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Devastation of the Family Home

In the field of economics, one of the most difficult items to estimate is the ripple effect associated with major events that significantly affect the economic and social welfare of a community. The recent housing crash, for which our economy is still reeling from, is a classic example.

In my estimation, the entire response from our federal government was in error, as government intervention took the place of free market capitalism to create devastating economic consequences which continue to this very day.  While some may conclude the government was attempting to help in a time of "crisis", I am reminded of another of the timeless quotes from Ronald Reagan: "The most terrifying words in the English language are: I'm from the government and I'm here to help".

 

The housing crisis established a house of cards, pun intended, where lending institutions gave mortgages to anyone with a pulse, packaged the loans into mortgage backed securities and sold them as A rated to investors.  With the leverage unsustainable, bank failures emerged and the devastation began.

Rather than letting the market cleanse itself out, where those who invested in error or without proper due diligence, or both, paid the price, the government initiated bailouts of the major lending institutions. These government investments in the banking sector have come with a heavy price for the lending institutions, including appraisal regulation that has significantly impaired the industry.

The government now has an embedded regulatory mechanism within the banking sector, and Fannie Mae and Freddie Mac continue to run inefficiency, with these government sponsored enterprises possibly needing more bailouts.  The housing market, although now seemingly stabilized and improving slightly in some markets, remains a shell out itself.

Home ownership is at historically low levels, in large measure to stagnant wage growth, with the worker actually losing ground annually. Many former homeowners are joining the millennials, where a majority unable to purchase a home are forced to rent, pushing rent levels to historic highs.

Much of the government interaction in the aftermath of the potentially orchestrated housing crash has limited free market principles, prohibiting the market from returning to optimal health.  Perhaps it is part of the war the progressives have on suburbs, maybe a vehicle in the transformation of wealth or quite possibly it is Orwellian in that gave the government an a prime opportunity to seize control over a large portion of the economy, and the citizenry.

Most in the economic world who embraces free market principles knew the path of quantitative easing and government interaction and control in markets was most problematic. While we await the next crash, which we forecast to come right around the presidential election, the devastation the crash has left on families across the nation is troubling and sad.

Many feel the great American dream is no longer obtainable.  Without question, if you have yet to obtain wealth, the degree of difficulty in achieving it has risen sharply under President Obama due to the infiltration of government regulation and taxation.

It seems 99 Homes may focus on the trial and tribulation of a family whose life was turned upside down at the drop of a hat as the housing crisis placed a stranglehold on the US economy back in 2008.

My professional activities, involving residential real estate appraisal, rental property management and as collateral risk analyst have given me a front row seat throughout.  When 99 Homes hits theaters, I will be there to grab a front row seat.

Twisted Tales

I did not know whether to laugh or cry.

That was my reaction to the following headline of a post by Tyler Durden over at ZeroHedge.com:

"With 1 In 3 Homes Unaffordable, Freddie Mac Prepares To Enter The Trailer Home Loan Market"

After fighting through the propaganda presented daily by the Obama administration and their media partners, it is quite obvious that the issues surrounding this headline are illustrative of an anemic and fragile economy, with our country teetering on economic peril few can currently visualize.

With all the failed stimulus, which I was against, we literally have nothing to show for it.  The economy "grew" an a paltry 0.01 percent last quarter, and it culprit is not the much discussed weather.  The culprit remains increasing taxation and regulation, and Obamacare, the biggest job killer we have witnessed in many a moon.

With over 90 million potentially fully employed workers out of work and the lowest labor participation rate since the economically dismal Carter administration, job growth is practically extinct and the annual after tax income for the average worker has decreased approximately 10% since the financial crisis of 2009.

Therefore, although housing prices have significantly retreated, due to a bludgeoned job market, as reported by Zillow, a third of the homes for sale are unaffordable to the average household. In addition, due to Dodd Frank and increased lending requirements, there is increasing difficulty in obtaining financing. 

Housing purchases have been happening over the past year, which have potentially inflated values.
However, it has not been the young family moving up from apartments or starter homes accounting for the sales; it has been Wall Street Hedge Funds and public and private real estate asset management firms, who have been making purchases to rent back to the increasing number of potential buyers unable to make purchases.

It is noted that in recent months these firms have significantly backed off their number of purchases.

