Review of How to Profit from the Coming Real Estate Bust: Money-Making Strategies for the End of the Housing Bubble (Hardcover)

SUMMARY:

I personally think the advice about "profiting" from the bust in this book is mostly worthless, indeed possibly even dangerous, but the arguments about whether there is a bubble & how to recognize it IMO are better.

DETAILS:

The first half of the book (which another reviewer suggests you could skip -- !!!) is actually the most useful IMO.It gives a general summary of the reasons that suggest current housing prices are unsustainable.The arguments are not very complex in construction, but I don't fault the book for it, I think it has a target audience, and that is the general public, not the subset who have a firm grasp of macroeconomics & math. My biggest gripe with this part of the book is that he expresses some facts in a misleading way, to my mathematically semi-sophisticated eye. For example, on p. 62 he has a graph of total US debt and GDP vs. a 45 year time axis. To the "untrained eye" (and he supports this impression in his text), it looks like debt is growing much faster than gdp. This impression is created by the fact that both are under $5trillion in 1957, and by 2002 gdp is $10t and debt around $34t. However, I suspect if you graphed the RATIO of debt to GDP (which is really the issue, what multiple of gdp is debt, i.e. very roughly, how many years of earnings collectively would it take to pay it off), you'll see the ratio MUCH higher at the start of the period than now, you'd probably see a decline in the graph slope for many years, then maybe an increase starting around 1985, based upon an eyeball evaluation of the two curves. That would have been a MUCH more meaningful graph, a more useful historical perspective. Maybe he thought that too abstract for his intended audience, being a derivative of the data (change over time in the rate of change of the ratio), but in this particular case I believe he has made more out of those historical numbers than is really warranted.The problem for me is, when you see that once you start to trust less all the rest of the arguments he makes, you instead find yourself wondering "what did he leave out or misrepresent this time?"But with that caveat, this is still the best overall attempt to make a case for a housing bubble, with the possible exception of a "Special Survey" done by the magazine Economist on 5/29/2003, which looks at the issue from an international perspective.

The last 1/2 of the book (the ostensible purpose, "how to make (or save) your money when the bubble bursts") seems even less well thought out. I'm not a professional investor, but I have been doing it a couple decades now & I came out of reading this book with very few viable (IMO) ideas on how to achieve what the title promises. For example, buying cash rich companies -- he lists msft, csco, intl, dell, nok. This advice is totally bereft of the context of stock price or p/e, and I'm sorry, a dollar is worth a dollar, and you can't say a company with cash is a good buy without even referencing how much cash you will pay for that cash!!!The suggestion of convertible bonds is also curious, I admit I have not looked at them much in my years, but my intuitive reaction is, won't these only do better than normal bonds as the stock price INCREASES (i.e. as it approaches the conversion price?), these bonds pay a lower rate & make up for that with the option to convert to shares at a fixed stock price. The value of that conversion option drops with the stock price (indeed for convertibles close to strike price, stock price changes are MAGNIFIED in the convertible pricing). So if what he suggest comes true, convertibles will be a WORSE buy than plain old bonds, overall.(maybe he suggests convertibles just as a safer alternative to stocks, and not necessarily better to buy than plain old bonds?If that's what he meant he should have SAID it though).And regarding gold pricing -- I actually have one raw gold producer that he mentions on my watch list right now, they are a major player in many other metals markets as well (copper, silver, etc). Having that POV, I can tell you that he has totally ignored the whole question of decreased industrial demand that would come with the kind of financial catastrophe he envisions, very relevant given the exposure this particular stock has to these other metal productions. Heck that is the reason that I am still on the sidelines, reduction of demand in China (which is creeping up in the news more in recent weeks as they attempt to engineer a "soft landing" to a badly overheated economy) could totally take the floor out from underneath a lot of these raw material producing companies.

Finally, while by no means suggesting this is a fair way to evaluate his advice in this second half of the book -- since the whole argument is predicated on the collapse of the housing market, which has not (yet) happened -- it should be noted that a quick review of many of his suggested strategies shows that anyone following his advice in the one year approx since he finished writing it (he mentions this being the beginning of June 2003) would have vastly underperformed the market, or even lost money, in the interim.

So, in short, I find the first half the book (is there a bubble, why) a pretty good introduction to the argument for it, not perfect, but perhaps the best one out there. I find the other half (what will happen to the economy when it bursts, how to profit/protect yourself from it) very much unsatisfying, and I am stuck where I started, thinking "I think there is a serious risk here" but still unable to figure out how to translate this concern into concrete action for my own personal finances.

*** UPDATE 9/12/04: Since writing this review on 5/2/04, I have found and read John Talbott's book from 2003 on the same subject,
"The Coming Crash in the Housing Market : 10 Things You Can Do Now to Protect Your Most Valuable Investment."Having read that, I have changed the title of the review, & I would now change my statement in my review above that this book is 'perhaps the best introduction to the argument for a housing bubble out there.'I now believe the Talbott book is better, the statistics in that book are more carefully and rigorously presented, and do not seem to suffer from the misleading presentations you see in this book.In other words, although both books make essentially the same argument, the Talbott book makes it more completely & convincingly.



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