BLOODHOUNDBLOG.COM

Tyler Durden:

It was just seven short years ago that the prices at the epicenter of the housing bubble, Los Angeles, CA rose by 50% every six months as the nation experienced its first parabolic move higher in home prices courtesy of Alan Greenspan’s disastrous policies: a time when everyone knew intuitively the housing market was in an epic bubble, yet which nobody wanted to pop because there was just too much fun to be had chasing the bouncing ball, not to mention money. Well, courtesy of the real-time real estate pricing trackers at Altos Research, we now know that the very worst of the housing bubble is not only back, but it is at levels not seen since the days when a house in the Inland Empire was only a faint glimmer of the prototype for BitCoin.

Urf.

A lot of the people I talk to in Phoenix are trying to time their exit. It wasn’t this way in 2005-2006; I had people still eager to buy ten months after the market had turned.

Joel Kotkin at The Daily Beast:

Once considered backwaters, these Sunbelt cities are quietly achieving a critical mass of well-educated residents. They are also becoming major magnets for immigrants. Over the past decade, the largest percentage growth in foreign-born population has occurred in sunbelt cities, led by Nashville, which has doubled its number of immigrants, as have Charlotte and Raleigh. During the first decade of the 21st century, Houston attracted the second-most new, foreign-born residents, some 400,000, of any American city—behind only much larger New York and slightly ahead of Dallas-Ft. Worth, but more than three times as many as Los Angeles. According to one recent Rice University study, Census data now shows that Houston has now surpassed New York as the country’s most racially and ethnically diverse metropolis.

Why are these people flocking to the aspirational cities, that lack the hip amenities, tourist draws, and cultural landmarks of the biggest American cities? People are still far more likely to buy a million dollar pied à terre in Manhattan than to do so in Oklahoma City. Like early-20th-century Polish peasants who came to work in Chicago’s factories or Russian immigrants, like my grandparents, who came to New York to labor in the rag trade, the appeal of today’s smaller cities is largely economic. The foreign born, along with generally younger educated workers, are canaries in the coal mine—singing loudest and most frequently in places that offer both employment and opportunities for upward mobility and a better life.

Over the decade, for example, Austin’s job base grew 28 percent, Raleigh’s by 21 percent, Houston by 20 percent, while Nashville, Atlanta, San Antonio, and Dallas-Ft. Worth saw job growth in the 14 percent range or better. In contrast, among all the legacy cities, only Seattle and Washington D.C.—the great economic parasite—have created jobs faster than the national average of roughly 5 percent. Most did far worse, with New York and Boston 20 percent below the norm; big urban regions including Philadelphia, Los Angeles, and, despite the current tech bubble, San Francisco have created essentially zero new jobs over the decade.

[....]

The reality is that most urban growth in our most dynamic, fastest-growing regions has included strong expansion of the suburban and even exurban fringe, along with a limited resurgence in their historically small inner cores. Economic growth, it turns out, allows for young hipsters to find amenable places before they enter their 30s, and affordable, more suburban environments nearby to start families.

This urbanizing process is shaped, in many ways, by the late development of these regions. In most aspirational cities, close-in neighborhoods often are dominated by single-family houses; it’s a mere 10 or 15 minute drive from nice, leafy streets in Ft. Worth, Charlotte, or Austin to the urban core. In these cities, families or individuals who want to live near the center can do without being forced to live in a tiny apartment.

And in many of these places, the historic underdevelopment in the central district, coupled with job growth, presents developers with economically viable options for higher-density housing as well. Houston presents the strongest example of this trend. Although nearly 60 percent of Houston’s growth over the decade has been more than 20 miles outside the core, the inner ring area encompassed within the loop around Interstate 610 has also been growing steadily, albeit at a markedly slower rate. This contrasts with many urban regions, where close-in areas just beyond downtowns have been actually losing population.

[....]