Mark Hanson is a top notch real estate analyst, and he recently presented the following chart indicating cash purchases, which were a stunning 63% of residential properties sold in Florida in December:

Mark Hanson/MHanson.com

As the FED seemingly prepares to end qualitative easing, interest rates, which have been been held down and are not a true reflection of the market where economic equilibrium would be measured, without continued FED intervention, are sure to increase.  With the employment landscape stagnant as best, the purchasing of home will become increasingly unaffordable.

Seemingly in anticipation of the negative environment for housing created by the government and their partners, GSE Freddie Mac is now set to begin financing manufactured-housing communities.

Make no mistake, increased financing opportunities are always welcome, although the government should not be involved, as the private sector should be the marketplace for mortgage lending.

But, with this action, is there a story behind the story?

Manufactured housing is typically utilized by lower income families and acreage owners in rural communities.  Are stick built homes to become increasing unaffordable, forcing middle class owners to back step and unitize manufactured housing?

Keep in mind as well, that potentially increasing regulatory actions by the EPA, under the Agenda 21 guidelines, may make transactions on older existing homes much more costly for all involved through having the subject improvement meet EPA guidelines with respect to energy efficiency of appliances, windows, roof cover,etc. before qualifying for financing from GSE's or money center banks the government has interests in.

As a real estate investor, I have not included manufactured housing in my portfolio, primarily due to limited economic life of the improvement in comparison to stick built improvements.  Be advised I am not the only investor aware of this. 

Thanks to the Obama administration and their anti-capitalist policies, the economic conditions in the country are horrendous.  Reminiscent of the climate in the Great Depression, if you are fortunate to have good, stable employment, it has been your neighbor who has been laid off who cannot find adequate employment who is really feeling the brunt of the poor economy.

With employment stagnant at best, and the true future effects of Obamacare unable to be adequately forecasted, the job market remains facing unnecessary head winds with are keeping our economy from reaching high efficiency.

Perhaps Freddie Mac knows something most of you don't, and is looking for another investment opportunity?   The weather is unpredictable; don't get the tales twisted.

Poll Queston Lacks Adequate Answers

An excellent source of information regarding the mortgage industry is found in The MReport. The MReport, self described as the pulse of the mortgage banking industry, covers the always changing components of the industry, directed by both the public and private sectors.

 

In an effort to grab the pulse of the readership, which is mostly comprised of professionals within the mortgage, appraisal and real estate industries, The MReport presents a poll regarding topics of current interest within the industry.

 

One such poll caught my eye recently, and led me down a road which elevated my blood pressure. Please see the following poll of the week, which asks what the "best course of action for the Congress to take to help improve the housing market." 

 

 

I do not know who writes the polling questions for The MReport; however, I would assume it is a member of their staff of writers, reporters or editors.  In review of the potential answers, one of two observations must be noted:

 

Either those comprised of writing the questions are borderline clueless on economic theory, or they are well familiar with economic theory and seek to nudge the readership into the acceptance that governmental interference, or as they apparently see it, helpful interaction, is a requirement in some form or fashion.

 

I find this troubling to say the least.  For those of us who champion free market capitalism, which would include our Founders I might add, there would be a few answer alternatives which we would respectfully submit.  Submitted for your review are the following:

1. Government should, at the earliest possible opportunity, exit participation in the mortgage industry, and allow the free market to find equilibrium and function in full efficiency.
2. Refrain from extensive regulatory action within the industry, eliminating attempts at engineering social justice through shaking down banks.
3. Retract Dodd-Frank, which has had significant negative affects on the banking industry, curtailing loan ability and strongly reduced the quantity demanded of potential buyers.
4. Retract The Home Value Code of Conduct, an anti free market control mechanism cast over the appraisal industry, which has had a historic ripple effect on negativism on the industry.

There is one thing Congress could do to help the housing market, and Ronald Reagan outlined it in his first inaugural address:  "Is it time to reawaken this industrial giant, to get government back within its means, and to lighten our punitive tax burden. And these will be our first priorities, and on these principles, there will be no compromise."

Immediately, several steps could be taken which give rise to employment and consumer confidence, providing a jolt to the anemic current growth levels.  Among those would be the reduction of the corporate tax rate and regulatory actions, both those employed through legislation and those implemented by executive order.  Retract all governmental interaction within the markets employed in the aftermath of the financial crisis, including the newly formed Consumer Protection Bureau.

Actions deemed supportive of a stronger workforce, the raising of the minimum wage and the new ordering of overtime payment, actually are an impediment to employment and negatively affect the marketplace and should be thwarted immediately.

