Dream
Homes and On September 13, 2006, the Senate Committee on Banking, Housing, and Urban Affairs invited a panel of experts to testify on the topic of "The Housing Bubble and Its Implications for the Economy." With the housing market dramatically slowing down, there is angst amongst the plutocrats in Washington D.C. that a nightmare scenario will unfold in which millions of over-leveraged homeowners struggle to avoid foreclosure; with many eventually losing the battle. Accordingly, the bursting of the housing bubble may cause a financial calamity that will make the S&L crisis, of the early 1990s, pale in comparison. Not surprisingly, as the Washington Post reported, the aforementioned experts have concluded that the housing "…sector is just returning to normal and is not poised to crash…" Nothing could be further from the truth. In reading over the testimony, prepared by each expert, it is clear that there is concern that some regions of the U.S. have experienced unsustainable real estate price escalations. As a result, there is a danger that homebuyers in such regions may have overpaid for houses and condos. Should a significant pullback occur, in these once-hot housing markets, homeowners will suffer the consequences of owing more money than their houses are worth (i.e. being upside down). To compound this problem, mortgage lending has been reckless, with homebuyers commonly purchasing homes using exotic mortgages such as adjustable rate mortgages (ARM), interest only mortgages, and option ARMs. With over $3 trillion in ARMs set to adjust in the next 12 months, there is a degree of nervousness amongst these experts as to how well homeowners will weather the storm of higher monthly mortgage payments. The consensus, nonetheless, is that the slowdown in the housing market will not stop the juggernaut that is the United States’ economy – even if a higher rate of mortgage defaults materializes. Such a conclusion demonstrates that dream-interpretation is a key component of today’s mainstream economic analysis. A glaring problem, with this expert-testimony, pertains to a complete lack of understanding as to how the housing boom emerged in the first place. A healthy boom must be engendered by an accumulation of savings. Considering that there is a negative savings rate in the U.S., America’s housing boom has been driven by easy credit as engineered by the Federal Reserve’s monetary central planning – this is why the housing boom is more properly deemed a bubble. And, of course, a credit-induced boom invariably leads to a bust. For true enlightenment, I would suggest that these panelists read The Austrian Theory of the Trade Cycle. It is also interesting that the panelists focused on the matter of house-price appreciation and how certain states saw more of this phenomenon than others. Hence, it is commonly asserted that all housing booms are strictly "local." Panelists, predictably, expressed worries about the "overheated" housing markets in Arizona, California, Florida, Maryland, Nevada, and Virginia. Real estate speculators, indeed, did enter these markets looking to "flip" houses and condos in order to make a quick buck. This denotes, sure enough, that lenders were shoveling money out the door to all comers looking for a mortgage loan – be it speculators, permanent residents, or buyers of second homes. It is ultra-easy credit that has driven home prices, in many locales, to stratospheric levels. And the national media reported breathlessly, ad nauseum, as to how so many people have made a financial killing in the housing market. Even if frothy housing markets were local, real estate captured imaginations from coast to coast. Accordingly, a "bubble-mentality" emerged, on a national scale, in which Americans sought to cash in on housing – one way or another. Using this perspective, and considering that mortgage lending standards dropped to near zero countrywide, I would argue that the housing bubble truly became a national phenomenon. So how did Americans, not living in a rapidly-appreciating housing market, cash in on the craze? First of all, regardless of where one lived, the common mantra was "you’d better buy a home today before they become too expensive." Additionally, the talking heads on CNBC, and elsewhere, were cackling such nonsense as "housing is a can’t-miss investment for the long-run." Is it any wonder that homeownership hit a record in the United States? To be sure, this record homeownership is a manifestation of the housing-bubble mentality. Secondly, with the assistance of banks and other lending institutions, Americans became conditioned to believe that houses were really ATMs standing at the ready to disburse funds on command. Thus, nationwide, Americans have borrowed against home equity to pay for new cars, boats, flat-screen TVs, vacations, home remodels, you name it. Houses are not only homes, but appeared to be self-filling piggy banks. Using these two points, I disagree with the assertion that all housing bubbles are strictly local. Most assuredly, there are cities in Florida and California where house-price appreciation was surreal. Where this assertion falls apart is that the housing boom was driven by easy credit and not accumulated savings – and easy credit has been available in all 50 states. Even if real estate speculators weren’t heading to Butte, MT