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262-TNGRadio – Robert Kleinhenz 1-28-12

Friday, January 27th, 2012

Robert Kleinhenz

Chief Economist for LAEDC

(Full Bio)

This week Bruce Norris is joined once again by Robert Kleinhenz. Robert is the Chief Economist of the Kyser Center for Economic Research, which conducts research on regional, state, and national economies. Dr. Kleinhenz has a Bachelor’s Degree from the University of Michigan, a Masters and Doctorate from USC, all in economics. Prior to joining LAEDC, he served as Deputy Chief Economist at the California Association of Realtors and taught economics for over 15 years, most recently at California State University Fullerton.

Bruce said he recently poked around at a refi and quoted a rate that he could barely understand. He said it was something like 3 7/8 for a 30-year mortgage. Bruce said going back 30 years when he became an investor and had refinanced his house at the time to get the money; it was perfect timing back in 1981 when he paid 17 ½ % fixed. Robert said there may have been a couple recessions in between, but what a difference two decades makes. Bruce wonders if when you are 22 and just starting out if you are thinking that it is in any way normal where you are only accustomed to seeing numbers that start with a 5 or a 4, and he wonders how different the future will be with the particular rate going forward. In this case you are comparing what happened back in the early 1980s to the interest rate situation today.

Robert said if he were to place a bet on what was likely to be more normal in the foreseeable future, he would look at the interest rate climate of today and not of the early 1980s. Back in that time we had high rates of inflation, and we had an economy that was in transition and stagnating in several sectors for several reasons. The main thing was we had a lot of inflation, partly driven by high oil prices. This in turn led to high interest rates and at the time the Paul Volcker of the Federal Reserve Bank of New York led efforts to bring the reign of inflation down. One of the ways it did that was by increasing rates by making it very difficult to borrow. This was a much different climate, and hopefully economists have learned a little bit about keeping inflation in check. Hopefully policymakers have listened to the economists who talk about it, and we are most likely going to stay in an environment over the next few years that either has low or moderate inflation and not double-digit inflation.

Bruce read a quote saying, “Experience is something that lets you recognize a mistake when you make it again.” What is interesting about not being concerned about the people that are in charge of policies is their opinion of how benign the housing problem was going to be. This bothered Bruce; and Robert reiterated saying policymakers are humans like us and sometimes don’t get the information right and sometimes still make poor judgments. We definitely have to be concerned about the fact that mistakes are made on the policy side just as mistakes were made on the business side of things. This gave rise to the situation we face today.

Bruce wondered if Robert was concerned about deflation if not inflation. He said it is not that he is not concerned about inflation, but he does not expect to see high levels of inflation over the foreseeable future, and that is predicated on policymakers and their ability to make the right decisions. It hinges on the ability of the Congress to come up with a credible plan to take care of these federal deficits over the long term. Somebody has to be interested in a bond that the risk-level seems appropriate with the return. What is interesting is the one-year T-Bill in Greece is paying 402% as of yesterday, which would probably give you an idea that you should not invest in it as you are not going to get your principle back.

The likelihood that the United States would find itself in the same position that Greece finds itself in is very low, so we should not be too alarmed. There is a very real possibility that we may face a debt situation, but there are several moving parts here. Fortunately, the ace in the hole that we have here in the United States is the fact that the U.S. dollar is the reserve currency, and our Treasuries tend to be the flight to safety for so many investors around the globe when things go awry elsewhere. Bruce did not know how profound an effect this would have because this is exactly what happened when you talk about a ten-year T-Bill. Most of us would have anticipated seeing something under 4% was pretty astonishing, and then it was under 2%. If someone has not already refinanced their house, you definitely need to be sitting up and taking a look at rates today because those rates are fundamentally driven by what is happening with the yield on the ten-year treasury, which nobody would have expected would fall below 3 or 4%, and here it has consistently been under 2% for quite some time. All of this is courtesy of something that is really outside of our borders. Part of this also stems from the Fed’s commitment to maintain low rates over the foreseeable future through the middle of 2013. There was this policy move and effort to insure that long rates stay low partly to help the housing market and to get investors to pay attention to the stock market where it would theoretically be better returns. There are a number of angles behind the Fed’s move, but this has served to also keep rates down.

To insure that something like what was aforementioned is in the Fed’s control, they would have a limited ability to do it. If the market moves in a big way, they may not be able to buck that trend. However, it does accomplish that end by buying or selling securities in such a way as to maintain rates at the levels that they are targeting at this time. We have a 0-fit fund rate and a mortgage rate under 4%. If we were to have an issue where the Euro zone went into a tough recession, Bruce wondered if there would be a domino effect here that could possibly kick us into a another recession. Robert said the cards we are looking at in 2012 include the situation happening in Europe. If their economy is weakened or there is some concern that we have already seen of economies tipping into recession; then that could jeopardize the situation here in the United States. We’re out of the recession and growing and now in the expansionary phase coming out of the recession, so that could tamper the growth or lead to a stall out in the economy here in the United States. This is economic linkage between the European economies and the U.S. economy.

The other linkage is the financial linkage. If the sovereign debt problem in Europe, not just in Greece but also Italy and possibly France, give rise to problems with banks not unlike what we had a few years ago at the height of the financial crisis, then that could stymie activity in the financial world once again. As a result of that, it could have a feedback effect on the real economy and either slow the growth pattern of the U.S. economy or tip it into recession. You have two things coming out of Europe that have the potential to either slow down or derail our current expansion. When the United States had defaults on the mortgages, mortgage-backed securities, and the CDOs, it had quite a direct effect on the people that invested in the banks.

Bruce wondered if the United States has as much of the investment there in Europe, or is it mostly contained inside of their own banking system. Robert answered that it was incestuous in a way in that there are flows capital that go across international boundaries through commercial banks; so if there is a problem that shows up over there, it may also show up on the balance sheets of banks over here. It is through this particular conduit or channel that we would see problems occur. Robert said he would be very surprised if we have something as calamitous as what we saw in 2008. To look at this situation in the financial sector, we have to recognize that so many financial decisions rest on some confidence of what is going to be occurring in the future. If you lack confidence in the future or just don’t know, then you are unlikely to make a decision or make a decision to do nothing. The problem with financial crises that we went through in 2008 is that they have long-lasting effects and wreak havoc on consumer and business confidence. They then leave businesses and households to sit on their hands until they get a sense that the coast is clear. That is one of the reasons this recession was so deep and continues to keep going as long as it has been. There is a real concern about the outlook, and it is reflected in consumer confidence and business confidence that has just not really shown marked improvement over the last couple years.

Bruce wondered if there is real concern about the oil world and if there is fear about aggressive actions such as the closing of the straight. Robert said if we take a step back to 2011 for a moment and think about all of the wild cards that played out in 2011, there are a lot and a number are still playable in 2012. There was earlier discussion on the European debt situation, which is a wild card that has been played several times over the past few years. The Greek debt crisis seems to be the one that is played most frequently. If you take a look at the Arab Spring, that gave rise to disruptions in the flow of oil and gave rise to higher oil prices. There is always the chance that something in the world of energy that triggers an increase in the price of energy, oil or otherwise, there is always the chance that this could slow down economic activity if not derail a growing economy. The other wild card that we have to contend with in 2012 that we also dealt with in 2011 was political. This year the big political wild card is what will happen in November with the election. It does appear as though we are going to continue to be stepping carefully through 2012, hoping that these wild cards do not wreak too much havoc on the economy. If they do, then they have an adverse impact on confidence. If there is an adverse impact on confidence, then the growth we anticipated is just not going to materialize.

In the employment sector, Bruce wondered how important construction is to the improvement of the unemployment. Robert said it is an important segment of the economy but is essentially flat on its back right now in California and elsewhere around the country. If you look at residential activity in the state of California, permits for example, they are just a fraction of what they were in years past. They have been at this very low level for just a fraction of any long-run numbers for the last few years, but it makes sense. If so many foreclosed or distressed properties are available for sale at a fraction of the cost of new construction, it is going to be sometime until after the backlog of distressed properties gets substantially moved before we see construction pick up in a noticeable way. There is a broad market for housing where distressed property values are probably way down on other properties. Things are also the same way with commercial construction. There are a lot of high vacancy rates for office buildings these days; less so for retail and certainly much less so for industrial. Industrial in Southern California is actually outperforming markets around the country. It has less than a 5% vacancy factor, so it is very much a mixed bag. However, construction is going to be recovering slowly, so meanwhile we should take a step back.

In a general sense, the labor market seems to be at a turning point where in order to produce more in 2012, it seems very likely that employers are actually going to have to add people, not just ask their existing labor force to work longer hours. There should be a general upturn in employment in 2012 compared to 2011. It is just a question of how much of an upturn there will be. We need somewhere around 300,000 jobs added per month across the nation in order to bring the unemployment down in a noticeable way in a reasonable amount of time.

The most recent report, the one for December, showed that we added 200,000 jobs, which was a great number based on the recent history. It is just not a high enough level of growth to bring the unemployment rate down. At 200,000 jobs per month, it could take 4 or 5 years for us to get back to a 6% unemployment rate nationally. At 300,000 jobs per month, it would only take a little less than two years, which is a huge difference. At the present time, we should be banking on the 200,000 jobs per month, barring any of these wild cards being played. If that happens for a few months time, then we might actually see the economy gain some ground.

The sector that is in the driver’s seat here is the consumer sector. Consumers are weighed down by uncertainty about their jobs and their economic outlook. The fact that are assets are not worth what they had been worth and the fact that they may have some credit constraints, access to credit may not be what it had been, especially with respect to buying homes. All those things are constraining growth and consumer spending, and that is really the main thing that we need to look for in terms of the driver behind the overall economy. If consumer spending picks up, then we are going to see job gains pick up as well.

