If all you have are lemmings...

Well, all of the lemmings are picking themselves up at the bottom of the cliff, bemoaning their fate, whining about their bruises. A few really got creamed, but many of those who went off the cliff first were big enough that they almost don't really notice the owies. So, for instance, Fannie and Freddie join FHA as direct agencies of government instead of pseudo-independent ones? The only folks who care are those who thought they owned 'em, the shareholders. Bet Fan & Fred's heads of appraisal quality control even gets their COLA (as distinct from Kool Aid). Hope none of my readers bear any resemblance to those legendary little furry critters.

Now, assuming that my intelligent readers were selling TO the lemmings, and, hopefully, parking the proceeds in something nice, it's time to do some bargain hunting. So, let's think about the possibilities.

Stocks, generally, not exactly my area of expertise, but looks like the lowest point of the market came after I put most of my money in. Still with the Dow at 10,000+ I don't feel too rodent-like. There may be another market-timing moment or two, but they're hard to call. Among stocks there are real estate developers. Wouldn't think they're likely to make much money for a couple years or more. Can they pay their debts? Do they have high priced land on their books, or were they able to unload it to CalPERS, then buy it back at the right price? REITs have had a good run this year, but with the occupancy and income of their properties dropping like a leaping lemming, were the buyers who support those prices just late to the leap? Maybe they believe in levitation? (...pass the Kool Aid...)

Bonds are another thought. Also, not strictly speaking, in my patch. For those who are recent finance graduates, they might even look good. After all, if China will buy T securities, why not? (...of course, what IS China going to do? cap our credit card limit and squish their exporters? new Cultural Revolution anybody?) A little noticed analysis of the stock market after 1982 posits that a lot of the upside was really just a reflection of the devaluation of all debt by the inflation of the '70s. As T securities are almost certainly bubbly (ask Warren Buffett, not me), short term yields distinctly unrewarding, and long term vulnerable to renewed inflation, that doesn't leave much. Maybe it leaves a narrow parking lot in the 5 year range. But even in real estate, parking lots aren't big winners, just rarely losers.

But, hey, I'm REALLY just a dirt guy, and what's at the bottom of the cliff? A lot of real estate. The really fun stuff in residential might be almost gone. Segmenting most of our markets, the desirable low-priced stuff has been pretty thoroughly picked over in the last couple years. There may be an early speculator or two who bought in with the idea that his day job would cover the negative cash flow, and who has now lost his day job. There certainly are higher priced properties which have languished on the market and are being marked down (http://www.charlesbwarren.com/train_wreck.html), but if you're talking about a $2 million house marked down to $1 million... Still sounds like a lot of money to me. But, maybe you were more astute, had more to sell into the bubble, etc...

The news du jour is the impending impact of a new horde of leaping lemmings, commercial property investors and their debt. Everybody loves a sale, and I'm not the only one (http://www.charlesbwarren.com/napkin.html) who predicts some big discounts (read CoStar Watch List). Here are a few of the tactics that might work for you. Do you rent space? Extend your lease with few or no escalations. The lessor might be desperate enough to agree. You might be able to argue rent reduction using the leases he's written in the last year or so. Can't do a deal? Think about moving into some of the space that HASN'T been leased in the last year or so. Or, how's your landlord doing on his mortgage payments? What's the mortgage amount compared to the current property value? There are a couple ways to work this play. One is to buy the debt at a discount from the bank. As long as the payments are made, you make healthy returns. If they stop, you foreclose and get the property at what I hope you feel is a good price. (Substantially less than replacement cost is a good starting point.) The other obvious trick is to buy REO property, but there isn't a lot of that yet. The important thing about commercial/industrial property is use. If you use the property and can afford to carry its cost, then that gets you real close to the deal, a bit like buying a house for owner-occupancy. Getting a little more removed, if you live in the community where you buy, you also have a level of background knowledge unavailable to others.

The point is that buying at a discount to replacement cost is only a starting point. Buying an industrial traction belt factory after even Winchester went to electrically powered free-standing tools paying any fraction of cost might not be much of a deal. This doesn't mean that buying for re-use is stupid. An old Westinghouse plant that repaired cargo ship winches is now an art related retailer 30 years after Westinghouse left the property. It's just that the analysis has to take into account the fact that replacement cost new is suddenly less relevant as a measure of value. If you have confidence that the use is still viable in the long term, cost new is more relevant. When RTC was peddling stuff at a fraction of cost in the '90s, much of it could be bought with confidence as a counter-cyclical investment because of location and long-run viability.

Anyway, hope you bought yourself a nice discounted home last year or the year before. Hope your business can find nicely discounted digs in the next couple. But beware folks who promise to "help you" invest in discounted property. That's a bit like folks who make a million selling books on how to make a million, just another flavor of Kool Aid.