Fairfax Financial 13F

[snailslug]

I'm only familiar with CA, but many parts of CA have already bottomed (mostly the less-desirable neighborhoods), places like Riverside, Oakland, etc.  Many houses in these neighborhoods are selling at 1995-1997 nominal pricing.

 

The more desirable neighborhoods like San Francisco and West LA probably will still fall 50%, but given that CA experienced some of the highest runups in the country, I think it very unlikely that the pricing will be -50% across the board from here.

[Crip1]

I tend to agree with Snailslug with regard to housing prices. Overall as of November closings, we are still seeing an acceleration of MOM price declines in the US, but, there are a couple of factors which, IMHO, will assert themselves:

 

1) Homes are as affordable now as they have been in years, many years. At some point people will start buying and we'll reach and supply-demand equilibrium with prices becoming static.

2) I do see some signs here and there of increased activity which will not be reportable until 3-4 months down the road (offers in February close in March or April and are reported in May and June). Granted it is anecdotal, and granted that I am not seeing the Real Estate market going ape, but the anecdotal signs seem to be pointing to a bottoming out.

 

My point is that I really do not see a 50% decline from here across the board. Time will tell whether or not I am right. I have no solid opinion on WFC other than to say that the fact that they came through the credit crisis in far better shape than the majority of their competition suggests solid management.

 

-Crip

[jasonw1]

Housing price dropping another 50% would mean that people can buy a house with roughly 2 years of household income, that would be among the lowest of all countries. I don't think there is a great bubble in US housing now, it's one of the most affortable in the world. You can see some numbers and comparisons here:

 

http://www.globalpropertyguide.com/Asia/Japan/price-gdp-per-cap

http://www.globalpropertyguide.com/North-America/United-States/price-gdp-per-cap

 

In Asian countries house routinely cost 5-10 years of annual household income.

[Uccmal]

jason, I am having trouble making anything out of those charts.

 

How many years annual income would it cost the average American to buy a house versus Canada and other parts of the world?

[Santayana]

We are entering a time of falling incomes and GDP.  Unemployment will continue to rise for a while, regardless of any stimulus package.  Pensions and benefits are being reduced everywhere.  House prices will continue to fall further than normal as a result.   After a bubble like we just had, there is bound to be some overshoot on the downside as well.    

 

US Dollars are becoming more valuable right now, not less.   I really don't think the Fed has it in their power to restart inflation on demand, helicopters notwithstanding.  It's not just WFC and GE that I see having a high risk of failure, it's any company deeply involved in financing activity, because a lot of them just aren't going to get paid back.

 

I'm really hoping that we learn on Friday that FFH still has a very large holding of US Treasuries.   That would make me more comfortable with this.

[dowfin1]

Case Shiller through 11-08 shows LA and Miami among the hardest hit areas with peak to trough losses of 36% and 40% respectively.  Another 50% down would make peak to trough losses of 68% and 70%.  Not likely.

[jasonw1]

It's hard to get apple to apple comparison and data for remote regions are not as available as big cities, so the data shown here is for premier city cneters, which defined as:

Administrative capital; and/or

Financial capital; and/or

The centre of the rental market

 

The ratio essentially shows how many years of GDP per capita it takes to buy a 100 square meters apartment in one of the prime locations of individual countries.

[netnet]

I'm only familiar with CA, but many parts of CA have already bottomed (mostly the less-desirable neighborhoods), places like Riverside, Oakland, etc.  Many houses in these neighborhoods are selling at 1995-1997 nominal pricing.

 

You're not that familiar with CA either.  We have been looking at a nice cosy little  house in Oakland--3 bedrooms for one million.  Tell me about undesirable!!  I hope it hasn't bottomed out, my wife really wants that house!

[oldye]

If they pass the budget California will see, a 5% increase to the state income tax, 12 cent increase to the gas tax, 1% increase to the sales tax (yes they're increasing the sales tax during a recession, yes the one that effects the velocity of money and takes more money from people who already can't afford to live in poverty, Double the Car Tax etc) ...Who wants Californians buying cars in this market? 

 

 

 

The 8th largest economy in the world has cut state employment by 24 days a year for 200,000 employees and are considering another 10% cut if the budget isn't better by this summer. 

 

If they're trying to drive real estate prices down in California they might as well get rid of prop 13 while they're at it.  Everyone around here seems to think illegal aliens (who came up with this term) are causing the huge budget gap, well I guess I got good news!...

 

Btw Fairfax paid 2x book to pick up 50 million dollars in Progressive Stock but didn't increase their position in Berkshire sub 80,000.  Interesting omission considering that they have a few A shares sitting around gathering dust.   

 

 

[Guest ericopoly]

The high end of the California market:

 

http://tinyurl.com/cl3b2r

 

That Windermere website is my favorite tool for getting a high level view of an area -- you can quickly see on a map how many listings there are, whether a house is right on a freeway, and price/photos etc.  Just mouse over a house on the map and then click for more details when the popup appears.

[snailslug]

I'm only familiar with CA, but many parts of CA have already bottomed (mostly the less-desirable neighborhoods), places like Riverside, Oakland, etc.  Many houses in these neighborhoods are selling at 1995-1997 nominal pricing.

 

You're not that familiar with CA either.  We have been looking at a nice cosy little  house in Oakland--3 bedrooms for one million.  Tell me about undesirable!!  I hope it hasn't bottomed out, my wife really wants that house!

 

net net -- Let me guess, Piedmont, Rockridge, Montclair or Oakland Hills?

[netnet]

Snailslug,

 

You've got it on the button: location, location, location.

It's Rockridge, our little over priced enclave! but better there than Flint, MI.

[Santayana]

I know the short term moves are Mr. Market aren't necessarily meaningful, but I think it's worth noting that WFC and GE are both off nearly 50% since the time we were having this discussion.  If they were 50 cent dollars when FFH made their Q4 purchases, are they 25 cent dollars now?

 

I remain long FFH, but am increasingly convinced that Prem made a bad decision to remove the hedges *and* add additional positions.

[StubbleJumper]

Why was it a bad decision to remove the hedges?

 

If you think the market was fairly valued during Q4, why would you have left the hedges in place?  Now, if you believe that the market was still overvalued last fall, then retaining the hedges would have made perfect sense.  From my perspective, I am very comfortable with valuations in recent months when the S&P500 is 700-800.  I am very enthused about the idea of the S&P hitting 500 during 2009, but I'm not sure that'll actually happen.

 

IMO, we should evaluate the decision based on its underlying thought process rather than by its short-term outcome.

 

SJ

[Santayana]

I didn't say anything was wrong with removing the hedges, it was adding new positions after they were removed that I question, especially in the financial space which has far too many questions abounding right now for me to believe that any margin of safety exists.

[netnet]

But remember market timing is a bit of a fool's errand to quote Seth Klarman's annual letter

 

"While it is always tempting to try to time the market and wait for the bottom to be reached (as if it would be obvious when it arrived), such a strategy has proven over the years to be deeply flawed. Historically, little volume transacts at the bottom or on the way back up and competition from other buyers will be much greater when the markets settle down and the economy begins to recover. Moreover, the price recovery from a bottom can be very swift. Therefore, an investor should put money to work amidst the throes of a bear market, appreciating that things will likely get worse before they get better."

 

Putting the hedges on was not market timing, it was (presumably) driven by the belief that the market was over priced.  Once high quality stock were cheap Prem loaded up.  Was that a bad thing to do?  Remember the story of Buffett and Washington Post.  He bought and down it went.  But he was right to buy.

 

Now, for us, we are still worried about the down-side and are willing to spend for a little insurance, but we are neither  as smart or rich as Prem.  Although, we are going to pull off the hedges if the market tanks 5% to 10% more.