Happy New Year!

I’m in the process of formulating my predictions for 2013 and should have those ready to go for next week.  I love this annual exercise, not because predictions are useful in and of themselves (they aren’t), but because the process that we use to generate them is something very relevant for the act of investing and it’s a practice we can learn quite a bit from.

While I like making predictions, I’ve never been a fan of resolutions.  Perhaps because if you have the proper processes in place, you never need to make public pledges to change your life in dramatic ways?  That said, I have some really exciting surprises planned for you guys in 2013 and I resolve to bring them to you as soon as possible.  I won’t be able to talk about it for a couple of months, but I’ve been secretly working on a new service, a separate newsletter that I think you’re really going to enjoy.  It’s a side project that was born a few years ago out of reader feedback and comments from my friends.  So far, its private audience has found it very useful and I’m hopeful that when it’s finally ready for a public audience, you’ll appreciate its utility as well.  That’s the goal, anyway.

So stay tuned this year.

Make sure you’re following us on Twitter or Facebook ^[1].

Follow @CogConcord ^[2]

But for content like ours, RSS is actually my subscription method of choice.

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It took me a long time to embrace the technology, but once I found Feedly ^[4], which I use as a browser extension and iOS app, my world changed.  When I’m waiting for takeout Chinese food, I whip out my iPhone and get the latest from all my blogs in one place.  If I’m awake with the little one in the middle of the night, I’ll pop open my feeds and be on top of things long before sun-up.

RSS is flexible, easy, and consolidated.  There are hundreds of RSS readers out there and I’ve only used a couple of them, so by all means pick the one that feels right for you and is available on the platforms on which you want to read it.  (Pulse ^[5] and Reeder ^[6]are among the most popular.)  Many of these apps are powered by the all-mighty Google Reader ^[7], which is what enables you to keep what you’ve read and what you need to read in sync through the cloud.

I like RSS because it’s non-instrusive and it allows me to get to the content when I want to get to it.  If I miss an issue, it’s no big deal.  I just get whatever’s current and if I have time, I can read as far back into the archive as I want.  Once I’ve consumed an article, it’s gone from my feed.  Thanks to the magic of the cloud, everything stays in sync across all my devices  I’m always getting the latest, unread content and I don’t have to remember to keep going back to my roster of sites and check for updates¹.

That’s just me, though.  I notice that only 115 of you are subscribed by RSS while over 1,000 are subscribed by email.  I guess my personal preferences (as usual) are in the minority.

That’s cool too.  I love email.  I subscribe to a few newsletters by email.  It’s also minimally intrusive and if I don’t have time to read whatever it is, I just delete it and hang out until the next issue.  If it looks intriguing but I don’t have time, I flag it for followup.

I want you to be able to use email for your subscription the same way I’d want it to use it myself.  So there’s zero spam, no ads, and all you get is one email per week containing the latest newsletter in its entirety.

So You Wanna Make Money in Real Estate…

For a newsletter with a global subscriber base, I know I spend a disproportionate amount of time talking about life here in Northern Nevada.  But today I’ve got a personal anecdote that could be relevant for those of you seeking opportunity and yield.

I happen to live in a community that was built by Toll Brothers.  It was originally built in 2006 and last year when I bought it, it was exactly the kind of house that nobody wanted: an over-sized luxury tract home.  I paid less than $100/sq ft for it, meaningfully below its replacement cost.  I viewed it as a defensive, long-term investment, my personal hedge against inflation and a bet that someday ten or twenty years down the road Americans would return to that deep-seated appetite for egregious, conspicuous excess.  I haven’t told Mrs. Concord this yet (shh!), but that’ll be the day we sell this house and move into something smaller, more efficient, and theoretically half the price.

Only about 3/4 of our neighborhood got built, and you can literally see where construction stopped in 2006.  Half the street has houses, the other half is graded, empty lots treated for long-term dust control.  It’s hilarious.  Every time I walk to the mailbox I feel like a geologist looking striations in the rock.  ”Hey!  Right there’s where the real estate ice age happened!”