Pressed by local developers and planners, some aspirational cities spend heavily on urban transit, including light rail. To my mind, these efforts are largely quixotic, with transit accounting for five percent or less of all commuters in most systems. The Charlotte Area Transit System represents less a viable means of commuting for most residents than what could be called Manhattan infrastructure envy. Even urban-planning model Portland, now with five radial light rail lines and a population now growing largely at its fringes, carries a smaller portion of commuters on transit than before opening its first line in 1986.

But such pretentions, however ill-suited, have always been commonplace for ambitious and ascending cities, and are hardly a reason to discount their prospects. Urbanistas need to wake up, start recognizing what the future is really looking like and search for ways to make it work better. Under almost any imaginable scenario, we are unlikely to see the creation of regions with anything like the dynamic inner cores of successful legacy cities such as New York, Boston, Chicago or San Francisco. For better or worse, demographic and economic trends suggest our urban destiny lies increasingly with the likes of Houston, Charlotte, Dallas-Ft. Worth, Raleigh and even Phoenix.

The critical reason for this is likely to be missed by those who worship at the altar of density and contemporary planning dogma. These cities grow primarily because they do what cities were designed to do in the first place: help their residents achieve their aspirations—and that’s why they keep getting bigger and more consequential, in spite of the planners who keep ignoring or deploring their ascendance.

Read the whole thing. I’ve been pimping Kotkin here for years. When you see his name out on the nets, give him your time. He’s been dead right about what’s happening in American cities, where Richard Florida has been dead wrong.

I’ve been a vocal critic of Ben Bernanke.  I thought his Quantitative Easing schemes would eventually create a bubble in the Treasury and mortgage-bond markets.  Bernanke has committed to keeping rates low for another 18-24 months.

I was wrong.  I violated the first rule of market prognostication (from the late Marty Zweig):  Don’t Fight the Fed

Let me give you some background.  Mortgage rates are driven by the secondary market (which is a fancy word for bond buyers on Wall Street).  I offered an abbreviated history of secondary mortgage marketing , six years ago, here on Bloodhound Blog.  Essentially it works like this:

• Home buyer applies for a loan with a mortgage originator
• Originator processes the loan for submission to a lender
• Lender underwrites the loan to agency guidelines (FHA, FNMA, FHLMC, VA)
• Lender funds the loan
• Lender secures guaranty from agency
• Lender retains servicing rights but assigns rights to principal and interest to an investment bank
• Investment bank packages loans in a pool, carves up the pool into bonds, and sells them to individual investors

Two things are important in secondary marketing:  the agency guaranty and the ability to sell the bonds.  The agency guaranty offers a sense of security to the investors and the demand for the bonds must be there.  When I thought rates would rise, because of runaway inflation, I posited the the Federal Reserve Bank’s power was quickly deteriorating.  What I hadn’t anticipated was that central banks, all over the word, were in even worse shape.  The Fed might be ugly but she’s the prettiest gal at the dance.

Last month, I asked Alan Nevin, economist with the London Group, “What if the buyers run away?”  To which, he replied, “Where will they go?”.

This is not a pollyannish answer.  Where WILL investors go?  I offered these options:  Hong Kong, Australia,  and Canada

Then it hit me–the world wide capital market is huge and the options for capital investment are limited.  Imagine the global capital market as a 64-gallon trash can.  The Hong Kong, Australian, and Canadian bond markets are like a shot glass, a pint bottle, and a quart can.  Even if you tried to dump all that trash into those three little receptacles, you’d have at least 63 gallons of trash which needed a landfill.

The domestic treasury and mortgage-backed securities markets are that landfill—a great place to dump all of that trash.  Maybe Hong Kong, Australia, and Canada can pull some capital away from the domestic bond markets but The Fed-controlled landfill is still a good place for investment.  For now…

A searing indictment of The Bernanking System in Business Insider:

Once people start to come out of negative equity, even more of them will sell and try to get out from under the cloud they are under. So, the housing bubble orchestrated by the Fed and by the hedge funds and by the wealthy could free up massive inventory. The average person fears negative equity. The Fed will not erase that memory.