In looking at a chart for mortgage equity withdrawal in 2002-2006, it was responsible for a lot of GDP growth. This driver has certainly been diminished if not eliminated from most people’s possibilities. As we go forward, it is certainly going to be the case that the American consumer is still going to have a place for the use of credit. They may not have access to the same amount of credit that was available when they were able to use their home equity in order to finance so many things. This is not a bad thing because it does seem to have created problems, especially problems that have spilled back into the housing sector. We do not want to go back this way, but we do expect to see that some loosening of credit access on the part of consumers would probable enable the consumer sector to get a little bit more steam and give a little bit more push to the overall economy.

Another issue is shadow inventory. Bruce wondered what Robert’s thoughts on what shadow inventory contains are. The definition of shadow inventory has changed over the last couple years, so Bruce wondered what Robert feels is the shadow inventory and what the best resolution for it is. Robert said it is useful for us to get a sense of how long we are going to be dealing with large numbers of distressed properties. If we use that as the definition and ask what things going to be like two years out, then the shadow inventory is the inventory that is on the books, such as MLS inventory for existing homes plus unsold new homes, and the unsold inventory for existing homes in the state of California, which is about 5 months inventory. Five months inventory is enough to actually sustain increases in prices and not decreases in prices because the average is about seven months, so we are at seven months if we are under five. By then we would go through the foreclosure pipeline, and the thing we would pick up would be the number of REO properties that are held by banks in inventory. This is equal to about another 2 ½ months of inventory. Now you are getting over seven months when you take the five mentioned earlier and add 2 ½ months, then there properties that are scheduled for auction and also another 2 ½ months inventory. However, the timeline for that is a much longer timeline.

For the REO properties, the point in time they go into inventory might be about 6 months or so before they are prepped and sold. The relevant shadow inventory number to use for current market conditions and understand what is happening in the current market is probably MLS based inventory plus new homes plus REOs in inventory. If we are asking the question about how long this is going to be with us, then we are going to go further up the foreclosure pipeline and pick up the properties that are in a pre-foreclosure state, such as an NOD or delinquent property. If this is the case, then you are looking at another 2 ½ months inventory. This is simply by taking the number of properties that are in pre-foreclosure state, which is roughly 100,000, and looking at that relative to total annual sales. You also have to look at the timeline. An NOD that is filed in January of 2012 is probably about 18 months away from going into the REO inventory. These numbers are roughly 100,000 in REO inventory and roughly 100,000 NODs plus delinquencies at the present time for the state of California. The timeframe is not anywhere close to normal as the statutory timeframe is about 6 months. Because of different kinds of policies and other factors, this timeline has been stretched out; and a number of lender and servicers have encountered a number of problems along the way.

The bottom line is as we are going further up the ladder and actually including more and more things in this notion of shadow inventory, we also have to figure out how long it is going to take to push all the properties through the foreclosure pipeline and out through the new home market. Therefore, we are looking all the way into 2014 before things get any closer to normal levels of distressed properties. The housing market is going to feel like it has recovered before that period of time, but we are going to have substantial numbers of distressed properties working through the housing market over the next three years. In Riverside, 62% of the sales are either short sales or foreclosures, which means when you sell 1,000 homes, only 380 buyers emerge. Everyone else is credit damage. This is going to take a while to heal.

If you want to learn more about Robert’s company, the Kaiser Foundation, go to LAEDC at www.laedc.org. Here, you can find out about the annual forecast event that will be happening this February 15th in downtown Los Angeles. This is a ticketed event.

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

Tags: bruce norris, chief economist, deflation, Euro zone, Federal Reserve Bank of New York, gdp, Greece, inflation, Kyser Center, LAEDC, MLS based inventory, mortgage-backed securities, mortgages, NOD, norris group, Paul Volcker, reo, Robert Kleinhenz, shadow inventory, T-Bill
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231-TNG Radio – Mike Shedlock 6-25-11

Friday, June 24th, 2011

Mike Shedlock

Registered Investment Adviser Representative, Sitka Pacific Capital Management

(Full Bio)

This week Bruce is joined once again by Mike Shedlock. Mike is a registered investment advisor representative for Sitka Pacific Capital Management.

Mike’s blog, Mish’s Global Economic Trend Analysis, was started back in 2005. Before, he had worked in the banking industry for over 20 years as an assistant vice-president for Harris. He then became a consultant in 1999, but the consulting jobs dried up after Y2K and 9/11. For this reason he was out of work for almost 3 years. He started his blog with the intent of being discovered, which originally he thought the odds were 0, but he proved himself wrong. He now gets a million and a half to 2 million page hits a month on his blog. He initially started writing about the things that he was going through at the time that a lot of people are going through right now. I could see the bubble in housing building, and people were telling him “Cash is miss, cash is trash,” but when you are out of work cash is not trash. Now, most of the people who told him this have actually lost money on their houses. He wonders how many of them would like to have their cash back in their pockets now that they’re unemployed. However, very few people listened. Bernanke tried to claim the housing bubble didn’t exist, but it was very easy for Mike to see it did indeed exist. He called the exact top of the housing market on his blog in real time in the summer of 2005. Some people tried to say that Case-Shiller showed the peek was in 2006, but Case-Shiller only looks at re-sales and not at new home sales. What started happening in the summer of 2005 that didn’t reflect itself in prices was huge incentives, whether it was free garages, free trips to Europe, free cars, free swimming pools, free landscape upgrades, free granite counter tops. It actually started with the free granite counter tops, and then it went as big as free pools. Case-Shiller never picked up any of this. Housing peeked in 2005, and it took another year for things to start heading down in earnings. The same type of thing happened back in 2006 when there was an 18% commission to sell a house in Phoenix.

One of the things that was very difficult about picking a top accurately back in 05-06 was you would have really had to understand the way real estate was being financed, and very few people understood what a mortgage-backed security or a CDO or a fault-swap until around 2007. Part of the problem was possibly a disconnection between the ways things were really being financed and how little the lender cared if anybody really could pay. However, it’s really hard to say what was going on in Bernanke’s mind, but he certainly did miss the housing bubble. He didn’t think there would be a recession and said, “The housing prices were supported by fundamentals” and mentioned there possibly being some “local froth.” Neither he nor Greenspan saw the role of the Fed’s interested rate. It’s interesting to ask how much of what Bernanke said he really believes or if he is simply trying to absolve the Feds’ guilt. Last week he did a very self-serving speech where he praised the Feds for doing things that caused the recovery, but ignored all the things that the Fed did that caused the bubble in the first place. Greenspan was a veritable cheerleader for housing, preaching variable interest loans, adjustable rate mortgages. He was praising derivatives and all the things we would look back on as silly. One did not need to understand credit derivatives or anything like that to know housing was in a bubble. All one needed to see was how fast home prices were rising vs. how fast wages were rising. Home prices were 3-4 standard deviations above rental prices and 3-4 standard deviations above wage growth. It’s simply not sustainable. That is how out of line home prices were. We’re closer now to being back at the trim line, but we’re still a little bit above it.

The tendency, however, is to overshoot to the downside. Should that happen, there is a chance for some significant declines in places like California. Home prices look a lot cheaper in Las Vegas because the bigger the bubble the bigger the decline. Some of the biggest bubble areas were Las Vegas, Florida, Phoenix, and a lot of places in California. California still has not corrected to where it needs to go to where one would say the valuations are reasonable. California also has Proposition 13, which is putting a floor on home prices. Some cities, such as Chicago, New York, and San Diego, are always going to have a premium because these cities are where there are a lot of jobs. However, there is a difference between premium and 300-400% and 3 standard deviations like we were above norm. A deviation is a mathematical function of a normalized curve that shows just how insane things are. Three times normal is an extremely low probability event, and when you get into that condition, you know that you’re in a bubble. Australia, Vancouver, Canada, and China are in this same situation right now. You can look at all these places and see that home prices are going up faster than rents and faster than wage growth. It’s not sustainable. The bubble in Australia has now popped, but all the mentioned countries were in a bubble longer than expected. When Canada’s and China’s burst, we are most likely going to see some 50% declines just like here in the United States.

There are a lot of smart people who disagree with the direction the market is going and believe we need to protect against strong inflation. However, before you can hear their arguments and debate you have to know what the terms mean. Mike defines inflation as an increase in money supply and market to market credit. A common definition people use for inflation is prices going up, and they look at consumer prices. Unfortunately, they ignore asset prices, which is one of the mistakes Bernanke and Greenspan made. They absolutely ignored asset prices and did not consider home prices as part of inflation. Had you taken home prices and put them in the CPI, then interest rates in the initial stages of the bubble popping were 5-6% too low. You put housing in the CPI; the CPI would have been about 8 or 9%. Instead, interest rates were 4 1/2%, so there should be no wonder that speculation in homes was running rampant when interest rates are that low. On the contrary, people today say inflation is going through the roof, but you have to ask if it really is. If you put home prices in the CPI, we now see something different. The CPI would be barely flat here now. This is what happens when you ignore asset bubbles and don’t put them in the CPI. This is what happens when you only look at prices. It’s not even really possible to measure prices. If you take a look at the CPI, this is a basket of goods and services, and there is not one representative basket. Take for example someone who is on fixed income and retired. They are going to care the most about gasoline prices, their heating bill, property taxes, rent prices, the prices of food, and medicine if they are not fully covered by Medicare. If also, for example, you take the basket of someone with kids in high school heading for college, you see the cost of college education has doubled in the last ten years or less. Someone can easily rack up $50,000 a year in expenses going to college. Kids are racking up $100,000 in debt. These are two different kinds of baskets, not one representative basket. Therefore, the whole idea of thinking you can measure the CPI is flawed.

