Bye Bye Lehman?/ Is 2010 The Time to Buy a House?

Rumors are swirling around the street that Lehman is going to get acquired. I have heard the price may be in the $15 area but I have been unable to confirm it. Lehman dropped another 10% in today's trading. Something is up boys and girls.

Bloomberg even reported the news today.

"Lehman Drops to Eight-Year Low on Sale Speculation (Update1)
By Jeff Kearns

June 30 (Bloomberg) -- Lehman Brothers Holdings Inc. fell as much as 11 percent to an eight-year low on speculation the fourth-biggest U.S. securities firm may be sold for less than its market value, traders said.

Lehman lost $2, or 9 percent, to $20.25 as of 3:06 p.m. in New York after earlier declining to $19.81, the lowest since May 2000. Options traders increased bets that Lehman will continue its retreat. The most-active contracts were July $20 puts, which gained 66 percent to $2.13.

``We're hearing that there may be a possibility of Lehman being taken over,'' said Michael Nasto, the senior trader at U.S. Global Investors Inc., which manages $6 billion in San Antonio. ``There hasn't been any positive news on this firm for the last couple weeks and the value of the deal might not be in the best interest of Lehman shareholders.''

My Take:


The market continues to beat down the financials. Since we are very oversold at these levels, I predict we are about to see some type of "event" in this arena. Something is going down folks. Will that surprise be Lehman? Will WAMU or Indy Mac go under or be acquired? Will MBIA go belly up?

I am not sure what it is, but the daily pounding in the financials means the market is trying to tell us that something big is about to happen.

Avoid all financials. Do not try to bottom feed here. Knife catching has never been very profitable.


Housing a buy in 2010?

Nadeem from the Market Oracle thinks so:

Nadeem's prediction:

"By the end of 2008, the annual rate of house price falls should slow to about 13%. Whilst it is not possible to forecast a bottom in the US housing market at this stage of the bear market, it is possible to come to the conclusion that most of the decline in nominal house prices is now behind us on the basis of analysis of the continuing decline in real-term house prices which suggests that a stabilising US housing market during late 2009 and 2010 will mask the continuing real terms inflation adjusted fall in the housing market valuations for several more years that will in effect have the impact of eroding all of the gains since the 1989 peak and reducing the gain from the 1994 low from 131% to just 40% by the end of 2010 as the below graph illustrates.

US House Prices Forecast Summary - Nominal US House Prices are forecast to fall by 30% from the Mid 2006 peak by the end of 2010, or a further 11% on the decline of 19% to date. US house prices will continue falling in real-terms even if a low in nominal house prices is made by mid 2010."

Quick Take:

I think 30% peak to trough price drops is a little on the light side in the bubble areas. I thought this chart did a great job of showing how severe the housing bubble was in historical terms.(the black line is the housing prices).

Whats depressing here is Nadeem thinks when you include inflation, housing will lose all of its gains from the 1989 peak. That's a 0% return on a 19 year investment.

If you bought at the lows in 1994 after the last bubble busted, your equity would have dropped from a 130% gain in 2006 down to only a 40% gain by 2010 as prices continue to fall and you adjust for inflation.

So lets take a long term look at the real return on housing as an investment including inflation if you bought at the bottom in 1994. a 40% gain over 16 years comes out to about a 2.5% return on your investment which is the historical average in housing.

Getting rich in real estate is nothing but a pipe dream.

So the next time that realtor a tells you "Now is the time to buy! Prices are down!" put a sock in her mouth and tell her to call you in 2010/2011.

You may ask why does the effect of inflation have such a negative effect on your housing investment? Just think, if you own a house that on average is rising in value at 2.5% annually and inflation is running at 5-10% annually, you are essentially losing money on your house each year.

Now is not the time to get into the flipping business!!

Sit back in your rental and relax. It will be a few years until housing will be attractive to own. Please don't ever think of your house as a good investment in the future. Its a place to live. Always remember that unless you like investments that return 2.5% annually.

You can invest in a CD and beat that return.