The only way people will risk negative equity is if their house prices are cheaper than rent. But the artificial inflation of housing prices will do nothing but push the average Joe away from housing.

Keep in mind that about 4.4 million houses were sold in 2011 and only 2.4 million mortgages were taken out for purchase. That is a mortgage depression and the rise in house prices has not changed that mortgage depression.

People are learning that the uptick in prices is a scam, both by banks withholding massive inventory, and by the Fed making more easy money available to the rich. Once they own most of the inventory, they will be forced to initiate a housing bubble or they will be stuck with the properties.

…is what people might say once we are all done here.

After following Robert Worthington’s post: Videos are in My Arsenal and the terrific advice he got, I decided it’s my turn to spend some time in the barrel. Not for videos (despite the abundant potential I see in videos, I’m not there yet) but rather single sites: I am dialing in my individal listing web site model. Well… at least I think I am.

Heck, just last week I bragged in a Comment on Eric Blackwell’s NAR, IDX, Franchisors post ”I know I can put together a single site that blows away most other agents and ALL other aggregator / franchisor lead generator thing-a-ma-bobs.”  Later that night, however, as I lay down to go to sleep, all I could hear, over and over in my head, was Robert Duvall saying to John Wayne in the movie True Grit: “I call that bold talk for a one-eyed, fat man!”  I realized that such a brag, based on only one person’s review (don’t kid yourself, though, my mom can be a tough critic) leaves room for improvement.

Real Estate, despite all the talking we do with others, is essentially a lonely business. (We do still talk to lots of people in order to generate business, don’t we? I mean… I didn’t miss some new App that does that for us, right?) When we create marketing pieces, and even entire marketing campaigns, we are often working in the bubble of our own minds. I have borrowed, swiped and learned as much as I can from what’s found on BHB, and so I can ask no better group to take a look at the direction I’m going and provide criticism. This single site, Wellesley La Mesa, is the first one utilizing my new layout and over-all look/feel, so it’s not too late to make wholesale changes if I’m missing something or just plain on the wrong path.

One note: the web site itself (The UnRealty Group), is about 30% finished, with lots of articles and content missing, so if you link over there, keep that in mind before tearin’ into me… I mean passin’ on your constructive criticisms.  Thanks!

The question comes from a comment to a post at Seattle-based start-up blog, GeekWire. The news? Zillow.com is bumping the per-share price on its forthcoming IPO to as high as $18, up from the $12-$14 range it started with when the public offering was announced.

I like that question, because it parallels one of my own: What, precisely, can Zillow hope to do — other than provide big paydays for its VCs and founders — with $71 million in new funding? Which parts of the site will require that much build-out?

My take: The web-tech IPO craze that’s going on right now is just the next phase in the rape-the-rubes strategy Wall Street has pursued since internet start-ups came on the scene in the late ’90s. There is plenty of money to be made churning the stock of “businesses” that, in the end, all amount to MySpace.com — all hype, no actual value.

What’s the name for that phenomenon…? Oh, yes — a bubble.

The good news: Cynthia Pang Nowak, formerly Redfin.com’s queen-bee PR geek, is now signed on with Zillow. While she may be both the smartest and most breathtakingly beautiful woman on the Puget Sound, it remains to be seen if she can answer the BloodhoundBlog question: What would David Gibbons do?

Meanwhile, GeekWire.com deserves your daily attention. Run by Todd Bishop and John Cook, formerly the start-up reporter for the Seattle Post-Intelligencer and a long-time friend of BloodhoundBlog, it’s kind of like TechCruch in the rain — but without the bluster and hyperbole. The daily email digest is quick way to keep up with the wired side of our world.

But: Am I all wet? Does Zillow.com look like a buy to you at $18? Can it go to $36? To $180? To $0.01? I like the people who work there, and the founders have been very good to us from the beginning. But I’ve never seen the value of Zillow.com, except as an advertising play, and I still don’t. As with the comment quoted above, am I missing something?