Mike has a letter on his website from a lady named Stephanie who is retired. To Stephanie, inflation meant her fixed income bought less. She said she gets $938 from Social Security, which is what she lives on every month. She has a cd that has $16,000 in it, which she was getting $75 a month on the cd at one time. Short-term interest rates are now down to nothing, so she is getting nothing on $16,000. She wrote Mike asking him for advice, and he responded saying that she was being clobbered by the policies of the Fed. Not only did the taxpayers bail out the banks at their expense, but the Fed continues to do so. When Bernanke holds the interest rates so low, he is hurting everyone on fixed income that has savings in cds or receives a social security check every month that buys less and less. These are the people that Bernanke is hurting. Norio Rabini just came out with a statement that he thought there could be quite a shaking up of bonds and yields in the next couple years. Mike mentioned this possibility too, although it is uncertain. He received an email recently asking this very question, and they got upset when he didn’t know. However, the real answer is anyone who thinks they know is probably lying. No one really knows. We can put together our guesses and make a case why we think something is going to happen, but when someone says they know, they really don’t. We don’t know what the Fed is going to do, or what the ECB is going to do, or what China is going to do. Everything is intertwined. China is having a government change in 2012, something of which not many people are aware. It is going to be a very significant one. The current leadership in China is focused on maintaining growth at any price. It is highly rumored that the next regime coming into China is extremely concerned about the property bubbles. If they slow the Chinese economy, slow the prices of commodities, drop oil, drop the CPI, and if Congress sticks to its policies of being fiscally conservative, we may still be running huge deficits, but we’re no longer adding to it. This is a change in the direction of downward pressure on the dollar. Last year the ECB thought Jean-Claude Trichet was going to hike prices last month, and he didn’t. If the ECB doesn’t hike, this is going to put upward pressure on the dollar and downward pressure on the Euro. All of these claims are being put out there, but most of the claims are lies; the people don’t really know. However, Mike is very supportive of what Rabini said about there being a legitimate chance of a bond market revolt. On Yahoo Finance Mike talked about this very thing. He was on the air with Aaron Task and Henry Blodget and had mentioned it two weeks before Rabini had even mentioned it. He said if they get another round of QE out of the Fed, there is a real risk of a bond market revolt. However, if he doesn’t and delays off on it, if there is a stock market plunge, if Europe delays hiking, if Australia does rate cuts, China slows, and commodities come down, then we can see a flight to treasuries. As of which one of these things will happen depends on where all the variables fit. It depends on what China does, what the ECB does, and what the Fed does. Only then can we have a more definitive answer.

The Fed will attempt to inflate, but it would be better for us to bite the bullet and balance the budget. Otherwise, there is a very big risk of what happened in Greece happening in the United States if the U.S. does not address its budget deficit. Interest rates do shoot up, and this is a very real risk. If we want to get back to growth policies, we need to balance the budget. We’re already spending $750 billion on defense, and we could probably spend $100 billion and have enough defense. We could also allow drug imports to come in from Canada, get rid of student loans, or kill the entire department of energy. There are a lot of things we could do that would get this country back on fiscal track. We can’t balance the budget in one year, but it is possible that someone can do it in 5 years. There is not really a choice here. If we continue on the current path of not tackling the deficit, then what’s going to eventually happen is something similar to what happened in Greece. The path we’re on is unsustainable. The sooner the Congress addresses this, the better. The sooner they address it, the sooner housing, commercial real estate prices, and the stock market will be negatively impacted. No one wants to see this happen; no one wants to see the short-term pain. However, the long-term pain gets greater and greater just like what happened in Greece if we don’t address the problem.

The U.S. has been following the path of Japan, which has had a 20-year run with their housing market. It seems we are still on this path, and even if the Fed does manage to obtain a little bit more inflation, home prices will probably not go anywhere for a decade due to the deleveraging of consumers. All the people out there who are thinking housing is at a bottom and better buy now should forget it. We are not going to have hyperinflation, and home prices are going to be stagnant for a long time.

To learn more, you can view Mike’s website at globaleconomicanalysis.blogspot.com, or type Mish in a Google search. He talks about housing, interest rates, Europe, gold, silver, and the global economy every day of the week.

Tags: Aaron Task, Bernanke, bond market revolt, bruce norris, Case-Shiller, CPI, deflation, deleveraging, ECB, FED, Greece, Greenspan, Henry Blodget, housing bubble, hyperinflation, inflation, Jean-Claude Trichet, Mike Shedlock, Mish, Mish’s Global Economic Trend Analysis, Norio Rabini, Proposition 13, Sitka Pacific, Yahoo Finance
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230-TNG Radio – Mike Shedlock 6-18-11

Friday, June 17th, 2011

Mike Shedlock

Registered Investment Adviser Representative, Sitka Pacific Capital Management

(Full Bio)

This week Bruce is joined by Mike Shedlock. Mike is a registered investment advisor representative for Sitka Pacific Capital Management, and he also has a fantastic blog site called Mish’s Global Economic Trend Analysis. In his blog he talks about oil interest rates, housing, the IMF, Europe, gold and silver, and anything going on in the market.

Even though times are a little tough right now to be an investment advisor, Mike’s work is going very well as he says that they have a neutral market and a cautious stance. Their mission at Sitka Pacific is to avoid the next decline. They had a positive year in 2008, even though hardly anyone else did. Even without being net short they had a positive year. They don’t bet on the market going down, but rather they try to go to the sidelines, find some things they like better than others, and have huge cash positions. This is where they’re at today. For the last year the stock market has gone up, and they have more or less been on the sidelines. NASMP was up 12-15%, while they were only up 6%. They don’t really like the risk award setup, as they believe that the odds are good that another recession is coming. They think the recovery is not real and is only based off of fiscal stimulus both from Congress and monetary stimulus by quantitative easing from the Fed that’s not sustainable. Both are coming to an end, and the Republican Congress does not want to have anything to do with larger deficit. Therefore, the fiscal stimulus is going to end unless things get extremely nasty. Global growth is slowing everywhere. In Europe, Australia, China, and the U.S. people need to be extremely cautious in terms of what they expect out of the stock markets.

Most of Sitka’s clients are in a capital preservation mode, as is Sitka themselves. The few that aren’t have left, but in the downturn they actually added to their client database significantly because Sitka missed the downturn but no one else did. They are starting to see a lot of things come together all at once. Commodities are back into a bubble; housing still has a further ways to go down, and they have already seen housing programs established. These include Cash for Clunkers and the various stimulus packages in housing. As soon as the tax credits for housing ended, housing prices went back down. To work with this, Sitka delayed things for a year expecting that home prices are going to fall to where they’re going to get anyway. Prices are going to fall until price meets genuine demand, not artificial demand coming from Congress. The very best thing that Congress can do for the housing market is to do nothing. They need to let prices fall, let foreclosures happen, and let prices get to where there is genuine demand. It’s then we can find a bottom. The more Congress tries to delay this, the longer and further off the bottom is going to be.

According to Mike, “Things don’t get where they’re going in a straight line.” This has a lot to do with intervention, which doesn’t change the ultimate direction but rather the timeframe in which something happens. This is why being an investment advisor is very difficult with unknown intervention. There are a certain set of people, for example momentum traders, who expect someone to catch every move in the market, both up and down. This is not something Sitka can do and most likely cannot be done at all, but this does not stop people from trying to do it or wanting to do it. The population tends to chase whatever the latest and greatest thing is right before it’s ready to plunge. This happened with housing in 2005, and it happened with the NASDAQ in 2000. Some people who were hesitant about NASDAQ all the way up from 1996 to 1999 decided right in 2000 that they were wrong and that the productivity miracle from the internet was real and they should get in before it was too late. Too many people think this is what makes the top. They think this is what made the top in 2005 in the housing market. People believed that home prices only had one way to go. Everyone had bought in. Even people who couldn’t afford a house bought one anyway. There was no one left to buy. The pool of greater fools finally ran out. This is one thing you have to be weary of as an investor. The mood of a market can definitely be opposite of the future direction. Things change very quickly. In the aforementioned situations, it changed on a dime. When it happened with housing in 2005, people were camping out and entering lotteries for the right to buy a condo. This is how crazy things were.

Another topic is deleveraging, which is inherently deflationary. Deleveraging means to pay down debt, so by definition deleveraging is deflationary. At the same time, it also depends on your definition of deflation and inflation. To Mike, deflation is a decrease in money supply and credit from mark to market, so according to this definition deleveraging has to be deflationary. However, if someone looks at things in terms of prices and they ignore home prices, for example, seeing the price of crude oil and thinking there’s nothing deflationary about it at all, then they’re not seeing the whole picture. Crude is rising because of peak oil, because of massive monetary stimulus in China, and also because of some quantitative easing by the Fed. It’s only the last that’s inflationary. What’s really funny is people complain about the price of a hamburger going up from $3 to $4 and look at the inflation, but they’re failing to look at what’s more important: the price of a condo falling from $200,000 to $35,000, or a hamburger going from $3 to $4. It’s irrelevant compared to the drop in home prices. Paying down debt is one part of deleveraging, but defaulting is also a huge part of it in real estate. This is really where the deleveraging is happening because the lenders are not getting paid the amount they have on the books. This is where Mike’s mark to market play comes in when he defines deflation as a decrease in money supply and credit mark to market. For the last year, the banks have gotten away with keeping absurd valuations on the value of their assets on the books. As long as the asset values on the books were rising, the junk bond market was going up and various things were happening that were inflationary. Mike doesn’t think the market is going to let the banks get away with it forever. The National Accounting Board, the Fed, and the FDIC have interfered with and delayed regulations 2 and 3 times now for the last three years on mark to market rules and valuing things on the books. They have kept things on the books at inflated values. As long as they were able to get away with it, we’re probably going to see another big credit scare where banks are going to have to mark some of the debt they’re holding on their books back to market. The value is going to plunge; the ability of banks to lend as a result of that will plunge. This is why banks are not lending right now. Banks are capital constraint and capital impaired, and there is few worthy credit borrowers that want to borrow. This is the deflationary backdrop; and we also have a deleveraging deflationary backdrop. In a sense, it’s really about attitudes. It’s the willingness and ability of banks to lend and willingness and ability of consumers and businesses to borrow.