or Detroit, MI looking to flip houses and condos, mortgage loans were still incredibly easy to come by for even the most unqualified of borrowers. Therefore, a low-wage first-time homeowner in Detroit (with a 0%-down adjustable rate mortgage) can incur a financially ruinous level of mortgage debt just as easily as a high-wage professional in Tampa can do so by going overboard when extravagantly remodeling a home – 100% funded by an adjustable rate home equity line of credit (HELOC). Both Michigan and Florida, as a matter of fact, are in the top-ten list of states with the highest foreclosure rates in the United States. Interestingly enough, Florida ranked 2nd in the U.S. for house-price appreciation while Michigan ranked 51st – this information was compiled, for the one-year period ending June 30, 2006, by the Office of Federal Housing Enterprise Oversight and includes the District of Columbia. Let’s juxtapose the top-ten foreclosure states with each one’s latest ranking in house-price appreciation – both rankings use figures compiled as of June 30, 2006:
In examining this table, it is evident that there is not (yet) a correlation between a high rate of foreclosures and a high rate of house-price appreciation. At the moment, the above-mentioned experts and the U.S. Senators seem obsessed with the danger that "bubbly" real estate markets are populated with homeowners who are over-leveraged and may be likely candidates for mortgage defaults and, correspondingly, foreclosure proceedings. Yet, what about the rest of the country? Perhaps a better way to look at this table is to understand that trillions of dollars of mortgage loans have been originated during the past five years and that there is a national housing and mortgage-debt bubble. Consequently, even without living in a hot real estate market, people everywhere could mortgage themselves into financial trouble. With seven of the top-ten foreclosure rankings attached to states with house-price-appreciation rates in the bottom half of the rankings, it seems obvious that these households would become financially tapped out earlier in this housing/borrowing craze. Had Colorado experienced California-like house-price appreciation, it most likely would not rank 1st in the foreclosure ranking. In such a scenario, Coloradoans would have had the "luxury" of being able to continue strip-mining ever-growing home equity and borrow more money to make ends meet – such as borrowing a large lump-sum in order to make future house payments, car payments, and grocery purchases while still having funds left over for an extravagant vacation. Alas, the borrowing binge ended all too soon, for many Coloradoans, and the debt hangovers have proven to be ruinous. Be assured that there will be a rotation in the state-by-state foreclosure rankings. As the mortgage-debt binges come to an end in California, Hawaii, Maryland, and Oregon, count on Colorado being knocked from the top of foreclosure-ranking list. Soon, over-leveraged homeowners, in these once-hot states, will experience the pain of rising mortgage payments, declining home values, and no more home equity against which to borrow. It makes sense that most of the frothiest states will rise to the top of this shameful list later in the borrowing cycle – which was set in motion by Alan Greenspan’s panicky interest rate policy culminating in a 1% Fed Funds rate in June of 2003. If members of the Senate Committee on Banking, Housing, and Urban Affairs had any clue, they would be investigating the criminal enterprise known as the Federal Reserve – a privately owned bank legally sanctioned to counterfeit money. Since the founding of the inflation-happy Federal Reserve, in 1913, the U.S. dollar has lost over 95% of its purchasing power. Heck, during the reign of Alan Greenspan, the dollar’s value depreciated by over 40%. In the context of the housing/borrowing bubble, the Senate Committee would deduce the following:
After deducing these important points, one would hope that our Senators would seek out information in order to paint a financial picture of the average American household. Martin Weiss, of the Safe Money Report, has done so and discovered the following: "According to Federal Reserve data, the typical American family today has a balance of only $3,800 in cash in the bank, has no retirement account whatsoever, owes $90,000 on their mortgage, and owes $2,200 in credit card debt." In other words, due to the Federal Reserve’s harebrained monetary central planning, typical Americans have virtually no savings and are heavily mortgaged. Intelligent Senators – if any exist – would then conclude that the present-day American economy is a debt-laden house of cards built upon the sands of fiat inflation. Ultimately, the panel of experts completely missed the point in that the housing bubble is most certainly all about debt. Whether or not a local real estate market was hot, a record number of Americans took the real-estate-debt plunge. Houses supplanted dot.com and telecom stocks as the next surefire wealth-building "investment." Americans, now, are more deeply in debt than ever. With so little savings to fall back upon, countless American families are one paycheck away from foreclosure and financial ruin. Once again, just look at the horrifying financial profile of the typical American family.