Of all the ill-conceived actions interjected in the marketplace, with or without legislation, without question the most harmful to economic growth and prosperity is the implementation of Obamacare.  It fails in its publicized objective and is nothing short of a job killer, cutting freedom and prosperity off at the pass.

With such common sense applications at the finger tips of of Congress, it is apparent that the objective is not to provide elements for increasing productivity and prosperity of the governed, but in fact to implement through taxation, legislation and sadly coercion increasing control over those for whom the Congress is charged with governing.

Quoting Reagan again, "I hope we have once again reminded people that man is not free unless government is limited. There's a clear cause and effect here that is as neat and predictable as a law of physics: as government expands, liberty contracts."

Our government lacks adequate leadership at this time, with encroachment of freedom joined by mounting financial and geopolitical problems. Under Obama, government is not only far from limited, but is both legally and illegally seizing power over the citizenry, and predictably, liberty, along with prosperity, is contracting.

Sadly, in a nation drowning in a sea of irrelevance, few recognize the dear gift being taken from them right in front of their eyes.  It should be noted that Reagan was right; "Government is not a solution to our problem; government is the problem."

Health Care Mirage

Unfortunately, due to arrogant elected officials, who shoved down the throat of the American people a take over of one sixth of the American economy without one Republican vote, and the inability to accurately interpret the Constitution by Chief Justice John Roberts, we are likely stuck with The Affordable Health Care Act, or Obamacare.

The roll out of Obamacare is running into all sorts of issues, inclusive of much higher than anticipated costs, increased regulation and difficulties in implementation.  The architects of the Health Care Act, written before Obama got elected by The Tides Foundation, know exactly what the future holds with respect to the plan.  The majority of the politicians, who never read the bill, are useful idiots playing the political game.

And of course, there is the extreme propaganda of false, incorrect and deceitful information the American people were handed by the politicians who supported the effort. 

*Premiums will fall
*No Death Panels (Sarah Palin was correct as usual)
*You can keep your Doctor

Perhaps the most deliberate omission in the description presented the American people was that, although the ACA itself is not a single payer plan, it was a necessary stepping stone, or trojan horse, because the architects deemed jumping to a single payer plan would be met with anticipated public disapproval.  The people must be nudged that direction over time, with the elimination of choice, and freedom, along the way.  Make no mistake, a single payer plan is the ultimate objective, although the mainstream media did their best to conceal it.

However, many have publicly stated the intentions, including former Senator Barney Frank (D:MA)and former Speaker of the House Nancy Pelosi (D:CA).  Rep. Jan Schakowsky (D:CA), not only admitted to the ACA being a precursor to a single payer plan, but gleefully spoke of her intention to destroy a private sector industry.  Imagine the arrogance.

Over at Verum Serum, Robert J. Samuelson has a great piece on the public plan mirage, although it fails to examine the extension beyond health care.  For example, as an investor in capital markets and real property, I found particularly interesting the portion of the health care bill that hits capital gains and real estate with an investment income tax of 3.8%. 

How does capital gains on investments or real estate relate to health care?  Well, obviously, it is not about health care.

As Ronald Reagan warned us back in 1961, a government method to impose socialism or statism on the people is through socialized medicine as a vehicle for increased taxation, regulation, surveillance and control. 



Secretary of Health and Human Services Kathleen Sebelius really insulted the intelligence of the American people this week when she opined that the implementation of the law was much more difficult than previously thought.

“Probably no one fully anticipated when you have a law that phases in over time, how much confusion that creates for a lot of people. So that has been difficult,” Sebelius said. “When the law was signed and people immediately did not get affordable health insurance, they were surprised and a lot were disappointed but now understand that this was a gradual phase-in.”

Really? Who is she trying to kid? 

The planners recognize that most Americans do not follow closely enough to decipher the lies being told them on a consistent basis, not to mention changes to the language, and therefore are not privy to the inside baseball of the plan.  Since when are revenues tax increases?

Those of us who understand free markets and the importance of individual choice knew full well what a monstrosity of misery the law would be. We also understood the false premise the whole movement was based upon.  Charts like the one presented below would have been pure comedy if it were not sadly real and poised to wreak havoc on our liberties.

 

Unfortunately, the more the planners plan the more the plans fail. Governments don't tax to get the money they need but find needs for the money they get.  Every area of freedom will be invaded by the tentacles of bills of this nature, and with each victory the progressive elite planners achieve, the more freedom we the people lose.