There has not been willingness for businesses to borrow. If businesses were expanding, we would see it in the job market and in loans increasing. Instead, what we are seeing is the value of the debts going up on the balance sheets of banks. However, banks are not really lending and the market has temporarily suspended mark to market sanity. Instead, we have a mark to nonsense prices that have inflated the value of the stock market. For now, Mike believes that asset prices are going to plunge, commodity prices are going to sink, and housing prices have a further ways to decline. Everything, including stock prices and junk bond markets, is back in a bubble.

One thing that’s also happening is consumers are becoming willing participants in deleveraging intentionally. They have access to credit then look around and don’t want it anymore. A lot of this has to do with people trying to refinance their homes at a lower rate. They have to bring money to the table to get that lower rate because banks require a 20% down payment. If they’re 35% in the hole and banks want 20% down, then they have to bring in 15%. We’re actually seeing cash-in refinancing now rather than cash-out refinancing in homes. This is another part of the deleveraging process that is voluntary. People are doing it so that they can receive a lower interest rate on their house. One of the statistics happening now in Riverside they have never had before due to never having encumbered owners is 71% of the transactions are either short-sales or lender-owned properties. This means that 71% of the sales do not reproduce a buyer in the marketplace. Out of 1,000 sales, we have lost 710 buyers for a period of time, buy you still have 1,000 houses to move. This is the big challenge for California in that you have a lot of houses that should be on the market that probably can’t be placed on the market because there is not really an owner-occupant buyer. No one’s willing to give financing to investors. For example, Fannie Mae is not doing it, and banks are not doing it. In some extreme cases, someone wanted to put down 60% or 80% down, and they could not get the financing as it was just not available. It’s possible some small local bank might give financing, but the big banks are not interested. This should tell you how capital constrained they are and how stuffed to the gills they are with mortgage debt that they actually want to get rid of but don’t know how. We also have some new rules that say the banks have to take 5% of the mortgage and keep that at risk on their balance sheets so they can’t securitize all of it. Banks don’t want any part of this either, so we have had an attitude change on the part of buyers and on the part of the lenders. Lenders don’t want to lend, and people are waiting for cheaper prices because they think they’re going down. It’s the confluence of these two attitudes and willingness and ability of banks to lend and willingness and ability of businesses and consumers to borrow. If you were a business, you would have no reason to expand in this kind of environment. Any business who wants to expand here should be turned away as a poor credit risk because they don’t know what they’re doing.

One thing that needs to happen is we need to get rid of Fannie Mae and Freddie Mac. In the short-term, real estate will be affected by the cost of obtaining a mortgage being raised above a specific amount. The amount that Fannie Mae would be willing to finance is going to go down. Anyone who wants to buy a home above that amount is now in a jumbo loan instead of in a regular loan, and a jumbo loan has a higher interest rate assuming they can obtain it at all. Withdrawing Fannie and Freddie from the marketplace will result in downward pressure on real estate prices, which is actually a good thing. The sooner the prices get to where they’re going, the better off we are. If this means that 30-year mortgages completely vanish, this is a tremendous thing. People should not be buying houses unless they have an expectation that they can pay it off in ten years. Obviously not many people have been able to do this and not at the prices that homes were at in the market. Fifteen years is a more reasonable timeframe. Instead, at the peak of the insanity, we were going into 40-year mortgages, others 50 and 100. If you need a 100 year mortgage to make something affordable, then it’s not affordable. Mike also feels the same way about 30-year mortgages. There should not be any reason for there to be mortgages longer than 15 years. If someone wants a 30-year mortgage, maybe they need to pay a lot more because there is a lot more risk. With 30-year mortgages, people are not paying the principle back fast enough, so in any downturn that comes there is going to be less equity and more likelihood for someone to walk away from it. Someone who had to pay the house back sale over 12 years, not counting those who bought right at the tip of the bubble, would have some equity built up. In fact, over the course of ten years they would have had their house paid off.

In regards to accessing the equity for business purposes, Mike would tell people not to do it. People thought there was free money available. They thought since the home prices went up they should take the money out and invest in the stock market. Very influential people actually advised others and wrote books telling people to take money out of their houses and invest in foreign equities because they only go up. It’s all part of when you leverage in this way the risk goes up. With the price destruction we have had in California, at some point the price of houses will be so far below replacement costs that there is no way to pencil in new construction. We will probably have a double-dip in some of the inventory types because of the lack of buyers and the quantity of inventory. Mike wrote a post three years ago titled “Structurally high unemployment for a decade,” which talked about how eventually when we get to the lowest possible price level, the job market probably will not return. We will have consistently high unemployment for a long time. At the height of the housing boom, we were creating about 250,000 jobs a month. At the height of the commercial real estate boom, which lagged and kept the economy going due to the subdivisions and strip malls being built, they were only averaging about 190,000 jobs a month. Unfortunately, the commercial real estate is not coming back as we’re not going to have another boom or another housing build out like we did originally. It takes 125,000 jobs a month to keep up with birth rate and immigration, so even if we did keep up with it, we’re going to have an unemployment rate at 8% all the way up until 2014. The unemployment rate right now would be 12% except for all the people who dropped out of the work force. They dropped out a faster rate than was thought, hence why unemployment is not making new highs right now. It’s at 9.1% right now and 10.1% at its high. We have added hardly any jobs since then, so now oddly we are heading into another recession with no telling where it’s going to go. We may not even lose that many more jobs. Housing is already trailing towards the bottom, so there’s not much to lose if we head back into another recession. However, you can still expect to see the unemployment rate shoot back to 10%.

To hear more from Mike Shedlock, you can visit his website at globaleconomicanalysis.blogspot.com. For a quick search, type Mish in Google.

Tags: artificial demand, bruce norris, Cash for Clunkers, deficit, deflation, deleveraging, Europe, FDIC, FED, globaleconomicanalysis.blogspot.com, IMF, inflation, Mike Shedlock, Mish, Mish’s Global Economic Trend Analysis, monetary stimulus, NASDAQ, National Accounting Board, oil interest rates, pool of greater fools, recession, Republican Congress. fiscal stimulus, Sitka Pacific, stimulus package
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The Norris Group Real Estate News Roundup 10/13/10

Wednesday, October 13th, 2010

Today’s News Synopsis:

Mortgage application volume increased 14.6% this week. All 50 state attorney generals are now involved in an investigation into lenders that filed faulty foreclosure affidavits. The FHFA is urging GSEs to accelerate the foreclosure process once the AG reviews are over. Foreign investors are planning to purchase large amounts of commercial property.

In The News:

Mortgage Bankers Association – “Mortgage Refinance Applications Jump as Rates Continue to Fall in Latest MBA Weekly Survey” (10-13-10)

“The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending October 8, 2010. The Market Composite Index, a measure of mortgage loan application volume, increased 14.6 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 14.8 percent compared with the previous week.”

NAR - “NAR Says Families Will Suffer if Foreclosure Freeze Continues” (10-13-10)

“Thousands of first-time and move-up buyers who hoped to make a foreclosed property their new home now face uncertainty, anxiety and possibly remorse as they worry that closing on their desired property could be in jeopardy. For many, the dream of homeownership could turn into agony if their home purchase is indefinitely delayed by a moratorium on foreclosures declared by some banks, the National Association of Realtors® said today.”

Los Angeles Times – “California to join multistate inquiry of foreclosures by banks” (10-13-10)

“California will join a multistate investigation into whether banks violated laws by cutting corners while foreclosing on homes as the Obama administration made clear Tuesday that it would not support a nationwide moratorium.”

Housing Wire – “Jaime Dimon: ‘Almost no chance we made a mistake’ with foreclosures” (10-13-10)

“JPMorgan Chase said new processes are being put in place to ensure it fulfills all procedural requirements going forward. ‘There’s almost no chance we made a mistake,’ Jaime Dimon, CEO of JPMorgan Chase, said during the conference call.”

Housing Wire – “It’s official: All 50 state AGs to review foreclosures” (10-13-10)

“Alabama Attorney General Troy King announced Wednesday he is joining the other 49 AG offices in a nationwide investigation into lenders that filed faulty foreclosure affidavits.”

Housing Wire – “St. Louis Fed economist questions wisdom of more quantitative easing” (10-13-10)

“An economist at the Federal Reserve Bank of St. Louis wonders if additional large-scale securities purchases by the Fed will produce the desired effects of driving down interest rates, boosting employment, and preventing deflation.”

Housing Wire – “FHFA urges GSE servicers to accelerate foreclosure process after reviews” (10-13-10)

“On Oct. 1, DeMarco said Fannie Mae and Freddie Mac are working with their third-party servicers to identify any loans that may be have been foreclosed improperly. On Wednesday, FHFA urged servicers to proceed on foreclosures as quickly as possible after all foreclosure alternatives have been exhausted.”

Bloomberg - “Investors Target U.S. Commercial Properties After Drop in Values, DTZ Says” (10-13-10)

“Commercial-property investors are preparing to spend more in the U.S. next year after more than two years of declining values, DTZ Group Plc said. Funds and investment companies increased the capital available for deals in the Americas by 54 percent since December to $97 billion, the London-based real-estate broker said in a report today. Most of this will be used for U.S. transactions.”

