If you haven’t noticed, I love trading in extremes. It really doesn’t matter what the asset is or if we are talking about extreme bearishness or extreme bullishness. Extremes are when you can buy or sell assets at favorable levels because people lose their senses.
Extremes are great because you can see them developing from a mile away. Usually extreme asset moves culminate in either a spike low or a spike high. It is at these spike lows and highs that the smart money gets positioned in a big way. In the current economic environment, I am seeing extreme moves developing in U.S. government bonds and real estate. The 10-year just dropped below 3% today, and I am very close to going short. Meanwhile, the surge in negative sentiment following the confirmed double dip in housing is pretty extreme.
Hate for Real Estate?
Bill McBride over at Calculated Risk has recently written that he is seeing the beginnings of a shift in sentiment in real estate towards hate. He’s experienced a couple of major downward cycles in real estate, and bottoms in his opinion are usually characterized by this “hate” of real estate. While he did note that the “hate” could last for years, this is just something to keep in mind.
I get the sense that you will be hearing a lot more about housing in the months ahead as sentiment sours. So many more people are now making the call that it will be years and years before housing mounts a recovery. In fact, according to Trulia.com, only 15% of American adults now think housing will recovery in 2012- down 44% from November 2010. This is a market that people are quickly losing faith in.
Real Estate Priced in Gold
Assets should be judged based on relative valuation- this provides perspective. A lot of gold bugs, including myself, use the Dow/Gold ratio as an indicator of relative valuation. In theory, the same type of comparison can be made between real estate and gold. If you chart the data, you’ll find that the home price/gold ratio has fallen quite dramatically the past decade. But people are choosing now to be intensely bearish on real estate? Why not 2000, 2001, or 2002 when the ratio was extreme to the upside?
This particular ratio, in my opinion, doesn’t have a lot further to fall. Since I think gold is going to rise much higher, it stands to reason that real estate will rise as well. 2012 is a very reasonable target for a recovery in prices.
We are entering a period where I believe people will have an unjustified fear of deflation coming from the perceived end of quantitative easing. To me, this is one of those classic “buy the rumor, sell the news” moments. I am patiently watching these trends develop until I feel it is the right time to take the opposite side of the trade.Follow