Our friends at Zillow.com have figured out the secret to getting news coverage: Bad news:

Home values in the United States fell faster in the first quarter of 2011 than they have in any quarter since 2008, when the housing market experienced its worst performance, according to Zillow’s first quarter Real Estate Market Reports(1). The Zillow Home Value Index(2) fell 3 percent from the fourth quarter of 2010 to the first quarter of 2011, and declined 8.2 percent year-over-year to $169,600. Home values have fallen 29.5 percent since they peaked in June 2006.

Negative equity reached a new high mark with 28.4 percent of single-family homeowners with mortgages underwater at the end of the first quarter, up from 27 percent in the fourth quarter of 2010. A homeowner is in negative equity when they owe more on their mortgage than their home is worth.

Meanwhile, foreclosures(3) rose throughout the first quarter as banks unfroze moratoriums and allowed foreclosures to resume. Foreclosures had fallen in late 2010 due to the slew of moratoriums brought about by the “robo-signing” controversy. In March, one out of every 1,000 homes in the country was lost to foreclosure.

With substantial home value declines, as well as increasing negative equity and foreclosures, Zillow forecasts show it is unlikely that home values will reach a bottom in 2011. First quarter data has prompted Zillow to revise its forecast, now predicting a bottom in 2012, at the earliest.

“Home value declines are currently equal to those we experienced during the darkest days of the housing recession. With accelerating declines during the first quarter, it is unreasonable to expect home values to return to stability by the end of 2011,” said Zillow Chief Economist Dr. Stan Humphries. “We did expect substantial payback from the homebuyer tax credits, which buoyed the housing market last year, but underlying demand post-tax credit, as well as rising foreclosures and high negative equity rates, make it almost certain that we won’t see a bottom in home values until 2012 or later.”

My own take is that we are at or near the knee in the curve: While supplies of fire-sale-priced homes may be abundant, resale prices are by now so low as to make cash-rich investors completely nuts. In Phoenix in April, our values were up for the homes we track. Doesn’t mean we’ve turned the corner, but big drops from here seem unlikely to me.

Meanwhile, here’s a bullish rejoinder to Zillow from the Wall Street Journal:

Remember Japan’s “zombie banks”? These were the financial institutions that haunted that country’s economic recovery after the 1990 crash. They staggered on with huge losses they could never repay — the walking dead.

Here in America we have “zombie homeowners.” Millions of them. According to Zillow, a record 16.3 million families are upside-down on their home loans. Sixteen million! And many are a long way upside-down. Their homes may never be worth as much as their mortgage. But they are hemorrhaging cash to pay the nut every month.

Recovery? What recovery? This looks a bit like a depression to me.

What does this mean?

All the misery makes me think of a great French general, Ferdinand Foch. He’s the one who defended Paris at the Battle of the Marne in World War I. During the darkest hour of the fighting, he is supposed to have looked around him and said:

“Hard pressed on my right. My center is yielding. Impossible to maneuver. Situation excellent — I attack!”

In other words, when it comes to distressed housing, I’m finding it hard not to be a contrarian bull.

Why? Am I crazy?

Well, maybe. But I’m a medium-bull for all the reasons everyone else is gloomy.

First, prices in many areas are now cheap. They have corrected a long way since the bubble began to burst five years ago. Of course, it depends on where you are. I’m still skeptical of the real-estate markets that have held up best — prime stuff like Manhattan, San Francisco or Beverly Hills. It’s hard to get a deal there.

But in the places that have fallen the furthest, there are deals aplenty. Zillow found only four metro areas in America that have leveled out, or risen, lately. Notably, two of those are in stricken Florida — Fort Myers and Sarasota. Have they fallen so far they’ve hit bottom? Maybe.