Bloomberg - “Banks to Shift From `Extend and Pretend’ in Real Estate Loans, Survey Says” (10-13-10)

“Lenders will shift toward amending commercial mortgages next year instead of extending maturities, leading to increased sales of distressed real estate, according to a survey of almost 900 property professionals. More than 63 percent of those surveyed said they expect maturing loans to be modified, while 7.1 percent said loans will continue without changes to defer losses, a practice known as ‘extend and pretend.’ About 16 percent of respondents said real estate with maturing loans will be foreclosed on and put on the market, and almost 14 percent said properties will be sold by borrowers, PricewaterhouseCoopers LLP said in a report today.”\

Looking Back:

One year ago, Fitch reported that 60 percent of borrowers from 06 to 07 had negative equity and owed more than their homes are worth. Interthinx’s Mortgage Fraud Index estimated that fraud decreased by 4 percent from Q1 to Q2 of 2009, but increased by 7 percent from Q2 of 2008. Statistics from MDA DataQuick showed that Southern California home sales increased by 5 percent from October of 2008.

For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor event calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.

Tags: attorney general, bank, broker, Chase, commercial, deflation, DTZ Group, economist, employment, fannie mae, FHFA, foreclosure, freddie mac, gse, interest, Jaime Dimon, JPMorgan, loan, moratorium, mortgage, NAR, norris group, property, realtor, refinance, Troy King
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The Norris Group Real Estate News Roundup 8/9/10

Monday, August 9th, 2010

Today’s News Synopsis:

The percentage of American single-family homes with mortgages in negative equity decreased by 1.8% from the first to second quarter. Freddie Mac is requesting $1.8 billion in federal aid after a $6 billion loss in the second quarter. Freddie Mac’s single-family inventory rose by 84.2% and its multifamily inventory doubled from last year. PIMCO fears the U.S. may be entering a period of deflation, and JPMorgan Chase expressed concerns that our financial system may crash in 2015.

In The News:

MSNBC - “Fewer U.S. homeowners have ‘underwater mortgages’” (8-9-10)

“The percentage of American single-family homes with mortgages in negative equity fell to 21.5 percent in the second quarter from 23.3 percent in the first quarter and 23 percent a year ago, according to the Zillow Real Estate Market Reports.”

Los Angeles Times – “Freddie Mac requests $1.8 billion in aid after loss” (8-9-10)

“Government-controlled mortgage buyer Freddie Mac is asking for $1.8 billion in additional federal aid after posting a larger loss in the second quarter. Freddie Mac said Monday it lost $6 billion, or $1.85 per share, in the April-to-June period. That takes into account $1.3 billion in dividends paid to the Treasury Department. It compares with a loss of $840 million, or 26 cents a share, in the second quarter a year ago.”

Housing Wire – “Flooded with Housing Inventory, Freddie REO Sales Surge Despite Foreclosure Alternatives” (8-9-10)

“Year-over-year, Freddie’s single-family portfolio increased 84.2% and the multifamily portfolio doubled. Monday morning’s quarterly results reveal a 655% increase in forbearance agreements, where distressed homeowners simply get more time to begin paying back the mortgage. These forbearance agreements numbered 21,673 at the end of the first half of 2010, up from 2,869 at the end of the first half of 2009.”

Housing Wire - “The Scope: JP Morgan Estimates Nearly 9m Mortgages Eligible for New FHA Refinancing” (8-9-10)

“There is $870bn worth of underwater mortgages that could be eligible for the new Federal Housing Administration (FHA) short refinance program announced last week, according to JPMorgan. Additionally, there could be as many as 8.9m loans eligible for the program, worth an aggregate balance of $2.3trn, which includes underwater borrowers and mortgages eligible for the Home Affordable Modification Program (HAMP).”

Housing Wire – “Zillow Sees 3.6% Dip in US Home Prices as More Underwater Mortgages Come up for Air” (8-9-10)

“For the 14th consecutive quarter, national US home values declined 3.2% year-over-year during Q210, according to a quarterly market report produced by real estate listing website Zillow. The average sales price for residential properties was $182,500 during the quarter, down 0.6% from the Q110 price of $183,700. In Q210, 21.5% of mortgage properties were in negative equity positions, compared with 23.3% in Q110.”

Housing Wire – “PIMCO: US On Verge of Turning Japanese?” (8-9-10)

“The US may be nearing a long period of limited growth with the risk of deflation that would bring the nation’s economy very close to that of Japan during the 1990s, according to investment-management firm PIMCO.”

Housing Wire – “Monday Morning Cup of Coffee” (8-9-10)

“Federal Reserve chairman Ben Bernanke said there are options to re-shape US housing finance that don’t involve government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. ‘There are a variety of organizational forms that might replace Fannie Mae and Freddie Mac that could likely provide mortgage credit without the systemic risks associated with these institutions in the past,’ Bernanke said in a July 23 letter to Ohio Democrat Rep. Marcy Kaptur, according to reports by multiple media reports.”

Bloomberg - “Crash of 2015 Won’t Wait for Regulators to Rein in Wall Street” (8-9-10)

“The financial system experiences a crisis ‘every five to seven years,’ JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon told the Financial Crisis Inquiry Commission in January. By that measure, the next crash could come by 2015 — years before new banking reforms are in place. Many of the measures ordered by Congress and global regulators, aimed at cushioning the financial system in future crises, are years away from being implemented. The Basel Committee on Banking Supervision plans to give the world’s banks until 2018 to comply with limits on how much they can borrow.”

Orange County Register – “Real estate loss hammers Calif. pensions” (8-9-10)

“The $200 billion California Public Employees’ Retirement System (CalPERS) earned 11.4 percent return in the year ended June 30 — despite losing 37.1% on its real estate bets through March 31. The $130 billion California State Teachers’ Retirement System (CalSTRS) was up 12.3 percent in the same year after losing 12.4% on its property holdings.”

Orange County Register – “Unsold homes up 57% this year” (8-9-10)

“The number of homes for sale on the Orange County housing market has mushroomed to 11,414 in the 30 days ending last Thursday. That’s up 57% since ‘inventory’ began a steady rise at the start of the year, according to the latest report by Altera’s Steven Thomas.”

Tags: altera, Bernanke, borrower, bruce norris, Calpers, CalSTRS, Chase, credit, deflation, distressed, economy, equity, fannie mae, Federal Reserve, FHA, financial crisis, forbearance, foreclosure, freddie mac, gse, hamp, homeowner, inventory, Jamie Dimon, JPMorgan, Marcy Kaptur, modification, mortgage, multifamily, pension, PIMCO, real estate, refinance, reo, residential, single-family, Steven Thomas, Treasury Department, underwater, zillow
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165-TNG Radio – Peter Schiff 3-13-10

Friday, March 12th, 2010

Peter Schiff

President of Euro Pacific Capital

(Full Bio)

Bruce Norris is joined this week by President of Euro Pacific Capital and author of Crash Proof 2.0, How to profit from the Economic Collapse, Peter Schiff. Peter is currently campaigning for the Connecticut Senate seat to replace Senator Dodd.

Europac.net is Peter’s website and the number to reach his group is 800-727-7922.

Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts on the U.S. stock market, economy, real estate, the mortgage meltdown, credit crunch, subprime debacle, commodities, gold and the dollar, he is becoming increasingly more renowned. He has been quoted in many of the nation’s leading newspapers, including The Wall Street Journal, Barron’s, Investor’s Business Daily, The Financial Times, The New York Times, The Los Angeles Times, The Washington Post, The Chicago Tribune, The Dallas Morning News, The Miami Herald, The San Francisco Chronicle, The Atlanta Journal-Constitution, The Arizona Republic, The Philadelphia Inquirer, and the Christian Science Monitor, and appears regularly on CNBC, CNN, Fox News, Fox Business Network, and Bloomberg T.V. His best-selling book, “Crash Proof: How to Profit from the Coming Economic Collapse” was published by Wiley & Sons in February of 2007. His second book, “The Little Book of Bull Moves in Bear Markets: How to Keep your Portfolio Up When the Market is Down” was published by Wiley & Sons in October of 2008.

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. A financial professional for over twenty years he joined Euro Pacific in 1996 and has served as its President since January 2000. An expert on money, economic theory, and international investing, Peter is a highly recommended broker by many leading financial newsletters and investment advisory services. He is also a contributing commentator for Newsweek International and served as an economic advisor to the 2008 Ron Paul presidential campaign. He holds FINRA Series 4,7,24,27,53,55, & 63 licenses.

In 2007, the crash was not obvious to many, but it was to Peter. Peter thinks he understood the economy better than most of the people in Wall Street and the government. Peter was better prepared because he was writing books about the economy, and he was working in the brokerage industry. He received many emails from other people who agreed with his views.

Peter believes the problem is that too many people learned Keynesian economics, and as a result, they had no understanding of how economies truly work. It is hard to see a bubble when you are inside one. Peter saw people buying houses at prices they couldn’t afford. He knew that lenders were letting people buy homes with no down payment, they were letting people lie about their income, and they weren’t documenting their assets. He knew the government was guaranteeing all that debt through Fannie and Freddie, and he understood the moral hazard of that behavior. He knew the Federal Reserve had interest rates much too low. He knew that the economy was in a mess, and that we were simply inflating a bubble. Peter claims you didn’t have to be a rocket scientist to see this problem coming; you just had to be an idiot, or too immersed in the bubble to see it coming.

Bruce saw many of the people who Peter debated, and they were very confident when they claimed Peter was wrong, and they still do. Many of these people still think that the economy is recovering right now, and that Ben Bernanke made the right choice by stimulating the economy. Peter thinks Bernanke made the problem worse. We are trying to reinflate a bubble, but this behavior is just going to make problems worse.

Bruce asks Schiff what he would label his State of the Union speech, if he was to give one. Peter does not think that the Union is currently sound. Right now, he is running for Senate in Connecticut as a Republican nominee. Peter believes that Chris Dodd enabled the housing bubble by giving support for Fannie and Freddie while they were making bad decisions. Schiff thinks we need to restructure our government, because it is spending too much and it is too big. Right now, the government is actually trying to expand rather than shrink, and that causes an increase in spending. We need to change our tax policy. Right now we are punishing hard work, savings and investment. We need to raise revenue through consumer spending. We need to remove many of the regulations that are distorting the free market. We cannot pretend that we can buy everything from China and Japan, and then pay for those products by borrowing money.