Tacking Tangible

The market indexes have been on quite some run.

If I could get a handle on all the lines of action going on on Wall Street, not only would I be a ventriloquist, I would be beyond wealthy. I am not.

The FED has increased the money supply by engaging in monetizing the debt, otherwise considered printing money, and that has resulted in excess money chasing too few assets, pushing the asset prices higher.

Due to the abysmal housing market, which cannot gain ground due to a horrendous job market and extensive regulation through Dodd-Frank, real estate investing has not been the avenue of choice for investors.  Gold and the stock market has.

A review of the NASDAQ after the close today shows the index increasing five year highs, and this has been a great run if you have been along for the ride. Take a look, but note the market level variance from the relative strength:



Weekly NASDAQ chart/Investors.com

While markets are forward looking and do not always reflect the current status of the economic realities on the ground, given our economy, it is reasonable to conclude the stock market should not be lurching into a parabolic assault on historical highs.  With an employment participation rate having retracted to levels not seen since the Reagan administration, a manipulated unemployment rate parked at levels not witnessed since The Great Depression, governmental assaults on small business, class warfare on the wealthy and putrid growth in the Gross Domestic Product, one has to wonder why the dichotomy between the capital markets and the reality on the ground.

As the excellent blog Zero Hedge accurately pointed out, many economic measures are breaking down, and while the Case Schiller Housing Index has shown signs of life depending on how you analyze the data, even though a shadow inventory remains, the housing market remains bottoming.

If housing is improving, with the state of the economy, one must conclude rising investor participation as first time home buyers are scarce.  If investors are becoming more interested in real estate, what market has fallen into disfavor and why? The stock market?

Indications are yes.

In fact, as BloombergBusinessweek reported, some $114 billion US Bank deposits have been withdrawn, at the fastest pace since the September 11, 2001 attacks. 

Apparently, few know why.

Paul Miller, a bank analyst with FBR Capital Markets, cautions against reading too much into the Fed’s weekly data. “It’s a noisy database,” he says.  No kidding.  With a media complicit in propaganda, and the FED intervening in market action in unprecedented levels, it is most difficult to accurately value equities.  It is the FED behind the curtain who is crowding banks out of the mortgage origination market and setting unreasonable credit requirements for lending practice, handicapping the housing market even with manipulated easy money.

But is there a correlation between rising housing investment and what looks to be a topping out of the DOW and NASDAQ?  Further, in anticipation of a market collapse, would tangible assets such as real estate become the favored investment?

Without government interaction, even though they have been replenishing their balance sheets borrowing free money from the Fed, banks could not withstand a major economic collapse.  Further, unwinding the hypothecation would be catastrophic.  If the clients of Jon Corzoine at MF Global are any indication, get your money while you can.  Maybe investors are.

No matter what market developments lay in store for us, a few things are certain in my view.  The housing market remains broken and cannot recover without a recovering job market. The market has been compromised and true evaluation is not possible. And, unfortunately and most notably, the rule of law and trust of the marketplace, integral for the survival of a free market capitalist system, has been violated.

As I have previously mentioned, until the rule of law is reestablished with the government becoming a bystander, allowing the FED to resume normal open market operations, the market place will remain compromised and a playground for the crony crowd.

Given the increasing turbulence, while I don't know what I am having for lunch tomorrow, I sense a major storm brewing both port and starboard. Caveat Emptor.

Lost in Space

60 Minutes was back in Central Florida for a report on the decimated Space Coast after the demise of the Space Shuttle Program.

Under the Bush administration, the shuttle program was announced to be discontinued, replaced with a new program called Constellation. Although President Obama is spending money like a drunken sailor, gambling on various projects while placing this country at the brink of financial collapse, he and his Congress could not find the money to continue the Constellation.

As a result, our national security is in peril, not to mention the devastating economic conditions, beyond Obama's horrendous economic policies, the Space Coast is dealing with. Take a look:



It is hard to believe this has happened in America, but then again, we are in the midst of the most disastrous presidency in memory. Much of America is in despair, and our place as the leader of the free world is in jeopardy. Certainly, November cannot come fast enough. I cannot imagine what kind of individual could cast a vote for the most destructive Commander in Chief this country has seen.

You would have to be lost in space.

Upcoming Occupy Oscillation

Friends, family and colleagues gathered today in Los Angeles to pay final respects to Andrew Breibart, who we lost much to soon late last week. It will be next to impossible to replace Breibart, but the lessons he taught and leadership he exhibited will span many to continue his work in his honor.

America will need it.

Among the many items Breibart was working on when he passed so suddenly, was the nucleus of the Occupy Wall Street Movement. The mainstream media reports that the movement was a flare whose light has dimmed, a spontaneous gathering group of young Americans we can all be proud of.

Nothing could be further from the truth!

The group are for the most part useful idiot looter foot soldiers of a well financed machine of anti-capitalist, anti-American Marxist radicals, most of whom have not forgotten their efforts in the 1960's. The heavy hand of big government and all their tentacles coming together is their aspiration in effort to re-create '68.

While this video is lengthy, please allow our lost warrior Andrew Breibart to introduce you to some of the players and a handful of their nefarious objectives.



Although some of these folks are intellectually sound, many in the mid to lower levels of the Occupy movement are nothing short of useful idiots. Should the objectives of the movement meet with success, these folks will be swept under away in the tide under the hand of the intellectually elite leaders, who no longer have a use for them.

Among the topics discussed in the video, one hits very close to home for me. As a Realtor, Residential Real Estate Investor and Appraiser, I am very concerned about the effort to occupy homes, not just in an effort to re-write contracts through intimidation, but to establish a new market based on a price they dictated by socialists inspired by fairness.

Actually, price, and in turn marketplace equilibrium, is established between parties engaged in arms length transactions who through a series of sales provide a range of prices which indicate a median and a mean. Third party morons, who aspire for social justice have no place intercepting contracts, but President Obama did just that during the takeover of the car companies, and gave them precedent.

For me locally, if you are not paying your contractual obligation for any of my properties, you will be evicted as quickly as the law allows. As I say, if you are not paying, you are not staying.

If we get to a point where contract law is compromised or meaningless, the integrity of the marketplace is lost. Investors will refrain from taking any risks, and thus, growth under free market capitalism turns to nothing short of communism.

It must be recognized that this is the goal of those who are organizing the Occupy Wall Street protests. It has been a 100 year effort, and the window for opportunity to seize control is now open like never before. These power players are hoping to slam the door on capitalism before you wake up.

Efforts through health care, the churches, Big Education, the EPA inclusive of Agenda 21, regulation and taxation, the banking system, pro-Islamic (flotillas) and anti Israel actions are part of the tentacles the octopus is strangling us with.

Occupy Wall Street will move to the forefront as the summer approaches. You need to know who our opponents are and act accordingly. In the event of a crisis, the heavy hand of government will seize the chance to freedom away from the people.

Freedom is not free. In defeating this unprecedented internal threat, it is time to pay up America.

Economic Imbeciles

The economy is a major disaster, and although the arrogant rhetoric coming from the Obama administration says we are in recovery, we are not. Check this out from American Crossroads:



This cast of characters under BHO are not fixin a hole, they are continuing to dig it while burying us in it. They would not know the Laffer Curve if it rang the front doorbell.

Families are hurting. Many are getting booted from their homes, and the backlog of foreclosures is lengthy, postponing the return to a normalized real estate market. The dollar is extremely weak, and as we know from Reaganomics, sound money inclusive of a strong dollar is necessary for a healthy economy.

Investors do not know where to turn, although my bias in real estate wonders if a return to a tangible asset other than gold is appropriate.

Currently, sound thinking Americans and investors fear our government. DOW 20,000 and a strong wave of prosperity awaits a return to free market principles by a government that fears the people. Coming in November 2012.

A Real Trump Card

In the real estate business myself, I have been a longtime fan of Donald Trump, admiring his work as a real estate developer. Although I am not to be considered a reality television viewer, I have enjoyed several episodes of Trump's The Apprentice on NBC. I met him seemingly in passing in Trump Tower in 1998, and he seemed like a nice guy and I enjoy listening to interviews with him as he is guy who speaks his mind.

Over the years, I have not been on par with Trump politically, particularly on the subject of the Iraq war. Trump thinks it was a horrible decision to engage Iraq, and due to that his opinion of George W. Bush is quite low. I completely disagree with those assessments.

Recently, Trump has labeled President Barack Obama as the worst in our history, which Trump says has forced him into considering a run for the White House himself. Conservative is how Trump labels himself, and therefore if he runs he will do so as a Republican.

His potential entrance into the political arena has already paid dividends. Outside of Trump tackling topics many run from, most notably China, he took on the birth certificate fiasco head on and low and behold, it finally appeared. For reasons like this, I welcomed his entrance into the fire.

Although it has seemingly tailed off this week, recent polling had Trump near or at the top of the leaderboard of GOP hopefuls for 2012. Common sense rhetoric is the vehicle Trump has used to gain these lofty poll numbers.

Many think this is a publicity stunt, and given Trump, who could argue. We will soon find out.

If Trump does run, he could play a real trump card.

Given his middle of the road stances on many issues and his dovish positions on middle east conflict, he will have great difficulty winning the GOP primary against a long list of strong candidates. Should Trump lose the GOP primary, he has ruled out an independent run, as he indicates this would likely hand the presidency to Obama, something he says would be catastrophic, and boy howdy do I agree.

Trump loves America no doubt, and he hates to see us in the weakened state we currently find ourselves in. Trump should seize the day, change his political affiliation to Democrat and challenge Obama in the Democratic primary. Trump could win that race fairly easily, slamming the charlatan on wide ranging issues from business economics to American spirit.

The Progressives have completely taken over the Democratic party, although this may be news to many in that group. I know there are many conservative Democrats who do not like the current direction of their party and would welcome a "Scoop Jackson" type Democrat to consider. In a primary, Trump could engage Obama directly, and I think this would be great fun.

This move would be fantastic theater and great for America, and it would give Trump the chance to speak in familiar tongue: You're fired!

Do it Donald; pull a real trump card!

Agent Speculator

This sign, reportedly located in north Central Florida, is most telling.

Please allow a moment of digression. Elements of the left wing, under the premise of assisting those in the lower levels of economic stature to purchase a home, applied pressure to banks to lend with potential charges of false racism to lend to this group of individuals. Certainly, you recall ACORN.

The easy money position taken by The Federal Reserve helped fuel and create an environment of easy lending to all levels of economic status. Coupled together, we all now know how catastrophic this series of moves was.

In response to the crash, the FED balance sheet has been expanded to allow for banks to reset. Initially, public thought was that the banks would lend this money out to the public to help restart the economy. Instead, banks have been hording the money.

Are the banks still trigger shy to lend to the small businesses and individuals that make up most of the economic growth in the community? Given the economic environment created by this administration, one which seemingly encourages people to escape their financial obligations, I would be.

Are banks not convinced of the stability of the underlying value of the collateral used to secure loans, such as real estate? I am.

Are banks saving up because they see what lies ahead in the future, which is the possibility of another crash. Could be, as a double dip recession is already underway and we can see bubbles in several areas, such as gold and silver.

If I had all the answers, I would be floating around on my Hatteras in the Bahamas.

Currently, the dollar is at near term low. One of the four pillars of Reaganomics was sound money, which includes a strong dollar, which puts our economy in prime position to function at high levels. With oil prices pegged to the dollar, a weak dollar is one of the main reasons gas prices are soaring. Another reason is the Obama administration, who set out to investigate what role speculators are having in causing prices to rise.

If I know demand is steady at a minimum and Obama is restricting oil production, adverse to increasing our domestic supply from drilling, is assisting in creating havoc in the oil rich middle east which disrupts distribution and is placing a heavy hand of regulation on the profitable energy sector, I recognize investment opportunities.

Investors are indeed speculating on higher oil costs. The way to derail the speculators is for the policies regarding oil to change, and that would heave to come from the very folks investigating potential speculation.

Recently, China has been decreasing bond purchases from the US and selling at a discounted rate, as the Chinese are not confident they will get paid what they are owed. This action devalues our economy, as does our government using quantitative easing (printing money) as stimulus.

High levels of inflation has already arrived in some areas (food), but will become an all encompassing issue in the coming years. The FED will work to quickly offset the inflationary pressure by restricting the money supply, which should include a rise in interest rates.

What will the playing field look like when this starts happening. Will the gold bubble burst. Will the much talked about municipal bond crash become a reality? Where will investors run to?

Perhaps the answer is Real Estate, a tangible investment which as adjusted has historically low prices. Due to high levels of vacant units nationwide and new home construction nil, a reset is not expected until about 2016.

If it does come full circle, I hear Exxon-Mobil is entering the home financing business. Just call me Agent Speculator!