Look at this chart. It shows Miami real-estate prices, adjusted for inflation, over the past quarter-century, using Case-Shiller data. The picture is pretty remarkable. The gigantic bubble has been completely wiped out. We’re back to prices seen in the 1980s — when “Miami Vice” was on the air.

The second reason: There are tons of foreclosures and short sales on the market. And there are plenty more sitting in the wings. Banks are holding back big shadow inventories of homes. And that means you can get a great deal. They have to sell. You don’t have to buy. You hold all the cards. Remember, the name of the game isn’t “let’s make a deal.” It’s “take it or leave it.”

Third, in many places rental yields are terrific. It’s cheaper to own than to rent. There have been some forced sales in my building in Miami. Based on my math, the latest buyers have bought condominium units for six times gross annual rents, and maybe 12 times net rents. We’re talking net yields of 7% or more. And rents are rising, because so many former owners are now renters.

The fourth reason I’m bullish is that you can get a very cheap mortgage. Thirty-year conforming loans are going as low as 4.3%. Throw in the tax break on the interest, and you are talking cheap finance. See latest weekly mortgage-rate update.

The fifth reason is that, as painful as this collapse has been, real estate has historically proven to offer very good long-term protection against inflation. Returns have typically averaged about 1% or 2% above inflation. At a time when everyone has been piling into gold, commodities and TIPS bonds to protect themselves against the possibility of inflation, it seems odd that the most popular and successful hedge, namely real estate, goes a-begging.

Thirty-year TIPS bonds are yielding just 1.6% over inflation, and shorter-term bonds offer even lower returns. Short-term TIPS are actually offering negative real yields. How holding TIPS may actually make you poorer.

The sixth reason I’m bullish is perverse, but I’m sticking by it. Everyone else is bearish. You cannot find a real-estate bull anywhere. No one wants to own this asset. No one wants to talk about it. No one wants to hear about it. Everyone seems to agree it’s just going down, down, down — forever.

They said much the same about stocks in 1987, 2002 and 2009; Treasury bonds in 1982; and gold in 2000. I cannot prove this is capitulation, but it sure smells something like it.

As ever, if you aren’t disciplined and patient, this probably isn’t for you.

I have absolutely no idea when real estate is going to hit rock bottom. It may take several years. I suspect it will do so in different markets at different times. But there are good homes out there going really cheap. If you hunt down the bargains, you’re disciplined about price, you get the right financing, and you hold on for five years or more, you’ll probably do pretty well from here.

Monday, I talked about how real estate is better described as a store of value rather than an investment, referencing the work Reason’s Anthony Randazzo published.  Randazzo really hit it out of the park because he showed, without a doubt, how the residential real estate bubble started right after 1992.  Look at the second chart (Case-Shiller Real Housing Price Index).  That chart shows the adjusted for inflation index.  It looks like an EKG after a jolt from defibrillator paddles.  Every curious person would want to know what those defibrillator paddles were.:

Only once the so-called 1992 Government-Sponsored Enterprise (GSE) Safety and Soundness Act opened up the floodgates of federal subsidies, later to be caffeinated by the Federal Reserve’s loose monetary policy in the early 2000s, did prices double nationally.

ZAP!!! The 1992 Government-Sponsored Enterprise (GSE) Safety and Soundness Act which turned out to be an oxymoron.

One commenter didn’t buy the results of the EKG and said:

Seems to me that America has had a succession of bubbles, market manipulations and public speculations since the mid 80s. Gold/Silver in the mid 80s, the Saving & Loan scams later, then the tech stock mania, then the real estate bubble and now we’re seeing gold/silver mania again as well as two recent bouts of crude oil speculation.

And these things were caused by activist government planning? No, these things were caused by BIG, BIG money jumping from place to place and “making the market”.

I asked a leading question:

What makes it “jump”?