For inflation to occur, you need to have a central bank creating a lot of money. Typically, the catalyst for inflation is government spending. When governments spend more money than they collect in taxes, they often get the difference from their central bank, and this is happening right now. Not only do we have all the ingredients for inflation, but we also have the ingredients for hyper inflation. Unless the government makes changes, we will have hyper inflation.

Inflation has not been a big factor yet, but Peter believes that this is because we cannot see it. We should be currently experiencing deflation but we are not. Prices should be falling, which would be helpful to the economy, but the government is preventing price reduction through inflation. One thing that Keynesians don’t understand is that high unemployment causes high inflation. Keynesians think there is a trade off between high unemployment and low inflation; this is actually the opposite of the truth. Generally speaking, most countries will low levels of employment have low levels of inflation. When you have fewer people working and producing goods, governments print more money to stimulate the weak economy.

In the 60s and 70s, we believed in the Philip’s curve, which got us in trouble. Bruce asks if the path to hyper inflation will take over a decade. Peter says it is up to the Chinese and Japanese. They have to decide when they will stop loaning us money that we cannot pay back. Peter doubts that this inflation process will take a decade. He thinks it will most likely happen over the next several years.

When the world stops buying our debt, we will either have the Federal Reserve print money to buy our debt, or we will make radical cuts in government spending. Peter hopes that we choose to cut our spending, but based on the current officials we have in congress, he believes we will choose to print money. Many countries throughout history have made the mistake of hyper inflation, and it has led them to disaster. Unfortunately, our government officials have learned nothing from history.

Peter does not think that our generation will see another politician like Paul Volcker; someone who is willing to take the necessary actions to save us from more trouble. In the 80s, we were lucky to have the support of Volcker and Reagan. Reagan understood that the government was too big, and he understood the importance of the dollar value. When Volcker was raising interest rates, politicians were calling for his resignation, but Reagan supported him. Right now, the person who occupies the White House is the complete opposite of Reagan. Obama believes that the free market is causing problems, and that the government is the solution. Bernanke is also the complete opposite of Volcker, because Ben supports mass amounts of government spending.

Home prices in California are firming, but this is occurring because the government is sustaining those prices. Right now, the government is actually making the problem worse. Builders are still making new homes, because the government is making it easy for people to buy homes with 3 percent down payments and low interest rates. If the market were in charge, prices would be falling so low that no one would want to buy and no one would be building new homes. What builders are doing is adding more homes to the incredible supply we already have. Once the government removes its influence, the collapse will be even bigger. We are still suckering people into buying homes that they cannot afford, and they are still able to extract equity from their homes which will soon disappear.

Peter believes that real estate prices need to fall, because the prices need to reflect a true market. In a true market, the average person should be able to put down 20 percent on a house, and then qualify for a mortgage without government guarantees. Also, people should have enough savings to pay for the other costs that come with owning a house. You need to have a reserve of cash for when emergencies, such as job loss, emerge. Prices need to fall to the point where people can do that, and Peter believes that this appropriate price rating is far away in California.

Keeping real estate prices artificially high is hurting the economy, because in order to inflate real estate prices, interest rates must remain artificially low. To do this, capital has to be sucked out of the real economy, which means that businesses cannot grow and expand. The more we keep home prices inflated, the more Americans will lose their job. Eventually, we will have higher real estate prices, but more Americans will be unemployed.

Right now, there are a lot of people who own houses who should not. For example, in California, renters were sucked into the market based on the expectation of making profit. The principal motivation for buying a house, for many of these people, was to make money. People will eventually realize that owning a home is not like owning a lottery ticket. There are many home owners who need to go back to renting. It is more flexible to rent, and it is typically less expensive.

Peter also thinks that many people bought larger homes they did not need during the real estate bubble, because they expected home prices to double. People expected their houses to appreciate to twice their purchasing amount. Once prices stop going up, people stop buying huge homes based on speculation, and they will simply buy what they need. Because of this market speculation, builders built too many mcmansions.

Peter also believes that California’s other big problem is that it is bankrupt. Companies are leaving, so the unemployment rate will be much higher in a couple years. When you are unemployed you cannot buy a home.

The only thing Peter believes will save California real estate is hyper inflation. However, Peter would not consider that to be a realistic solution. Hyper inflation may allow people to live in their expensive homes, but their other expenses, like air conditioning and eating, will become more expensive as well. Peter thinks that houses will still have their value, but people will be huddled in blankets; looking pathetic.

Bruce asks Peter, “When you get to the senate, can you change certain real estate policies, which will allow investors to receive financing? Investors are willing to put 20 to 30 percent down, but they cannot currently get financing for investing.”

This is because the government is directing all it’s financing to homebuyers and college student. Peter wants to stop the government from subsidizing anyone’s mortgage. This way, loans will go to the most credible borrowers, and the investors will surely be the most credible borrower. Peter would prefer to have an investor, who has the money, buy a property and maintain it, rather than keep an individual in his or her property when they don’t have the equity to maintain it.

Renting makes sense for a lot of people. Peter was a renter for nearly his entire life, because he made plenty of money and he felt it made more sense. In Florida, he rented a nice place for much cheaper than what he could have owned. He recently decided to buy for multiple reasons: 1) He was tired of moving around; 2) He paid 40 percent less than the owner who bought it in 2002. 3) It was 60 percent less than what the property was listed for 2 years ago. It would have cost him more money to build the home.

People ask Peter if they should buy real estate for financial reasons, and he tells them “absolutely not”. If you are thinking about real estate as an investment, then Peter thinks you should rent.

Peter believes that interest rates will increase at some point, because the government is artificially suppressing them right now. The longer we keep interest rates low, the higher they will end up. Many people feel encouraged to buy homes when interest rates are low, but Peter has the opposite perspective. Peter would rather buy interest rates when they are high, because prices are typically low when interest rates are high.

Bruce mentions that last time, prices did not decrease as the interest rates increased. Peter claims that this happened as a result of government interference. The Federal Reserve kept rates low in order to allow people to overpay for houses. Lenders also allowed people to buy a home without a down payment. These two factors encouraged people to buy, and as a result, people gained a positively speculative mentality towards real estate prices. The mania of real estate profit further encouraged home purchases.

You can no longer get an ARM, and only qualify at the teaser level. People were once able to get loans with 2 or 3 percent payments.

Peter’s website is www.europac.net

You can learn about his brokerage business at that website. Peter can help you invest your money around the world.

Peter’s recently published book is “Crash Proof 2.0”.

If you want to help Peter get to senate, his campaign website is www.schiffforsenate.com

Tags: bruce norris, deflation, depression, down turn, economic, economist, economy, education, Euro Pacific Capital, FED, Federal Reserve, free market, health care, hyper inflation, inflation, investing, Peter Schiff, Phillips curve, real estate, recession, republican, the norris group, unemployment
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164-TNG Radio – Robert J. Samuelson 3-6-10

Friday, March 5th, 2010

Robert J. Samuelson

Author and Columnist

(Full Bio)

This week Bruce is joined again this week by Robert J. Samuelson. Robert is an award winning columnist and author. He has been writing a column for The Washington Post since 1977, and for Newsweek since 1984. He has recently published a book named The Great Inflation and Its Aftermath: The Past and Future of American Influence.

One of the main claims in Samuelson’s recent book is that the rise and fall of inflation was the most significant event in the past 50 years. When most people think of the fall of inflation, they think of a very short time. One of Samuelson’s key points is that there was nothing usual about the last 25 years. Samuelson thinks the fall of inflation was even more important than the rise of inflation.

In the early 80s, inflation was reaching 15 percent, mortgage rates were around 15 percent, and the prime rate for good bank customers was over 20 percent. When inflation came down, interest rates came down slowly, because no one believed that inflation would come down. Asset prices, beginning with the stock market, began to increase during this time. The Dow Jones industrial average was between 800 and 900. There was an explosion in the stock market over the next 20 years. By 2000, the Dow was over 10,000. Stock market wealth within households went from about $1 trillion in the 80s to over $11 trillion at the end of the 90s.

Later, this increase in stock values lead to an increase in real estate values. For many years, consumers spent more of their income and borrowed more. There were only 2 modest recessions during this time in 1991 and 2001. This increase in wealth made people very careless. It conditioned them to take risks which they should not have taken, because they believed the economy had entered into a state of prolonged prosperity.

If you have a feeling of preordained success about an investment, you are probably ignoring a lot of the risk factors you would normally pay attention too. People thought that risk had gone down because of lower inflation. They also felt that they understood risk better. People then began to take more risks because of these two false assumptions. Lenders began to lend money to people with high levels of debt, and they did it with silly and destructive interest rates. People assumed that stock prices would increase forever. For many years, Samuelson warned people that things would not continue to increase forever. Some of those people looked at Samuelson with pity, because he wasn’t taking part in the stock market increase.

Great gains inspire perverse behavior. There were people who owned 50 and 60 homes, who did not have a normal job, with a $30,000 negative cash flow per month. They would show you their list of properties with pride, because they were worth $4 million. They assumed they would be able to sell all their properties to people who were even dumber than they were. These kinds of people were sure that their investments couldn’t go wrong.

Before the bubble burst, people had high expectations for success, which allowed them to grumble about things not being good enough. The paradox at that time was that they could only have grumbled if they expected themselves to be heading towards paradise. The fact that things had been so good for them allowed them to criticize the actual conditions. When historians look back at this time, they will likely conclude that the times were not that good, even thought they really were; the times just weren’t as good as people thought they should be.

Roughly 2/3 of today’s population are too young in 1980. They were either not alive, or they were in their pre-adult years. They were not aware of the 70s and the high inflation, but even the people who lived during that time forgot about it.