Eric Englund, who has an MBA from Boise State University, lives in the state of Oregon. He is the publisher of The Hyperinflation Survival Guide by Dr. Gerald Swanson. You are invited to visit his website. ©
2006 Eric Englund Pictures
at a Federal Exposition Economic indicators have long been used by economists as a means of forecasting the economy’s future. Economic indicators are broadly defined or “split up” such that each and every one of them falls into one of three distinct groups: Leading Indicators: Leading - These types of indicators signal future events. Think of how the amber traffic light indicates the coming of the red light. In the world of finance, leading indicators work the same way but are less accurate than the street light. Bond yields are thought to be a good leading indicator of the stock market because bond traders anticipate and speculate trends in the economy (even though they aren't always right). Lagging Indicators: Lagging - A lagging indicator is one that follows an event. Back to our traffic light example: the amber light is a lagging indicator for the green light because amber trails green. The importance of a lagging indicator is its ability to confirm that a pattern is occurring or about to occur. Unemployment is one of the most popular lagging indicators. If the unemployment rate is rising, it indicates that the economy is doing poorly or that companies are anticipating a downturn in the economy. Coincident Indicators: Coincident - These indicators occur at approximately the same time as the conditions they signify. In our traffic light example, the green light would be a coincidental indicator of the associated pedestrian walk signal. Rather than predicting future events, these types of indicators change at the same time as the economy or stock market. Personal income is a coincidental indicator for the economy: high personal income rates will coincide with a strong economy. The Stock Market Is A Leading Indicator The reason why the stock market is widely viewed as a leading indicator is perhaps best summed up by the OECD who explained it like this, “Because a stock market’s valuation reflects investors’ confidence in it and therefore captures perceptions about its future viability, share prices indices have a strong forward-looking component. For this reason, and because the speed with which they are calculated and published means they are available immediately after the end of the reference period, they are frequently used in the construction of forward-looking indicators. Although primarily designed as measurements of market performance for use by individual investors and investment fund managers, share price indices are also used as indicators of economic activity by business and government analysts.” With such being the case, let’s now take a look-see at these pictures showing what the stock prices of the BIG FIVE HOME BUILDERS in the U.S. have been doing lately, shall we;
2. Centex [NYSE: CTX] Market Cap: 6.4 bln.
3. Kaufman and Broad [NYSE: KBH] Market Cap. 4.2 bln.
4. Ryland Group [NYSE: RYL] Market Cap. 2.0 bln.
5. Champion Enterprises [NYSE: CHB] Market Cap. .57 bln.
Not exactly a picture of gloom and doom, ehhh? In fact, if we are to believe that the stock market is truly a leading indicator – then [despite the current, or coincident, rough patch we are experiencing] recent stock performances are telling us [foreshadowing] better times in the near future. But What Happy Ending Could Stocks Be Foreshadowing? It is my belief that the recent run in the stocks of the homebuilders is foreshadowing the Federal Reserve once again opening the monetary liquidity spigots [and, oops – the ending won’t likely be very happy either]. Here’s why: I’ve written many times about inflation being the “life blood” of ANY fiat money regime. If you don’t believe me, ask Kilroy. Well, asset bubbles – everything from equity market [NASDAQ] run ups to commodities booms to run away real estate prices – provide the necessary cover for the Federal Reserve “to do” exactly what the perpetuation of the fiat monetary system requires – namely, an endless [geometric] run up in the money supply and / or credit. Central Planners / Banksters have a host of tools at their disposal, which they cunningly use to reach this end. Ever increasing oil prices and the expansion of credit and the monetary base [in U.S. Dollar terms] we’ve already experienced are little more than a “chicken or egg argument” as to which came first – with the vast majority of petro-dollars being recycled into, you guessed it, more and more [demand for] U.S. dollars. The important thing to take away is that you cannot have one without the other and BOTH are necessary to perpetuate our beloved – Central Bank inspired - fiat hegemony. While Keynes himself said, “in the long run, we’re all dead”, another equally true fact can be said about fiat money, in the long run, in a world with finite resources, fiat money is destined to fail – quite simply, because it’s designed to and it always has. And it will again, too. History has shown us, the preferred method for this failure has more-often-than-not been via a hyperinflationary crack up boom, followed by a deflationary collapse. When we truly hyper-inflate – and we will – housing prices will first spiral UPWARD into the heavens – not DOWNWARD into the abyss. This story reads like a script from a Hollywood movie, doesn’t it?
Think again; and where’s your sense of imagination!? Just “click your heels three times” and [while repeating, “there no bank like J.P. Morgan Chase”] imagine a world where every adjustable rate mortgage that comes up for renewal [where the mortgage payment is scheduled to dramatically increase] – and the payee cannot afford the new payment. So, instead, the lending institution keeps the monthly payment “the same” and capitalizes the shortfall – tacking it onto the “back end” of the loan which just happens to sport a “new” 40 – 50 yr. amortization schedule! Perhaps we could even call this “roll over” a ‘deferred debt terms [DDT]’ or better yet – get the smart folks over at Goldman Sachs to “package” these critters up in a new fangled mortgaged back derivative. What Makes Me So Sure It Will Go This Way? Simple! We’re not in Kansas anymore! Ask yourself – again, if you already have – why the Fed stopped reporting M3 Money Supply data? Now ask yourself why official inflation reporting is grossly understated? How about distorted and contorted employment data and the hollowing out of the American middle class? Now try to make heads or tails of the manic swings in precious metals prices? These are ALL historic benchmarks of value and economic health – and they’ve all been rendered more or less meaningless. Sometimes Words Paint A Powerful Picture Too Additionally, one only need consider behemoth Fannie Mae's own admissions when considering the extent to which Regulators and Officialdom will go to project and protect their “all’s well view” of the world, “Cautionary Note Regarding Previously Reported Financial Results - On December 22, 2004 Fannie Mae announced that its previously issued financial statements should not be relied upon in light of the SEC's determination that the financial statements were prepared applying accounting practices that did not comply with generally accepted accounting principles, or GAAP….” With no reliable, audited financial statements to form the basis of ANY credible metric of valuation; has not real estate valuation already entered the realms of make believe? Isn’t real estate already effectively worth “WHAT EVER WE’RE TOLD IT’S WORTH IN FIAT TERMS”? Given factual admissions like this, on what basis could supposedly savvy, informed institutional investors and fund managers possibly be proffering to unsuspecting ignorant stake holders as to why they continue to buy and hold untold billions of FNM stock and securities?
