You’re probably wondering why a bearish newsletter like Notes would recommend buying real estate. After all, we’ve just experienced one of the severest real estate crashes in history.

House prices are in the gutter. Taxi drivers the world over are bemoaning the fact. And you can’t open a newspaper without reading about homeowners “upside down” with their mortgages.

Of course, it’s because of the almost universal hatred of real estate that we feel it may be worth investing in right now. Here at Notes, we believe that being a contrarian investor is the best way to make money in the markets. And that means being greedy when others are fearful and fearful when others are greedy.

The Wikipedia entry for contrarian investing defines a contrarian as someone who “attempts to profit by investing in a manner that differs from the conventional wisdom, when the consensus opinion appears to be wrong.”

A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricing in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company’s risks, and understates its prospects for returning to profitability. Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains. Conversely, widespread optimism can result in unjustifiably high valuations that will eventually lead to drops, when those high expectations don’t pan out. Avoiding (or short-selling) investments in over-hyped investments reduces the risk of such drops. These general principles can apply whether the investment in question is an individual stock, an industry sector, or an entire market or any other asset class.

Our motto here at Notes is much simpler to understand. As far as we see it, you’re either a contrarian or a victim.
Underground investor Steve Sjuggerud reckons it’s now almost time to buy residential real estate. This from Friday’s DailyWealth:

I track three main indicators to tell me the “health” of the residential housing market. They’re all pretty simple to understand… and two out of three are incredibly good in their timing (the third is a good judge of value). Let’s look at ‘em, one by one…

First up: The number of new homes started by builders. After “housing starts” hit a bottom, home prices tend to bottom six months to a year later. Importantly… Housing starts are at a record low right now.

Builders start too many homes (when the blue line goes above 2,000) in good times. Prices peak soon after. In bad times, builders start too few homes (when the blue line goes below 1,000). A bottom in home prices follows.

Based on this chart, housing prices could bottom soon… possibly in the next 12 months.

Second: The supply of homes available for sale. This indicator is typically called “months supply.” But it’s really a ratio of the number of houses available for sale divided by the current rate of sales per month.

A high supply of new homes on the market causes prices to fall. (It’s simple supply and demand.) Once the supply of new homes peaks and starts to come down, home prices bottom and start to rise.

Today, the supply of new homes is near a record peak, and it’s coming down. So a bottom should come within the next 12 months.

Lastly: Housing “affordability.” People buy homes when they’re affordable. In technical terms, homes are “affordable” when the median family’s income can afford the mortgage payment on the median home at current mortgage rates.

Right now, homes are more affordable than ever, based on this ratio.

Since houses have fallen so quickly in price and mortgage rates have fallen to record lows, housing affordability is at record levels. This is a great “value” indicator for housing… and value is great now.

Housing is not like the stock market. Cycles in housing move slowly. So we can wait on an uptrend to “confirm” the housing market is back before we move in.

We’re lucky here… we have a few good “leading” indicators, with good track records. Of course, my indicators could deteriorate from here. But right now, they’re at record levels and showing signs of improving.

It’s not time to buy residential real estate… yet. But the time is darn close.

• • Do you have a loss? A loss occurs when you sell for less than your tax basis – the price you paid for the property, plus improvements, etc. If you have been claiming depreciation on the property, it lowers the basis.
  • Section 1231 loss. If you’ve owned the property for more than a year than you can claim the best kind of loss – a section 1231 loss. This loss can be deducted against all other income – and if large enough, could completely offset your tax liability for the year.
  • Don’t forget passive losses. Passive losses are deferred on a property until it generates a net positive income or you sell it. Don’t forget to claim these if they have been deferred in the past

Although several years ago selling a rental property at a loss would have been unheard of, the “times they are a changing.” Bill Bischoff of SmartMoney.com goes over the basics of selling a property at a loss: