Toward the end of June, about 900 new homes were to be released in Hawthorne Village in Milton, Ont., a small community west of Toronto. Competition for the residences was fierce, and a couple of dozen tents were pitched by buyers eager to get an early chance to bid. A mania? Absolutely, in our minds.
Our collective memory at Contra the Heard casts back to the late 1980s, when this type of event was relatively common.
Buyers were crazed by a market that appeared to have only one direction, up, and multitudes feared that if a home were not purchased quickly, then the dream of ownership would never become a reality as prices would only move further and further from their grasp.
How wrong they were.
A few years later, housing prices across the land had declined, in many places dramatically, and those who rested patient reaped ample rewards.
We constantly avoid making short-term predictions, acknowledging that the more diminutive the time frame, the greater the likelihood that our conjectures will prove wrong. However, this time the probability of our conviction is strikingly strong, so our weight will sally forth to the end of the limb: In one year, housing prices will be either comparable to now, or less. Readers should note that our predictions in the past have not proved bulletproof.
How might one profit from this mania? We both purchased commercial real estate company Grubb & Ellis Co. (GBEL-Nasdaq) on the over-the-counter market earlier this year at about $1.10 (U.S.) a share. This Northbrook, Ill.-based company with annual revenue slightly north of $425-million was particularly hard to buy, as trading volumes at the time were less than 10,000 a day, thin by most standards. Sometimes days in a row would pass without a transaction.
People had good reason to avoid this outfit. The company endured a couple of brutal years, losing money in 2002 and 2003. Cash flow experienced periods of negativity, the drain being severe enough to lead to a negative book value. Things were so bad that the corporation was banished from trading on the big board, to the humbling backdrop of over the counter trading (OTC).
Despite these discouraging signs, the time seemed ripe for us to jump. It helped that Grubb was well known to us, purchased in 1993 and 1995 at an average price of $2.55 a share. Its future seemed uncertain and until 1997 the stock price did little. But then the enterprise caught wildfire, and our position was exited in three tranches at between $14.38 to $16 a share. Content to mock us, the stock price skied above $20, being a top performer on the New York Stock Exchange, but heck, it was derision that did no harm to our egos.
One of us is concerned enough about a crash in real estate prices because of high prices and rising interest rates that he recently took a fast profit, pulling 25 per cent of his position off the table at $1.94 a share. But that still leaves plenty of shares to ride on this boom-and-bust arena, where our tea leaves read both havoc and profit simultaneously. It would not surprise us to see this stock, which closed Friday at $2.80 push back into double digits as share volume heats up, as is starting to happen.
In the meantime, we'll simply save our tents for camping.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter. This column first appeared on GlobeinvestorGOLD.com.