- pictures really are worth a thousand words, aren’t they? Welcome to Emerald City!
©
2006 Rob
Kirby Let's
Just Call it "Price" In a perfect financial world, the concept behind the widely used “market value” definition, which has no less than 5 parts, is fraught with ambiguity to cover all potential situations that might arise, and includes parts that most valuation analysts have no ability to confirm, might have merit. But things aren’t perfect and the market is filled with consumers. My view is that we talk their language when it comes to putting values on real property assets. A few weeks ago, I attended a luncheon where the topic, geared for the attorneys in the audience, was how appraisers can provide a variety of values for the same property. For those in the business, it is clear that market value is market value as long as all variables are held constant. Remove an extra parcel of land, add a Hypothetical Condition, change the date of value and voila, like a card trick, the value changes. What if the variable is the user? What is a market value given to a lender who wants a property appraised in short-order for not-too-much money compared to the property owner in the midst of a neighbor dispute with intentions to sue? Are all things equal even if in both cases, it is called a market value? No way. Now, for argument sake, let’s call it price, not market value and apply it to something other than real estate, say a deli. What is the “price” if I order the sandwich with no meat, only cheese? What is the “price” if I want that grass fed roast beef sandwich, not the pressboard? You see what I’m getting at? The way that price is used in the context of the request makes it clear that premium or discount is expected by the one ordering the item. In the world of real property valuation, if only we could say the market value on a lender special (low fee, no care on the part of the one placing the order, no recourse) or a market value on court soaker (a report refined to the nines, a hand crafted number). The one placing the order knows there will be a different cost for each option and will have expectations set accordingly. About that luncheon, an attorney couldn’t believe the appraisal community could render an opinion ethically for a market value and for it not to be required to hold up to all levels of scrutiny. “Didn’t the appraiser have an ethical obligation?” I explained, that when an appraiser is asked to prepare an appraisal on behalf of the lender who merely want to check box checked, and there was no mention that the report would be used to help in a divorce proceeding, well then one couldn’t expect it to defend a report to all users for all reasons. When I left, I thought about the appraiser who had been subpoenaed to appear as a witness for that divorce proceeding. I wondered how much stress went into the build up of the case being crafted by the attorneys and couldn’t help but wish appraisers could use the consumer friendly “price” in lieu of the cumbersome, fraught with pitfalls of a definition employed by the current system of “market value”. For background, the rules designed for appraisal are modeled to cover the behinds of the Federal Reserve. Yes, the way it is pitched is for “public trust” to be served by appraisers but really, who is anyone fooling? In California, an appraiser needs to be licensed only for those transactions classified as “federally related transactions”. This means transactions involving the Office of Thrift Supervision, Federal Deposit Insurance Corporation, Federal Reserve Board, Office of the Controller of the Currency, and the National Credit Union Administration, which are the very organizations regulate most lending institutions. The room full of attorney from that lunch left baffled as to who they should contact for their real property valuation needs, what to ask of them (remember new Scope of Work rules as of July 1st) and how to differentiate the mediocre from the excellent work product. That is not good for the appraisal industry. What about the consumer who wants a readily understandable summation of their property value? Think Zillow and how its success is achieved through its easy to navigate and read website. What about the appraiser who is being asked to uphold the impossible market value definition that can be twisted to fit anyone’s needs? Surely, there could still be adjustments such as a higher price was paid for that property because it has parking for 20, compared to most with only on-street parking. The part that I like is that the consumer could readily understand the rational. And, at the end of the day, aren’t we all just consumers and isn’t the price of something we are confronted with on everyday basis? Using Google and the search parameters: definition market value, the options were a mix of stocks and real property. The following is a cut and paste from the top 2 search responses using: http://www.answers.com/topic/market-value; and http://www.thefreedictionary.com/market+value
and from http://www.thefreedictionary.com/market+value):
©
2006 Leigh Budlong, MAI · CCIM |
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Bedlam