But this summer, all that started to change.  I finally saw some new construction start go up on one of those lots.  It was the first new house in 6 years.  A nice looking man and his family moved in.  Then another house started to go up.  Then another.  Then, about a month ago, five started to go up all at once.   My guess is that these are spec homes, rather than the traditional build-to-suit semi-custom construction model homebuilders normally use.  When construction is finished in a few months, I’ll be able to say for sure.  Rather than selling people the exact house they want, the business for Toll Brothers in Northern Nevada has changed.

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I’m sure a lot this has to do with our local condition of not having enough inventory on the market.  At the end of 2011, Nevada passed legislation that made it a whole lot more difficult for banks to foreclose, requiring that they present all the necessary documentation demonstrating their right to foreclose.  This was our state’s delayed reaction to all that robo-signing business.  In any case, foreclosure volume dropped something like 97% between the month before the legislation passed and the month after.  Foreclosure volume has slowly risen since then, but still remains low relative to previous years.

Check it out:

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Legislation like this is problematic in Nevada for two reasons.  The first is that, because home prices collapsed around 50%, there were a large number of distressed sales between 2008 and 2011.  Homeowners who needed to sell had no choice.  Either they had significant negative equity from their mortgage and were forced into a 6-12 month long short sale, or they could opt to stop making their payments and just chill out until the day they’d have to hand over the keys to the bank.  In fact, there was a time when virtually every sale on the market here was distressed.  I didn’t know it at the time, but when I bought my home — a foreclosure — in the middle of 2011, it was the 9th inning of Nevada’s distressed market.  Today, foreclosures sell at a price disturbingly close to non-distressed properties, a price which also happens to be 15-20% above what it used to be.

And that’s the second problem this legislation has created.  It’s led to a mini “echo bubble” in our market, artificially limiting supply and driving up price.  My guess is that this isn’t the only market in the country like this.  It’s nice if you’re a seller, but I’m worried about new buyers and curious about what the long-term repercussions will look like.

Some of this recovery is real, but the question is what portion of the rise is artificial:

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I’m also curious why it took Toll Brothers so long to act on this, although, in the world of home construction, they’re probably acting very quickly.  I wonder if they’re doing this in other inventory-constrained communities.  I wonder if it could lead to a significant boost in sales in 2013.  And I wonder if that’s one of the reasons why the stock has gone straight up in the last year:

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Clearly, their goal right now is to get these houses built and sold.  A large part of Toll Brothers’ business is buying cheap land and then developing it when the time is right.  My guess is that somewhere, high up the ladder, some Toll Brothers executive said that the time is right for Northern Nevada and the time may not be right for long.

Perhaps they see stagnation or a drop in prices 2-3 years down the road.  Perhaps it’s just being opportunistic in response to the sharp increase in local prices.  Either way, if they thought the iron was going to get any hotter, I have to believe they’d wait longer to strike.  They’d develop these houses on-demand, the way they normally do, rather than incur the expense of building them now and taking the risk that maybe they won’t sell.

Also: they’re not the only developer around here doing this.  I’ve noticed other regional homebuilders doing similar things, quickly developing land that’s been sitting idle for years.

Anyway, this is all entirely anecdotal.  Stories like these are fun, but aren’t always useful.

I do wonder, however, if you’re seeing something similar in your own city.

What about REITS?

I’ve heard a lot of people asking if there is still opportunity in Real Estate Investment Trusts.  It’s not just homebuilders who have been on fire, REITs have been knocking it out of the park as well.  As an example, the iShares REIT 50 Index ETF (FTY) is up over 25% since Thanksgiving 2011 and it’s currently yielding around 3.5%.  Another year like that, and it’ll be at an all-time high, back to where it was near the peak of the bubble!  Is your house worth today what it was in 2006?

This is a reminder that when it comes to making money in real estate, what really matters is yield not price appreciation.  These property management groups don’t make their money by buying and flipping properties the way your sketchy brother-in-law was preaching back in the boom days.  That’s not a sustainable model.  Instead, these companies buy value and put the properties to work.  They know the local markets.

REITs can be a helpful vehicle to play the ongoing recovery in real estate.  As always, there’s plenty of risk, and my guess is that you might get a better entry point in the next 12-18 months.  But there’s sufficient opportunity left to warrant a deeper look.  Rather than going with a single stock in the sector, I might look at a low-cost ETF instead.