Samuelson knows a columnist who wrote about Reagan’s leadership qualities. Samuelson does think that Reagan was a good leader, but the columnist did not address inflation at all. This history is the lost history. Professional historians and economists have engaged in an act of amnesia. This is scary because people will be more likely to make the same mistakes in the future. Samuelson thinks it is good to have the truth for the sake of truth, but also because if we don’t know the truth we will likely repeat our mistakes. There are prominent economists who are claiming that a little more inflation would be okay. Samuelson believes that if we encourage a little inflation, we will end up with a lot of it.

When society is used to good times, it can be difficult to ask for sacrifices, depending on what sacrifice you are asking for and why. Today, we have made more promises to people than we can afford to keep. Most of these promises are to retirees through social security, Medicare, and Medicaid. The cost of paying for those programs, when the baby boomers retire, will be staggering. Our children will be saddled with very high taxes, high budget deficits, or great cuts in other services. If we explain this to people, perhaps they would be willing to make some sacrifices. They may have to cut back on benefits for retirees, and raise the eligibility age for those programs. There may also be some sort of tax increase. None of our political leaders have made the case for sacrificing for our own interest. They seem to be waiting for a crisis to happen, which will force them to do things they should have done on their own.

There seems to be a popular conception that hyperinflation will likely occur in the next 20 years. However, based on our current scenario, Bruce does not see this occurring any time soon. Bruce and Samuelson are more considered with short term deflation. Samuelson doesn’t understand how you get higher inflation when you have empty shopping malls, 10 percent unemployment, and surplus factory capacity. As long as the people running economic policy in this country don’t come to the conclusion that higher inflation is better, we shouldn’t have it in the near future. When Samuelson says near future, he means 3 to 5 years.

In the long term, some people say that we will have to inflate because we have so much debt. The problem is that it is not easy to inflate your way out of debt. Forty percent of inflation turns over in a year or two. If you raise the inflation rate, you don’t really erode the debt, because you just have to refinance it at higher interest rates. In theory it seems like a practical choice, but in reality, it is not realistic.

Economists make the mistake of assuming that the economy responds in a mechanical way to credit, interest rates, government spending, and taxes. These things are significant, but Samuelson doesn’t think they are everything.

What happened in Japan was that they had an economic model, from the 50s to the middle 80s, which worked well for them. They had an export led economy, and they had an undervalued exchange rate. Their domestic economy was not very dynamic, but their exports kept growth and investment high. That model didn’t work in 80s because the exchange rate appreciated dramatically, and their exports became less competitive. This caused the Japanese to settle into a low growth mode, and they haven’t found a different economic model that works better. Contrary to what people learn in college economics, monetary and fiscal policy cannot change that kind of problem. The Japanese efforts to expand their economy through large budget deficits and loose monetary policy didn’t work. Their policy was dynamic internationally, but not domestically, and Samuelson thinks that is the problem in Japan.

If deflation became anticipated, it would be very destructive. Samuelson doesn’t think that modest price decreases would be that bad for a little while. However, if people think that prices will decrease forever, then they won’t borrow money, because their debt burdens will rise. They will postpone buying because the car they could buy today will be expected to fall even more in the future. This mentality will reduce demand, and then unemployment will increase.

Bruce asks Samuelson about what has changed in the baby boom generation’s expectation for retirement. Samuelson claims that this question is a little above his competence, because he is at the very edge of the baby boom generation. Samuelson feels that his retirement has become much less certain. He has saved a fair amount of money, but one thing he has learned is that markets don’t always increase. For example, if you have $100,000 on Thursday, six months from Thursday you may only have $100,000 minus 30 percent of its value. If you thought that money amount would be adequate to supply you through retirement, you may discover later on that it isn’t. That whole generation is probably feeling that same way about their retirement savings. Bruce thinks this mentality will cause a scenario that will not be inflationary. The economists that Samuelson talks to claim that people have short memories, so if we get into a fast growing economy for a few years, then their mentality of fear will disappear. However, Samuelson tends to agree with Bruce in his belief that these setbacks will leave people with a scarred mentality.

Samuelson wrote that the baby boom generation was the benefactor of large chunks of profit. They had the stock market increase, and then they had the real estate increase. This caused the baby boom generation to accumulate a lot of equity. Most of the GDP growth after 2002 came from equity growth and the extraction of it. Bruce wonders what is going to fuel the GDP growth going forward. This makes Bruce think, “How will we get inflation if we will have difficulty obtaining a moderate GDP growth?” Samuelson says that in an ideal world, the source of growth for the next 10 years would come from higher exports, fewer imports, and investment related to those thins. Also, more investment into our energy infrastructure might help as well. Specifically, natural gas could help us a lot now that we know we have more than we previously thought. Also, oil production can make a big difference for our potential economic growth.

After the Great Depression, a pact was made between the government and big business. Bruce asks if Samuelson sees another pact being made today. Samuelson does not see another pact being made today. The pact that occurred in the past was informal and unstable. After World War II, businesses did not want to be reviled in the same way they had been during the Great Depression. Because of this, businesses submitted to social and economic regulation in return for continued market freedom. What we should have today is a generational pact in which the baby boomers agree to reduce their benefits, so that we can take those burdens off of the young. This will allow them to start businesses, have children, and live in such a way so that a significant chunk of their income isn’t being drained to support their grandparents. Bruce completely agrees with this. There are plenty of people who can afford to pay for their own retirement, instead of having their grandchildren be taxed for it.

Robert Samuelson has created one heck of a book: The Great Inflation and Its Aftermath: The Past and Future of American Influence.

Tags: author, bruce norris, columnist, deflation, demand, economic policy, foreclosures, gdp, inflation, monetary policy, podcast, politics, real estate, retirement, robert j samuelson, robert samuelson, stagflation, stimulus, the great inflation and its aftermath, the norris group, trust deeds, unites states
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163-TNG Radio – Robert J. Samuelson 2-27-10

Friday, February 26th, 2010

Robert J. Samuelson

Author and Columnist

(Full Bio)

This week Bruce is joined by Robert J. Samuelson. He is an award winning columnist and author. He has been writing a column for The Washington Post since 1977, and for Newsweek since 1984. He has recently published a book named The Great Inflation and Its Aftermath: The Past and Future of American Influence.

In discussing the similarities between the Great Depression and the great inflation, Samuelson wrote, “What ultimately governed their decisions was the conventional wisdom at the time. The policies had been set with egos at stake. They were presumed to be correct.”

Bruce asks what the conventional wisdom in the 1960s was in regards to creating a healthy economy. The conventional wisdom in the 60s was called Keynesianism. This term was coined from John Maynard Keynes; a British economist who died in 1946. Keynesianism lead people to believe that professional economists had concurred the business cycle. Economists had figured out how to forecast the economy, and they had the tools to counteract recessions. Economists believed they could maximize economic growth, and keep unemployment at very low levels. This mentality lead people to believe that they could bring about endless prosperity.

The Philips Curve was named after the Australian economist A.W. Philips. Philips postulated that there was a fixed trade off between higher inflation and lower employment. You could pick which poison/benefit you desired to receive by raising one and lowering the other.

Walter Heller was chairman of Kennedy’s council of economic advisors. Kennedy was a person who truly listed to his advisors. Bruce asks if the economic thought of the time was played out in Kennedy’s policy. Although Kennedy was a practical politician, he was open to new ideas. His advisors argued that the policies which Eisenhower followed in the 1950s were behind the times. Heller argued that economists could prevent recessions, keep unemployment lower, and maximize economic growth. Kennedy was a skeptic at first because he had been raised to believe that the government should balance its budget, and inflation was a bad thing. Heller argued that we could use federal budget deficits to manipulate the economy, and even if a little inflation resulted, it wasn’t a terrible thing because you would have lower unemployment and people would adjust to it. Since the economy of Kennedy’s first two years did not do incredibly well, and because he was genuinely curious, he was open to the idea of inflation. The ideas that Heller sold to Kennedy were embraced by most economists.

This theory of a stable trade off between inflation and unemployment was obviously wrong. Economists could not create a fixed rate of inflation. In fact, we got an ever-accelerating rate of inflation. When Kennedy first became president, the inflation rate was between 1 and 2 percent, but by the end of the 60s, it was 6 percent, and by the end of the 70s, it was 14 percent. Having this rising inflation made the economy less stable. Between the end of the 60s and the early 80s, we had 4 recessions of increasing severity. The recession of the early 80s had a peak unemployment rate of 10.8 percent. The net result of this economic experiment was that everything turned out to be completely the opposite of what the economists had promised. It promised stable inflation, but didn’t get stable inflation. It promised fewer business cycles and recessions, but we got more business cycles and recessions. It promised lower average unemployment, but we got higher unemployment.

The general idea of inflation is starting to become popular again. The chief economist of the International Monetary Fund recently put out a paper saying, “Maybe a little bit of higher inflation is okay.” Hearing this, Samuelson thought, “Haven’t they learned anything in the last 50 years?”

We were in a desperate position in 2008, and the idea of the economic stimulus program was desirable. However, Samuelson does not think that this program was executed well. The economy was in the process of falling off the edge. The idea of people being able to manipulate the business cycle seems ultimately self defeating. We have to intervene, but we have to be more restrained in our interventions. When interventions succeed, they create conditions that strike back at us.

If Robert wanted to make a formula for creating inflation, the most important ingredient would be to not care about inflation; to not care about keeping the money supply stable. This old fashioned idea that stable money is a responsibility of the government seems to be an ancient relic of the barbarian past. Robert thinks that responsibility is extremely important. The mindset of decision of makers, and the public, is the most important thing. Also, creating too much easy credit is a precondition for most sustained inflations. You can have easy credit, an easy monetary policy, and an expansive money supply, and not get inflation if there are other things off-setting the monetary stimuli. However, if you have people in charge who don’t care about inflation then you are preconditioned to have higher inflation.

Bruce will return to this topic in the next segment.