at the Federal Reserve Voting with your money, and Economic Tapeworms -- Prologue In June 2006 I resigned from a realty valuation professional organization, which I considered to be an economic tapeworm for a number of reasons. If a significant number of qualified realty valuation experts leave the industry and change careers, the result for buyers and sellers active in micro and macro reality markets is quite obvious in either a soft or hard landing for realty in the United States. We have the ability to effect changes by voting with our money. A Little Background Music, Please! The Federal Reserve banking cartel and all their minions rule the roost in micro and macro real estate markets. Economic tapeworms exist for their own greed, self-indulgence, and suck the nourishment [money] from the host. The Fed is an economic tapeworm in its own right. The mortgage interest deduction as well as tax-free exchanges like the Starker 1031 exchange are designed, along with the Fed’s monetary policy to keep Americans in debt up to their eyeballs, providing not only consumerism funds to buy and consume, but to provide funds to float Wall Street as well. Providing not only inexpensive mortgage funds with a wink wink from the Fed, as well as allowing the banking cartel to provide thousands of varying mortgage products to the consumer are all part of the shell game floating real estate’s boat. For the sake of profits, even less than qualified borrowers are targeted by predatory lending and mortgage servicing practices. We even have white-collar mortgage and appraisal fraud running rampant in real estate sectors. Foreclosure rates are increasing in many real estate markets across the country, many times running through all sectors of the socio-economic scale impacting both folks with little means and folks with high earning capacity. We as a people have been dumbed down by the Fed’s control over the educational system from kindergarten to major universities and colleges that being in debt is the place to be. Ben Franklin, however, said it best: Neither a borrower nor a lender be. Real estate was, is, and will always be a commodity – the price of which can fluctuate with the market. Real estate is also a depreciable asset when there are building improvements on the land. Anytime the Fed creates more paper Federal Reserve Notes, which is what it does by design, form, and function, we have an inflation [more paper money chasing fewer goods and services]. For many years these legal tender pieces of paper have funneled into real estate pushing up the supposed market value of the properties. As properties inflated, folks extracted “equity” to spend in the consumer economy, taking on more debt collateralized by inflated property. This is a Ponzi Shell Game within its own right. But, Mr. Greenspan said…. The Federal Reserve lies. Mr. Greenspan said several years ago that real estate could not be a markets bubble as all real estate markets are local. I have commented on that many times before. Fannie Mae, Freddie Mac, and the Federal Home Loan Banks as the big three sell pretty packaged “bundled loan securities” as ABS and MBS to global investors secured by loans from local real estate markets. The light of day has shown different types of executive perks and accounting tricks in the GSE companies to grow their market shares in their book of business. The use of derivatives and counter-party agreements have been used to spread their risk around to other areas of the financial markets. We all know that the boys up in Omaha at Berkshire Hathaway believe that calling derivatives sewage is an insult to sewage. These derivatives are also based on local realty markets. This has all been made possible by the printing press of the Federal Reserve creating money out of thin air in the Mandrake Mechanism. Folks who believe that the Congress will be the one voting to bail the GSEs out if things get really nasty in the secondary mortgage market, are probably on Prozac. John Dizard in Alarm Bells Sound for Fannie and Freddie points out that the Federal Reserve will ultimately be the mechanism in the name of the game is bailout – bailing out the derivative counter-parties on Wall Street to the GSEs. As a matter of fact, it appears quite obvious that REOs, non-performing loans, increasing foreclosures, and declining realty prices under these types of collaterized risks with the Federal Reserve as the central bank lender of last resort further compounds Ben Bernanke’s problem of maintaining the Federal Reserve Note as the world’s reserve currency of choice. Bailouts by design are inflationary to the money system, because the lender of last resort surely doesn’t have the gold or silver [specie] for the bailout – it just creates more of the paper stuff out of thin air. The Pause that refreshes…. I stumbled across this link to filmmaker Aaron Russo regarding America: Freedom to Fascism. My link is a Yahoo link to a 35 minute interview with the filmmaker, which I found to be quite entertaining. Nope, nothing he says in the interview becomes something that I didn’t already know. I suggest my readers break from my essay, and just watch, listen, and learn from the interview link. If my readers are unfamiliar with G. Edward Griffin’s Creature from Jekyll Island… a second look at the federal reserve, Edwin Vieira, Jr.’s Pieces of Eight, Lawrence Reed’s Great Myths of the Great Depression, or Eustace Mullin’s Secrets of the Federal Reserve, perhaps this may be an eye-opener. The main point that I want to make is that real estate prices and values under a specie backed money system [precious metals not created out of thin air] would have limited reason to inflate in price, and would remain relatively stable for the most part. To be sure real market forces that impact real estate would become more recognizable to investors. When we have property that inflates in price because of the printing press, the real nature of physical real estate and the rights of ownership become obscured to buyers, sellers, and investors. See: Ponzi and Electricity. A central banking system is one of the tenets of the communist manifesto. Central banking is quintessential to the destruction of liberty, economic freedom, and real property. It is also cardinal to the shredding of the Constitution and the Bill of Rights. American Gulags, Ashcroft’s Hellish Vision, 1984 Re-Visited?Jonathan Turley, constitutional law professor at GWU, wrote Camps for Citizens: Ashcroft’s Hellish Vision. I suspect part of those are just plain old “Debtors Prisons” for folks who just can’t pay the piper to the bankers since the US Congress revised the bankruptcy laws in favor of the banking cartel and the Federal Reserve. I suspect most of the 50 states now have laws on the books, that if they sell your foreclosed property for less than the loan amount, the debtor is still on the hook for the