I think the road ahead for real estate is long, stable, and predictable.  It’s not exciting, by any stretch of the imagination.  But real estate is functioning closer to normal right now, with a better probability at growing above trend than an equivalent distance below it.

And as you guys all know, my “chart of the year” has room left for improvement:

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Top 4 Newsletters of the Year

Based on reader traffic, here were the four most popular Cognitive Concord newsletters in 2012:

1.  The Housing Market: For Real or Fakeout ^[13] — This one was the most popular by a significant margin, almost a factor of two.  I’ve been writing a version of that same newsletter for almost 4 years now, so I guess it’s a formula I should keep around.  And newsletters like this are fun and easy to write.  I like to use data to tell stories and people like to hear stories that feature good data.  Especially if it’s relevant (as real estate is to most of us) and actionable.

2.  The Yield Vigilantes ^[14] — According to Google, I was the first guy on the Internet to use the term “Yield Vigilante.”  Since then, exactly one other person has used it.  This guy ^[15] (in a mighty fine article, I might add).  Come on people!  We need to get this term into circulation!  I will not rest until I hear Tom Keene use the term “Yield Vigilante” on Bloomberg TV.  It sounds silly, but in all seriousness, there are a few extremely important lessons in this one.  Investors are simply desperate for yield, and it’s created this really weird equilibrium where it’s extremely dangerous to chase yield but at the same time, difficult to bet on rising yields.  I wish I knew how it was all going to end.  Whoever figures that out will make a lot of money.

3.  The Ten Commandments of Technical Analysis ^[16] — For an article that exists in basically identical form on a million other websites, I was surprised at this one.  But it seems destined to become one of my most popular newsletters of all time.  I’ll have to make it a point to generate some new “evergreen content” like this in 2013.  Technical Analysis isn’t the end-all be-all, but it’s a necessary arrow to have in one’s quiver.  You don’t need to be an expert, but if you understand basic concepts like support and resistance and how to pick out trends, you’ll get much better results.

4.  Q-Infinity and Beyond! ^[17] — Fed bashing: a time-tested formula to drive up pageviews!

Real Estate.  Yield.  Technical Analysis.  The Fed.  This is what you guys were most interested in last year.  Honestly, you picked some good topics.  Those were arguably topics that helped you the most as an investor last year.

So good job on that.  I can’t thank you enough for reading and for making 2012 a great year.  It’s an honor to have such an intelligent audience and I’m thrilled about all that we have in store for 2013!

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¹How to set up a kickass RSS feed

If you are serious about embracing RSS and you want to get in the know in Finance, here’s what you do.

1. Set up a Google Reader account and then go download Feedly ^[4], Pulse ^[5], Reeder ^[6], your choice.  Or just use Google Reader ^[18] itself.
2. Make a category in your reader.  Call it “financial blogs” or “market news” or whatever.
3. Then add these six feeds: Barry Ritholtz’s The Big Picture ^[19], Joe Weisenthal at Business Insider ^[20], Felix Salmon ^[21], Calculated Risk ^[22], Abnormal Returns ^[23], and Cullen Roche’s Pragmatic Capitalism ^[24].

I’m not a blogger.  The reason why I’m not a blogger is because those guys are bloggers.  Nobody — and certainly not me — holds a candle to those six.  They’re head and shoulders above the rest and if you follow them, you will know everything you need to know in finance.  You can officially turn off CNBC because you will be smarter than CNBC.

After doing that, make another category in your reader.  Call this one “financial newsletters” or “investment commentary” or whatever tickles your fancy.  Add us ^[3].  Add John Mauldin, Bill Gross, whoever else publishes a free, long-form newsletter.  This one you tailor to your personal preferences.

Because I’m a junkie, I’ve got a “tech” feed too with Gizmodo, TechCrunch, Mashable, etc.  And because I’m a geek, I subscribe to a bunch of board game blogs too.  Use the technology to get whatever it is that you want.

RSS basically allows you to build your own magazine.  The catch is that you have to leverage programs like Feedly, Reeder, or Pulse to do it.