyascott.com/catalog/IBEZec/
Can’t make the trip in November? Subscribe to our Borrow Low – Deposit High Educational Service and see the new portfolios in our next MultiCurrency Update. See https://www.garyascott.com/catalog/bl/