money that vaporized. It is interesting that the Fed can create money out of thin air, but we as debtors cannot. As in any commodity, the market price of real estate can go up or down. The Constitution gave Congress the ability to coin money, but it was the actual Coin Act of 1792 that defined the money and the dollar as a measure of weight based on the Spanish Piece of Eight [371.25 grains of fine silver]. See also: FSOs Honest Money. What is so funny is that the US Dollar as a unit of money weight disappeared in 1965 when clad coins were made. The last of the silver certificate $1 Dollar “Bills” were removed from circulation in the late 1960s shortly thereafter. The definition of market value for real estate includes payment for the property in Cash as US Dollars. US Dollars don’t exist, but Federal Reserve Notes created out of thin air do. The definition of market value is therefore bogus. When one understands this premise, one can clearly see that it is impossible to predict how fast, just how low, and just how long realty prices have the potential to remain depressed as a commodity. Most folks consider real estate to be an investment. That is true to the extent that the owner is not overly leveraged with debt on the property. A true investment is one that is paid for with no debt service. Precious metals are true investments, that although don’t provide a return with interest, owning precious metals as commodity and fiduciary money certainly has less burden of ownership than maintaining a piece of real estate [maintenance, upkeep, property taxes, insurance, & other expenses]. Dr. Zhivago, the Bill of Rights, and Habeas CorpusThe 1965 David Lean film with Rod Steiger, Julie Christie, Alec Guinness, and Omar Sharif is one of my favorite films, and I first saw it when I was thirteen years old. There is one scene when Zhivago returns to his wife and father-in-law’s home in Moscow after the Bolshevik Revolution. The family to Zhivago’s amazement was sharing their personal residence with the masses as a “more equitable arrangement.” This was a confiscation of private property rights by the revolutionary government. The writ of habeas corpus goes all the way back in English and American law to the Magna Carta in 1215. Without habeas corpus protecting citizens, the rights of ownership in private property do not exist, for the state can confiscate those rights in real property. Without habeas corpus the Bill of Rights, which essentially protects the rights of ownership in real property is gutted. Keith Olbermann in Why Does Habeas Corpus Hate America? does an excellent video presentation, which describes this impact on real property and real property values. How can real estate in any micro or macro real estate market maintain value when the rights of ownership are not protected, and can be confiscated? The Russian Revolution of 1917 was based on the tenets of the communist manifesto, including redistribution of wealth and the establishment of a central banking system to control the money. This certainly is a “more equitable arrangement.” DenouementThe Founding Fathers started a revolution with the most powerful Empire in the world in the 18th Century to protect private property as essential to what they considered to be within the economics of life, liberty, and the pursuit of happiness. The American Revolution was an economic war. These men and women effected change by voting with their money, as well as their lives, liberty, and sacred fortunes. Many of the Founding Fathers lost everything that they held dear with their vote. Many lost their ownership rights in real property with their vote. Any destruction of real property prices from whatever cause or market force, diminishes our ability to vote with our money in the marketplace, be it a soft landing, or a full fledged crash landing. Sound money is essential for market stability in real estate micro and macro markets. Legal tender fiat paper money not backed by specie [precious metals] undermines the rights of real property ownership including its value. This renders the rights of real property ownership being nothing more than a manipulative tool of the Federal Reserve, and as such, a commodity that can be manipulated or confiscated at the whim of governance in their synergistic relationship. This is true bedlam at the Federal Reserve. ©
2006 Gale Bullock, aka Ole Bear, Editor Is
Residential Real Estate an Investment? How did American culture come to believe with such fervor, that owning a home(s), no matter how leveraged, is the way to build wealth? This is a question I ask myself more frequently now than I did at the beginning of my 17 year career as a real estate appraiser. This essay intends to examine the common sense associated with the current notion of the American public that owning a home is a sure way to build wealth in America. In so doing, we will also explore how early Americans viewed debt in a completely different way. Why should your home create wealth for you? To start, let’s think about the reasoning behind the premise that a home is a sure way to build wealth. Why should your home increase in value? From the time it is new, most components of the house begin to depreciate at differing rates. Some components last longer than others, but most parts of a home will need to be replaced over time. Not much maintenance is necessary for the first 5-10 years of a home, but at the end of that period it is usually time for new paint and floor coverings. The water heater may need replacement at this point. During the second and third decade of a homes existence, many more costly things begin to wear out and need replacement. Baths and kitchens typically need remodeling at this point, and the furnace and heater will also likely need replacement. After 25-30 years most roofs will also need to be replaced, if that hasn’t already happened sooner. Clearly a home will require many dollars of maintenance to keep pace with the natural depreciation that is a function of normal wear and tear