Samuelson remarked that the learning curve of successive presidents and their advisors is remarkably flat. It amazes Bruce that we have very intelligent people running our government, yet there has been no progressive learning curve. The same mistakes were made as new presidents came into power. Bruce wonders what role politics played in swaying the economic policy of the 70s. In the 60s, economists persuaded political leaders that it was possible to have sustained economic growth, with few recessions, and low unemployment. Once those ideas were accepted by political leaders, it became a part of the fabric of the public’s expectation. When these ideas did not accomplish their purpose, other people tried to achieve the same goal using different policies. Essentially, they continued to use bad policies to prop up a structure which was already collapsing. Unfortunately, our leaders were not able to admit and act as thought they were incapable of solving our financial problems. It fell to Ronal Reagan to deliver the news that their promises could not be fulfilled.

Arthur Burns was the Federal Reserve chairman from 1970 to 1979. He was an economist from Colombia University. He was also the head of the National Bureau of Economic Research. His major mistake was that he bought into Keynesianism. Once he bought into it, he did not take the actions he needed to prevent inflation. In Samuelson’s book, he stated, “What was politically convenient, was also rationalized intellectually.” He was pressured from Nixon, and he was politically expected to fulfill the goal of constant economic growth with no business cycles. At some point, the Federal Reserve would have to stop the rising inflation, so they would tighten credit and reduce the money supply. This would cause a recession, which made the people upset, and so they would start the inflation process again. The Federal Reserve couldn’t decide how to solve the financial problem, and they ended up choosing to do nothing constructively.

Samuelson believes that if you have expectations of higher inflation, then you will get higher inflation. This kind of thinking makes businesses and workers act in such a way as to produce it. Businesses start thinking that they can pass on any price increases, and workers assume that they can get increased wages to pay for their higher cost of living. This mentality causes a wage/price spiral. Unless the government steps in and stops this mentality, it will continue.

At the end of World War II, there was a huge burst of inflation, because during the war we had wage/price controls. As soon as the artificial suppression of the wages and prices was removed, there was a huge increase in inflation. However, we did not get double digit inflation in the late 40s or the 50s. This makes Samuelson ask the question, “Why didn’t that happen?” This wasn’t because policy became oppressive; it was because people didn’t expect the wages and prices to continue to increase. People at that point in time didn’t think that the U.S. was going to have inflation for forever, so they didn’t act that way.

At the end of the 70s, people were scared by inflation. They feared that the government could not control inflation, and they didn’t understand inflation. They didn’t know whether their wages would keep up with rising prices, they didn’t know if their savings would be eroded by rising prices, and they didn’t know how high interest rates were going to go. In the early 80s, mortgage rates got up to 15 percent.

Bruce Norris refinanced his house to become a real estate investor at age 17. People didn’t know if that kind of inflation would continue. Opinion polls showed that people did not think the future would be better than the past. The fears then, and the fears now, are not that much different from each other.

Samuelson believes that the fear, anxiety, and pessimism induced by inflation were the main reasons Ronal Reagan was voted as president in 1980. The vote wasn’t about conservative vs. liberal politics. They didn’t know if Reagan could fix the problem, but they certainly knew that Carter couldn’t. This change in public perspective gave Volcker and Reagan a chance to try something new. They were the right pair to make those changes. Volcker was chairman of the Federal Reserve board at the end of the 1970s. Volcker was chosen to be chairman of the Federal Reserve, because Carter had hired the previous chairman to take the position of Treasury Secretary.

Volcker and Reagan shared the belief that the country could not prosper with double digit inflation. Volcker decided that the government was not going to pump out money and credit. After that decision, interest rates increased, inflation slowed down, and the economy went into a horrific recession. Reagan did something that no politician would have done at the time; he supported Volcker’s decision. This caused Reagan’s popularity to plummet, but he continued to give Volcker his support, because he thought Volcker was making the right decision.

What was unique about Reagan and Volcker’s policy was that all of the adverse consequences were up front. No politician likes to have the news filled with negative information related to their presidency. From Samuelson’s perspective, any other politician who had been president would have told Volcker to stop. If Volcker did not stop, then they would have created legislation to change the nature of the Federal Reserve, so that it would be more accountable to its political masters.

Bruce encourages everyone to get “The Great Inflation and Its Aftermath: The Past and Future of American Influence”. Roger will be on The Norris Group’s Radio Show during the next segment.

Tags: author, bruce norris, columnist, deflation, economic policy, foreclosures, inflation, monetary policy, politics, real estate, robert j samuelson, robert samuelson, stimulus, the great inflation and its aftermath, the norris group, trust deeds, unites states
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161-TNG Radio – Christopher Thornberg 2-13-10

Friday, February 12th, 2010

Christopher Thornberg

Principal at Beacon Economics

(Full Bio)

This week Bruce is joined by Christopher Thornberg. Christopher is an expert in the study of regional economies, real estate dynamics, and business forecasting. In 2006, he co-founded Beacon Economics which is an economic research and consulting firm that specializes in real estate markets, local economic development, and public and private policy issues. Christopher has also been part of the Norris Group’s award-winning fundraising series, I Survived Real Estate.

Christopher and Bruce discuss the current state of the market and whether the market is truly experiencing a comeback or is it completely manufactured. Christopher goes into detail about Bernanke and his current handling of the market. Government actions has delayed the inevitable and Christopher and Bruce discuss what the different strategies have been and how effective they have been and how much longer we should expect to see these manipulations.

Bruce and Christopher talk about Fannie Mae and FHA and the growing issues with FHA’s portfolio. The Mortgage Bankers Association estimates 20% of the their loan portfolio is in trouble.

A complete transcription of the show coming soon.

Tags: Beacon economics, bruce norris, California, CALIFORNIA FORECLOSURES, california real estate, Christopher Thornberg, deflation, fannie mae, FHA, forecast, foreclosure, inflation, investing, investor, loan portfolio, market, podcast, Radio, real estate, real estate investing, real estate investor, the norris group, update
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The Norris Group Real Estate News Roundup 12/01/09

Tuesday, December 1st, 2009

Today’s News Synopsis:

The NAR reports that pending home sales increased during October by 3.7 percent. The California Board of Equalization claims that most homeowners will see a decline in property tax after a deflation of 0.237 percent. According to Real Estate Econometrics LLC, the commercial mortgage default rate on loans held by U.S. banks increased to 3.4 percent in the third quarter.

In The News:

NAR - “Nine Consecutive Gains for Pending Home Sales” (12-1-09)

“The Pending Home Sales Index,* a forward-looking indicator based on contracts signed in October, increased 3.7 percent to 114.1 from 110.0 in September, and is 31.8 percent above October 2008 when it was 86.6. The rise from a year ago is the biggest annual increase ever recorded for the index, which is at the highest level since March 2006 when it was 115.2.”

Sacramento Bee – “Most California property tax bills will fall slightly in 2010″ (12-1-09)

“The Board of Equalization said Monday that most California homeowners will see a slight decline in property tax bills, based on the board’s preliminary estimates of deflation at 0.237 percent.”

Housing Wire – “$1trn in Commercial Real Estate Equity Lost, Say Analysts” (12-1-09)

“Property values are down 40% and about $1trn commercial real estate (CRE) equity was lost since the sector peaked in 2007, according to research by Keefe, Bruyette & Woods.”

Housing Wire – “Lend America Out of Business” (12-1-09)

“The FHA’s action prevents Lend America and Ideal from originating and underwriting FHA-insured mortgages or participating in FHA’s single-family insurance program. FHA also charged $512,500 in civil money penalties in the wake of a civil lawsuit that HousingWire previously reported reveals a pattern of mortgage fraud spanning more than 20 years across a number of mortgage firms.”

Housing Wire – “Short Sale Incentives Coming in 2010, Treasury Says” (12-1-09)

“HAFA allows the borrower to receive pre-approved short sale terms before the property is listed and frees them from future liability for the debt. Also, servicers utilizing the program are prohibited from requiring a reduction in the real estate commission agreed to in the listing agreement. The borrower also receives a $1,500 incentive for relocation after the transaction. The servicer receives a $1,000 incentive to cover administration and processing costs, and investors will be paid a maximum of $1,000 for allowing up to $3,000 in short-sale proceeds to be paid out to subordinate lien holders. In total, each transaction under HAFA will cost the Treasury up to $3,500 of incentive payments.”

Housing Wire – “RealtyBid.com Discounts Fees in December” (12-1-09)

“RealtyBid.com, online home auction company, discounted its standard listing fee from $150 to $25 through the end of December. Real estate agents looking to market property listings through an online auction can take advantage of the offer. If the property sells, RealtyBid.com will cut its sales fee, or the buyer’s fee, from 1% to a flat fee of $500.”

Bloomberg - “Commercial Mortgage Defaults at U.S. Banks Reach 3.4%” (12-1-09)

“The commercial mortgage default rate on loans held by U.S. banks more than doubled to 3.4 percent in the third quarter as vacancies rose and rents declined, Real Estate Econometrics LLC said.”

Bloomberg - “Construction Spending in U.S. Unchanged After Falling in Sept.” (12-1-09)

“Construction spending in the U.S. was unchanged in October after declining five straight months as rising office and retail vacancies deterred the building of commercial projects. Spending in September, previously reported as an increase, fell 1.6 percent, according to Commerce Department data released today in Washington. Construction spending declined on office buildings and commercial projects, while homebuilding increased.”

Looking Back:

One year ago, the government announced its plans to spend $800 billion dollars on mortgage-backed securities and consumer-debt securities. Treasury yields dropped to record lows. Bernanke announced that the federal reserve was considering lowering interest rates.

Tags: agent, auction, bank, Board of Equalization, bruce norris, Commerce Department, commercial, construction, default, deflation, Econometrics, FHA, fraud, insurance, Lend America, mortgage, N.A.R., NAR, national association of realtors, property, real estate, RealtyBid.com
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