Paul Dietrich's Global Investing Trends Report

What Is Happening To The Housing Market?

Posted April 10, 2008 · 1 Comment



I am pleased to provide you with FOXHALL CAPITAL’s 2007 Investment Performance.

For reference, the S&P 500 INDEX in 2007 was up 3.5% in price terms and, if you include dividends, it was up 5.49%.




INVESTMENT                                   PEFORMANCE          EQUITY/BOND

STRATEGY                                                                            PERCENTAGE


GROWTH                                             8.88%                         100%/0%


GROWTH & INCOME                           5.56%                          75%/25%


BALANCED                                         7.60%                           50%/50%


CONSERVATIVE                                 6.14%                           25%/75%


GLOBAL HARD ASSETS                     21.98%                             -


PACIFIC RIM &                                    20.82%                              -



STRATEGIC 50/50*                              6.07%                         4th Quarter only


*(Our newest strategy 4th quarter results vs. –3.33% for the S&P 500 including dividends)


Past Performance is not indicative of future performance.  The indices are unmanaged and investors cannot invest in an index directly.  Please visit for compete information on each investment portfolio.  




In the last edition of the FOXHALL GLOBAL OUTLOOK, I suggested that this current bear market and recession would last for at least two more years. It now seems the FEDERAL RESERVE agrees.


At the March 18th FED meeting, their just - released board minutes stated that, because of the credit and housing market problems, the economy could face a “prolonged and severe economic downturn.”


Several weeks ago, another FEDERAL RESERVE report stated that the most serious lending abuses in ADJUSTABLE RATES MORTGAGES (ARMs) took place within the last 18 months. Most of those ARMs have not yet triggered their higher rates.


The report stated that the worst of the housing foreclosures was still to come and that most of these foreclosures would reach a peak in the second half of 2009 and the first half of 2010.


We face the prospect of seeing one story after another on the nightly network news in late 2009 and early 2010 where banks will be auctioning off foreclosed homes on the steps of local courthouses and there will be no buyers.




Last week I had lunch with a major Miami real estate developer. He told me there were currently 20,000 unsold new condos in Miami today and another 20,000 are in some final stages of being built over the next 18 months. That is an unsold inventory of 40,000 condos.


In Miami’s best years in 2005 and 2006, developers ONLY sold 5,000 condos a year. It will take developers 8-to-10 years to unload the current unsold inventory of new condos and it is the same story in many other areas of the country.




Until recently, homes have not been a great investment. Professor Robert Shiller of Yale University has a very depressing graph showing the price fluctuation of the standard American home for the last 116 years. This graph is the price of existing homes, not just new homes, adjusted for inflation.


For example (see graph 1 below), had you bought a standard American home exactly 100 years ago in 1908 when prices were kind of high, you had to wait until 1946 to get

your money back. That means a couple who were 25 years old in 1908 had to wait until they were 63 to break even on the purchase of their house. THAT’S 38 YEARS!


And according to Professor Shiller, people were OK with that. “Housing was something you bought because you needed it and you wanted to live in it. It was not really an investment,” he told an ABC News reporter.


Even more recently, from 1953 to 1978 for 25 years housing prices went up and down within a very narrow price range. Until the last 10 years or so, people didn’t count on homes to make them rich. This concept of “homes as an investment” is very new, because over the past 10 years our homes did make us richer.


Graph 1




This all raises the important question, what happens now?


If you look at the graph and the historically steep climb housing prices have shot up to since 1997, is this a massive economic bubble that is in the process of deflating like tech stocks after 1999? Will prices fall all the way back to the century long middle range of the graph?


That is what happened in Japan in the early 1980’s. They had a property boom and then prices fell for 15 consecutive years.


Can that happen to the U.S.? According to Professor Shiller that is a real possibility. He says, “We have a new culture now. People see homes as primarily investments. It is a very different way of looking at housing. I think it will be very volatile for a while.”




This graph tells us that home prices DO NOT always rise and in 116 years we have NEVER been in a situation like we are now. Again, according to Professor Shiller, “This is the biggest boom we have ever had. We are in completely uncharted territory here.”




The FEDERAL RESERVE now believes the current bear market/recession will be “prolonged and severe,” and since we are also in uncharted territory because of the current banking, credit and housing crisis—with the worst of housing foreclosures yet to come according to the FEDERAL RESERVE.


Given these extremely turbulent times, it is very important that all of your investments are firmly protected to withstand anything the stock market throws at you over the next two years.


That is why we believe that a defensive investment strategy like we employ at FOXHALL CAPITAL is the best way to manage your investments in this very uncertain economic period. There are economic periods in bull markets when it pays to be a little aggressive. But not now—this is a time to be prudent and careful.


Now is the time to have all of your investments in inflation adjusted U.S. government bonds, gold, oil and other commodity funds that have historically performed well during past stock market downturns and recession. This is the time where you want to sleep well at night and not have to worry about whether the stock market is going up or down, because your investments are being actively managed in a FOXHALL DEFENSIVE INVESTMENT STRATEGY.


Until next week…



—Paul Dietrich



Disclosure: The opinions and portfolio information provided in the Foxhall Global Outlook are subject to change at any time, and are not to be construed as advice for any individual nor as an offer or solicitation of an offer for purchase or sale of any security. Client accounts may differ from model allocations due to many reasons. All investment strategies offer the potential for loss as well as gain. Individuals should consult with their financial professional to determine an investment strategy appropriate for their objectives, risk level, and time horizon prior to investing. Past performance is not a guarantee of similar future performance.



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About Paul Dietrich
Paul Dietrich is the Chairman, CEO and Co-Chief Investment Officer of Foxhall Capital Management, Inc. (Foxhall).  Foxhall currently manages investments for individuals, mutual funds and private institutions throughout the United States. Paul Dietrich is also a portfolio manager to a publicly traded mutual fund, the Foxhall Global Trends Fund.
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