and age. Tastes, styles, and floor plans change over the decades as well, so it is likely that your home’s floor plan will become somewhat outdated relative to what is built new. Yet another factor, that seems not to favor an increase in market value. But what would force the value of a home to increase at the rate of 10%, 20% or even 30% per annum as has been the case recently in America? In the last few years, you could not put 20% down on a property, finance the balance with a 30 year fixed rate loan and cover your mortgage, taxes and insurance with the market rental rates. In many instances market rents in my local area are only about half of what PITI costs new buyers in the same neighborhood. So you obviously wouldn’t want to buy a home for its income potential. Why then have homes appreciated in value at such a rapid pace? Given that it will cost significant amounts of money to maintain a home as it ages and that one should not expect to be able to cover the costs of ownership via rental rates, it must be due to some other forces. One is left to conclude that the inflationary actions of the Fed and the reckless loans and underwriting practices of lenders has allowed buyers to afford more than they previously could with the more conventional financing terms common just 10 years ago. Before the Gold Standard was totally abandoned in the early 1970’s…… Not too many decades ago, families tried to minimize their debt levels. Many people rented and saved money until they had a substantial down payment before purchasing a home. No one expected to make a huge profit on their home due to appreciation. People were happy to be able to live in it, raise their family and pay off their loan over time. And anyone who bought a residential property as a rental, didn’t expect to make a killing on appreciation, they just banked on having the rent cover the PITI, and over time the tenant’s rent helped to pay down the mortgage. Such investors were motivated primarily by having tenants pay off their mortgages, not by rapid appreciation. As the real estate market appears to have stalled like a rocket whose second stage did not ignite, one wonders whether the parachute will deploy, or if the rocket will dive nose down into the earth! Inventory levels are growing rapidly, and it is only a matter of time before the fundamental rules of economic supply and demand cause values to decline at rates that might equal those created when supply was limited, and buyers were overbidding. Also consider that option arms, negatively amortizing loans, balloon loans and many other risky loans provided borrowers with abundant credit to aid in the overbidding while values were increasing. Ironically, lenders will make the decline even worse when they begin to tighten their credit standards as values begin to slide. Tightening credit standards that remove or limit these creative financing schemes, will exacerbate the oversupply and push values even lower. These is kind of a cat and mouse game and lenders will continue to tighten their credit standards as the market continues to decline. And once again, lenders will have a big impact in the changing market values, this time as they decline, just the same as they did when values were on the way up due to increasingly lax lending standards. Foreclosures are increasing and this greater supply will also have a negative impact on values. How far can values decline you ask? Common sense would indicate that values might need to decline to the point where a typical buyer could manage to put a 20% down payment and then be able to afford the monthly payment on a 30 year conventional fixed rate loan. In my market – the East Bay Area of the San Francisco Bay - I think the comfort zone for that payment would probably be between $2,500 and $3,000 per month. Such payments for 80% loans on 30 year fully amortized fixed rates of 6.5% indicate values of between $495,000 and $595,000. Current values are more like $750,000 to $1,200,000, affordable to many only with the creative financing products pushed by mortgage brokers and lenders in recent years. A recent article in Business Week magazine indicates that between 25% and 35% of all loans made in California have some sort of optional payment plans, so that borrowers don’t have to make a fully amortized payment. Such loans were once only a tool for the wealthy to help manage cash flow, and never to help people afford more house than they could qualify for…until recently. Although many so called experts have told us that things are different this time and that debt is something that can be managed, the only thing that really is different is the huge amounts of money that the mortgage business has made during the real estate bubble this decade. I have heard it said that the second most referenced topic in the Bible is that debt is something to be avoided! Most people have understood that for generations. The American public obviously doesn’t get it right now. But it will learn a hard lesson soon and then it will not forget! For a while at least! And how did Americans view debt at the time of our Founding? Just how did debt become so trivial in America? Americans would do well to take a lesson from early America. Consider Robert Morris, 1734-1806, [See Link: http://bioguide.congress.gov/scripts/biodisplay.pl?index=M000985] a prominent founding father; a member of the Continental Congress; a signer of the Declaration of Independence; and a delegate to the Constitutional Convention of 1787. He was also known as the financier of the American Revolution, being George Washington’s right hand man during the Revolutionary War, and essentially the Treasurer for the Continental Army. Washington rewarded his loyalty with an offer to be the first United States Treasurer during his administration. Morris respectfully declined and instead recommended Alexander Hamilton for the job. He was one of the wealthiest men in the early USA and was elected one of the first 2 US Senators from the State of Pennsylvania. His