It's Happening Now

For homeowners, credit is still marginally difficult to secure even as most banks have received federal assistance to resume fair and prudent lending practices. But, while even the most intellectually challenged banker can make money borrowing short at next to free and lending long at around 5%, few banks are doing so. Why? Do they know something we don't? Is there another shoe to drop?

FOX Business Neil Cavuto uncovers it is happening as we speak.



Unfortunately, the economic policies of the current administration, which can be summed up as an assault on small business, is prohibiting the marketplace from resuming economic growth. Yes, a jobless recovery.

If these proposed actions, from excessive new regulation, increased taxation, "skyrocketing" energy costs under cap & trade to the insane prospect of government run health care, the prognosis for real recovery is bleak.

The commercial real estate sector cannot bounce back without small business expansion, which is fueled by entrepreneurs who start and expand small businesses, and thus occupy office and retail space. The current environment is not supportive to small business. A sad situation indeed.

Regression To The Mean

Lets follow the sales progression of a home in southeast Orlando and see what information we can derive from the marketplace.
In May of 1999, after 199 days on the market, this @2000 square foot home in the Southchase area of Orlando sold for $123,000. This 4 bedroom, 2 bath home, the subject of this case study, was built in 1996, features volume ceilings, interior laundry, a covered rear porch and is located on a corner lot.
Our subject property sold again in September of 2002 for $160,400 after only 17 days on the market. We note that the 2002 sale was outpacing the projected annual appreciation rate by approximately 8%, which is not alarming in a fast growing community such as Southchase.
In 2005, with the escalation of housing prices in full gear, our subject sold in June for consideration of $269,900, full asking price, after only 7 days on the market.

After some interior renovations and a couple of buckets of paint, our subject was re-listed in August of 2005 and sold after 49 days on the market for $317,500. Now that is impressive! This value is some 70% above the projected appreciation schedule, which is obviously quite risk sensitive and in my view would be cause for concern if I was a buyer.

In Central Florida, the typical annual appreciation level for single family residences in decent areas has been approximately 6.5% over the last decade and a half or so. The following shows a 6.5% annual appreciation of our subject based off the 1999 sale price:

1999---$123,000
2000---$130,995
2001---$139,509
2002---$148,578
2003---$158,235
2004---$168,521
2005---$179,475
2006---$191,140
2007---$203,564
2008---$216,796
2009---$230,888

Evaluations of market price in the housing market has many of the characteristics found in the stock market. Risk is measured by the distance from the moving average, and the first 2005 sale is at a level some 45% above the projected appreciation, which clearly would indicate a substantial level of risk. Prices could "correct" back to the projected appreciation level without violating the trend of the market.

The second sale in 2005, even with the improvements to the property, signals what technical analysis would define as a "blow off top", which is a sudden sharp rally, an explosion to the upside which occurs after a long advance. This event usually signals the total exhaustion of buyers who have used up all their buying power and leads to a sharp decline in values typically back to or slightly below the moving average levels. It is then followed by a prolonged bear market, which we are presently experiencing.
In November of 2008, I was asked to perform an appraisal assignment on this property. The indicated value came in at $215,000, which incidentally, is right on top of the indicated value the subject property should represent in 2008 following the projected path of appreciation.

Below is a chart of the median sales price of homes in data through December 2008 from The Orlando Regional Realtor Association, of which I am a member. The escalation of value above the average appreciation path beginning in 2004 is clearly evident, and that is a measurement of risk. The chart shows us how pricing has now regressed to a level that is on par or slightly below the projected path.

What does it mean? In a normal environment, the downside risk of purchasing a home today is at normal levels, and that any significant deterioration from here would be abnormal and unprecedented. The affordability factor is in the buyers favor, and with the movement by the Federal Reserve injecting capital into the system, even with the lagging indicator of job losses mounting, we should begin to see an improved market by mid 2009. What are your thoughts?

Bottom Fishing

The Orlando Regional Realtor Association, of which I am a member, reports existing home sales in greater Orlando rose for the second consecutive month in October, representing the first time in over two years we have had this occurrence. Could this be signifying a turn in the local housing market?

Certainly, the amount of sales includes distressed properties, either those in pre-foreclosure, already foreclosed upon or short sales. But burning off the inventory is key to any market recovery, so as long as the sales out pace the inventory growth, progress is being made. The Condo market, included in these figures, remains a disaster, signaling single family homes may be faring better than the overall figures show.

