Bubble Files, Part 2: How to Spot a Housing Bubble and Sell Before the Peak

Editor’s note: Recently, we sat down with Lee Adler to take a deep dive into his real estate background and experience. He shared with us how he identified the housing bubble of the 2000’s and what warnings signs he saw in leading up to 2007/2008 financial crisis. So today, we want to share with you a recording of our conversation with Lee, as well as the transcription (reorganized). (For Bubble Files part 1, click here). And to take full advantage of a real estate profit opportunity in an all-star stock at a bargain-basement price through a brand new service, click here. It can be considered one of the safest REITs we can buy because the tenant base never misses a rent payment, as it operates within the only sector that is pretty much guaranteed to grow and cannot run out of money.

In 2005, as the prices in housing were going crazy, and as sales volume was at radical levels, I sold my house in Florida.

In other words, I cashed out on my housing investment at nearly the perfect time, just before selling opportunities had dried up and the housing market completely collapsed.

I had bought my house at the bottom of the market in 1991 because I saw the discounts – and because of the panic at that point, the value was just too good to ignore!

By 2005, the price of my house had tripled from the price that I had paid for it. And I had bought it with virtually no money down. So I was sitting on a tremendous profit.

I had become increasingly nervous about the state of the market, and felt like I just wanted to grab the money and run.

And run I did!

I allowed the market shake out over the next few years, and it turned out to be one of the best decisions of my life.

So today, I want to reveal to you a similar opportunity – a housing bubble that we are nearing the end of right now – and show you how you can profit.

But first, a little more about the previous bubble…

A Glance at the 2004 Housing Bubble Warnings Tells Us to Sell Soon

The idea that nobody saw the 2007 crisis coming is sheer nonsense.

I was running a fairly active message board at the time. There were other bearish message boards out there, such as Prudent Bear Fund’s Bear’s Chat, and tens of thousands of people were frequenting them. And they were warning of the gathering storm, the coming crisis.

Critical: Everything you need to know to weather this market storm

So there were a lot of ordinary people who saw what was going on in the market, and many of them were too early. People on my boards were complaining about the rapid rate of price ascent as early as 2003. I felt that is was safe to stay in at that time, that the trend was intact.

And then in 2004, I started writing that we were 18 months away from a peak. And I was basing that on past patterns of other bubbles that last four to five years from the time that they emerge from their base pattern. So at that point I thought – well, we’re three years into this, we maybe have a year or year and a half to go. So I began to write fairly stridently that we were in the end stages of it. Most of the people that I was talking to were in complete agreement, although not necessarily selling their own houses.

I think we’re in an analogous situation today. I’d think about taking the money and running. If you’re a retired “empty nester,” this is as good a time as ever to get out.

Given the slowing in volume, the rise in mortgage rates, and the tremendous housing inflation we have already had – house prices all over the U.S. are much higher than they were at the top of the previous bubble – I think it’s a good idea to get out of the housing market again and rent for a while.

Housing inflation has been driven by the mortgage subsidy under the Fed’s QE program in which they were buying up mortgages. Right now, I think it’s inevitable that mortgage rates will head higher. Wages are not keeping pace and the affordability problem is growing.

Nevertheless, what we’re seeing now is different. We don’t have the fantastic bubble move of 25, 30, and 35 percent that we were seeing in 2004 and 2005. But we’ve had a consistent 6 or 7 percent annualized inflation rate going back to 2012. That has pushed prices to a very high level.

But the only reason that the market has been able to sustain it is that mortgage rates went to record lows. The net result is that the monthly payment remained consistent with what it has been in the past. As the interest component of the monthly payment goes up from here, the principal component will have to go down. So I believe that over the next few years we are going to see higher mortgage rates and lower prices as a result.

So that’s what I was seeing at that time, and how it relates to what we are seeing now. The warnings were fairly obvious to everyone following my work at that time, and the only ones that pretended they didn’t see it were the policy makers. There were a few economists that were sounding the alarms. But mainstream economists are generally worthless in terms of telling anyone to sell anything. And the Wall Street establishment will never ever tell anyone to sell anything.

So if you expect even the economic, political, banking, academic, or media establishments to ever send a warning, then forget it! There are of course the permabears who are always bearish, but you have to look at those people skeptically as well.

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To Know When the Housing Market Has Turned and How to Reinvest, Follow This Advice

I was in tune with the housing market when it turned positive back in 2012.

Bob Shiller, the Nobel Prize Winning economist who supposedly had been the only one who predicted the crash – although he was one of millions who had predicted it – was still bearish on housing in 2011.

But there’s really no secret to the recovery process. You can see the housing market turning. It’s just a matter of paying attention to them and observing the degree of disconsonance between the reality and what mainstream analysts are saying.

I reinvested the money fairly quickly in an emotional decision to buy a property in my wife’s hometown in Canada at that time. I made that decision based on a desire to be close to the family.

There are two kinds of decisions we make in life. We make decisions from the heart and we make decisions from the head. I made a decision from the heart – and while it was a bad investment, I’ll never regret it. As long as we are clear that we are making an investment of the heart and that it’s going to turn out to be something worthwhile, then it’s possible to justify a loss in the investment.

The lesson is that we need to always be cognizant of the risk that we’re not jumping back in too soon, that we’re making an investment decision from the head. I don’t have any regrets, but when you have that money after you cashed out, be careful not to let that money burn a hole in your pocket. Sometimes the right thing to do is sit and let that cash do nothing. So I’m counseling patience.

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Rather Than Buy a House, Consider These Precious Metal Stocks Instead…

As for right now, as I have said already, my advice to people is to avoid buying a house from an investment standpoint at this point. Now is a good time to sell, not to buy. If you’re planning on going in and expect to be in the property 15 to 20 years, then maybe it’s okay.

My advice to people who are buying today is to consider not just the fact that prices are liable to depreciate, but also the tremendous cost of ownership, the interest cost relative to rent. Do a rent versus buy comparison.

But everyone’s situation is different. So I wouldn’t make a statement that absolutely everyone shouldn’t. But I would give a lot of consideration to renting for a period of 1 to 3 years before buying a house.

I think that if we’ve been in an environment where prices are rising radically for 3 or 4 years, we have to look very skeptically at that. We are probably in the final stage of a bubble.

The stock market certainly met that criteria as of January of this year. And in September we came back to the highs again, so I think we have to look at movements like this very skeptically.

We have to look at the duration and shape of the bull market that we’ve been in. Regardless of whether it’s stocks, commodities, housing, or bonds. Those kinds of parabolic moves are not sustainable.

In terms of where to invest today – well, gold has crashed. And gold mining stocks have crashed. So we may be able to start looking at that for signs of a buying point.

I’d be looking for opportunities to buy the precious metals in the months ahead, and I’m definitely feeling that I want to stay away from stocks at this point, although maybe we can hedge with buying a few calls to participate in whatever upside is left.

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Sincerely,


Lee Adler


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