ambition and greed got the best of him though, as he speculated on land in early District of Columbia and he found himself overleveraged. At the close of the Eighteenth Century, not repaying your debts was completely unacceptable and he was put in a debtor’s prison in Philadelphia from 1798-1801, and was released only when the first Bankruptcy reform laws were passed by Congress. Those in debtor’s prison did not eat or drink unless relatives or friends brought them food – or paid off their debts! Common criminals were treated better in prisons than were those in debtor’s prisons. A wave of small pox swept Philadelphia while Morris was in debtor’s prison. All common criminals were released from prison because it would be sure death to stay there, however those in debtor’s prison were not released. Morris somehow survived this epidemic and he later died in poverty in Philadelphia in 1806. Such public disdain for debt in early America is a far cry from the loving embrace that America has currently with debt, and lots of it! How could just 200 years bring such a complete change in the public’s outlook on debt in America? Americans would do well to consider history and reflect on their current financial practices, particularly the idea that large amounts of debt on your home are not a problem! A Reality Check for Today….. Residential real estate is meant to be lived in by its owners – it is not an advisable investment vehicle if all an investor wants to do is make money. The Fed has already been most gracious enough to helicopter equity to millions of homeowners through the printing press. If investors wish to make a profit on real estate investments, they should consider non-residential investment properties with reasonable debt levels! -- for a cash on cash return to investor equity that we "in the business" call the Equity Dividend Rate. No one should plan to retire on a wealth effect created by their home. Instead people should hope that they can own their home free and clear by the time that they retire, and have a retirement income from alternative sources as wise and prudent investors in the financial markets. Real estate, both commercial and residential, is but a small sector of global financial markets. Hard or soft landing for US real estate? It really doesn't matter to homeowners who buy a home for the right reasons. These are personal use and satisfaction above all in keeping with a family's affordability index, then location, school districts, proximity to jobs, churches, community services, shopping, floor plan, amenities, quality, functional utility, age, condition, size, and grounds just to scratch the surface of what appeals to a family buyer motivating the purchase. If you are buying a home to make money speculating on perpetual increases in a paper dollar market price, you probably have a fool for an investment advisor. If you are buying a home to invest in your family and its quality of life, then that's one of the best things one could ever do -- for family is the investment of a lifetime, isn't it? -- no matter what the price of the home is worth, as long as one can afford it. ©
2006 Bruce Hahn Debt-Addicted
Gamblers I will let others speculate on how the financial consequences of the housing bubble will play out. I would like to point out some of the damage done by this housing mania and the benefits we stand to enjoy from its demise. Consider the many negatives caused by this market of the past few years. The United States is way over-invested in residential housing. This drains capital away from productive uses. First time buyers have essentially been priced out of many markets, denied the normal life choices available to generations before them. Think about the trillions of dollars in debt that have been taken aboard household balance sheets. For all the talk of how many people own homes, it is usually not mentioned that as a whole, the nation enjoys a lower percentage of equity than prior to the boom. Perhaps the worst aspect of the housing mania is that we have become a nation of debt-addicted gamblers, rather than savers and producers. I disagree with the idea that a return to historic norms for home prices equals disaster for this country. To the contrary, we can expect great rewards. Investments and capital should flow toward market-determined endeavors. Reckless speculation could become the lazy-mans shortcut, and frowned upon. After saving a down-payment, young people can look forward to owning a home without insane debt levels. As a matter of fact, perhaps saving will be seen as a virtue again, and debt will be viewed for the burden it truly is. Let’s really get optimistic and hope that the Federal Reserve will receive the credit for this debacle that it justly deserves. Maybe people will wise up to this paper money game and insist on reform. We might really hit the jackpot and find a citizenry demanding that the various government entities give up their stranglehold on ‘public lands’ that they never paid for and which rightly belong to the people. We may even follow the advice of one presidential candidate and sell-off the land to retire the public debt and create a real trust for those on social security, prior to ending that venture. Sure, falling home prices will hurt some financially. But the die is cast, and wishing trees would grow to the sky won’t help. A return to prudence can’t hurt these people or us in the least. Recessions serve to purge an economy of mal-investments. And to the extent that occurs, a deflationary recession in housing is a good thing. |
GLOBAL
REAL ESTATE MARKETS FORUM
Using
the intellectual tools of Austrian economics, there is little doubt that
the debt-fueled housing bubble will turn into an economic bust of epoch
proportions. Perhaps when the bust becomes painful enough, a superior
panel of 
Who Said There’s No Way To Bolster A Market Armed To The Teeth?
Given
that we’ve already entered the world of “make believe”, one only
need look at the picture the stock market is telling us – THIS