Affordability is quite attractive for would be buyers as interest rates remain historically low and prices of homes have fallen to levels not dreamed about three years ago. Unfortunately, credit remains a significant issue, even with the actions of The FED and the federal government.

FOX Business Network's Alexis Glick discusses the housing market with Spencer Rascoff of Zillow.com. Take a listen.

They Know Nothing

On CNBC's Stop Trading with Erin Burnett a year ago today, Jim Cramer absolutely lost it while discussing the subprime mess.

And what a mess it is. Cramer is just great entertainment and Bear Stearns, trading 109 on this day, is now a morsel of JP Morgan. Since then, the FED has cut over 300 basis points and difficulty in acquiring credit remains at extreme levels as we continue to wring out these excesses and absorb the existing housing inventories.

Bailout Ben should say Bye Bye

Hoping the Diet Coke will curb my yawning, I sat at my desk reviewing the swollen active listings on the multiple listing service in residential real estate here in Orlando. Just down the road, Federal Reserve Chairman Ben Bernanke is speaking to the Independent Community Bankers of America annual convention.

As some of the commentary became public, the threat of falling asleep promptly departed as I fell out of my chair. The Chairman, indicating he thought foreclosures would continue to rise and more price declines are expected, suggested a plan to combat the problem that forces me to immediately call for his resignation as Federal Reserve Chairman.

Bernanke offered that mortgage companies and banks could reduce and/or forgive portions of the principal of the loan amount in an effort to provide relief for those about to lose their homes and those in the foreclosure process. I’m no Milton Friedman, or Larry Kudlow for that matter, but this suggestion is un-American and a prelude to derailment of free market capitalism.

To begin with, it is not the job of the taxpayer to bail out idiots who made poor economic decisions. Secondly, what ever happened to free markets cleansing themselves of their excesses without governmental influence? Have we not learned what artificial influence on markets can do?

Stocks immediately sold off, as those on Wall and Broad have keen insight. The idea spells trouble on many fronts. First, most mortgages have been resold, and part of our current economic issues are that there are no buyers for these packets of mortgages because it is too difficult to estimate the hidden damage, or potential writedowns. Unless you are a shareholder of these banking institutions, you are not shedding any tears their balance sheets are in such turmoil.

In addition, how about those mortgage holders who did their due diligence and making payments on time, who have performing loans? We don’t get this benefit? Bernanke seems to favor debt forgiveness over default, but it's the shareholders of the banking institutions debt, not Americas. It seems Bernanke wants to reward bad behavior. In fact, he is not the only one.

With that in mind, why would anyone without internal integrity ever pay off a loan since portions may be forgiven. In economics, there is a ripple effect and in this case, it could damage liquidity and economic psychology beyond repair.

The Fed Chair has had an embarrassing couple of months but this absurd idea seriously questions his competency, and that type of thinking has no business as Federal Reserve Chairman.

Message of the Markets

Make no mistake. We are currently in a bear market for stocks. While the US Markets were closed as we celebrate the Martin Luther King holiday, indicies abroad sold off Monday and indicate a potentially brutal day at the corner of Wall and Broad Tuesday. While stimulus plans being thrown around seem to the average observer as good, the fact is this type of plan is a band-aid at best. We need macro changes, starting with lowering the corporate tax rate and extending the Bush tax cuts. Contrary to belief, reducing the tax burdens on corporations allow them to expand in areas from research and development to the hiring of additional employees while increasing output. Where is Art Laffer when you need him?

The FED needs a .50 basis point cut like yesterday and should assert themselves to be anticipating the problems and not reacting to them.

Lets look at the sub prime crisis, which has exposed many companies lack of forecasting ability. Extremely low interest rates in the aftermath of the events of September, 11, 2001 (remember those) precipitated a historic rise in the average value of existing homes. Values were far above the historical moving average, and this is where risk increases. Values essentially doubled in half a decade and all the homebuilders lined up to get their share, ignoring or lightly weighing the above mentioned risks. The party ended and several had lampshades on their head when the lights came on. We are now digesting the excesses, or have a hangover if you will. This takes time. Regression to the mean, which would be an average appreciation of about 6% a year, suggests that home prices could retract over 50% from here and the gains would still be substantially above the normal appreciation. The same would be investors who quit their jobs to trade stocks in 2000 are the same would be investors in trouble now having pretended to be realtor and appraiser.

Want a time frame for the hangover? Perhaps the chart below offers a clue!