I should have pointed out that there was a commodities bubble in the late 70s (remember the odd and even days at the pump?) but, let’s add that 70′s commodities bubble, to the many asset bubbles cited by the commenter, and ask “Is that normal?” and, if it isn’t (by the way, it isn’t normal), we must wonder, did anything happen in the 1970′s which would cause money to move quickly in and out of asset classes?  Isn’t there some asset standard to which our dollar could be pegged?

The answer is like a bar of gold, hidden in a big, steaming pile of off-balance sheet financing: Bretton Woods.

The U.S. created fiat money which means we poofed the value of the dollar from thin air.  Actually, we trusted a very powerful man, to manage this nation’s money supply as if there was an underlying reserve.  We gave the man behind a curtain, a stick and a carrot, and said “go get ‘em Art, Paul, Alan, Ben!”  The men behind those curtains started dangling carrots and beating with sticks (desperately, I might add) until they could find “sectors” of the economy to inflate (in hopes of pulling the rest of the economy along for the ride.  When the men behind the curtain couldn’t pull the rest of the economy along, they channeled Lord Keynes, through their buddies in DC, and tried to “boost aggregate demand“.

This isn’t a “conspiracy theory”, promulgated by evildoers committed to a New World Order, it was a farce, a scam, a Ponzi scheme, enacted by well-intentioned men with the hubris that they were more powerful than what Adam Smith described as “The Invisible Hand”.  Men who considered themselves…God-like.

What makes it jump?

Big, BIG Money jumps to whichever asset bubble it’s being led to be it by carrot or stick.  To wit:

Today, we’re throwing back the curtain and finding out the results of the arrogant shenanigans:

A newly-released study from the Congressional Research Service bolsters claims that the nation’s largest banks profited off the Federal Reserve’s financial crisis-era programs by borrowing cash for next to nothing, then lending it back to the federal government at substantially higher rates.

Duh!  I told you this would happen two years ago when I pointed out that the BawldGuy axiom (Lenders Lend) was, for the first time, false:

The “government option” makes it impossible for private mortgage financing to make a profit. Certain banks received TARP funds, at a ridiculously low carrying cost (like .25%), and lend that money out, risk-free, at 5.0%.  That’s an awfully FAT profit for a virtually risk-free transaction.  That may sound good to you but it tells me that we are dissuading private lenders from entering a market which so sorely needs them.

If you aren’t having this conversation, with the poor victims of this Ponzi scheme (your underwater clients), you are a hustler, a salesman, a full-fledged, mindless drone, hiding behind your paid-up NAR dues.  If you’re not having this conversation, with would-be home buyers, you are a huckster, a salesman, a debt-pushing pimp, hiding behind your paid-up dues to the welfare queens at the MBAA.

You are not a professional, regardless of the pin you wear on your lapel.

Stand up for your clients !  Eat that carrot, break that stick, and expose the men, hiding behind curtains, for what they are; home wreckers.  Tell your clients how dangerous their actions were so that they have full disclosure about the future of real estate.  It’s still bright but your clients need to know how this mess happened so that it never happens to them again.

Primum non nocere.

Debra and I had the good fortune to met Anthony Randazzo at a Reason Foundation dinner last week.  Mr. Randazzo published an article today, about real estate as a “store of value” (which was consistent with what we’ve been talking about here on BloodhoundBlog).

Few people will dispute that more homeowners adds “social value” to communities.  Greg Swann articulated that nicely here:

The essence of our freedom is the free ownership of the land, and yet everywhere we turn, private property is subjected to one law after another, and everything that is not forbidden is compulsory instead.

This is a grievous error. The men who become Brownshirts or Klansmen or Khmer Rouge — the men who make up murderous mobs — are men without land. It is the husbandry of the land — each man to his own parcel — that most makes husbands of us, that sweeps away our willingness to live as brigands or rapists or thugs.

By robbing the private ownership of the land of its meaning, the state is, by increments, robbing its citizens of their humanity. No one burns down his own home, nor his neighbor’s home. But when the time comes that we all seem to own our homes only by sufferance, none of us will have anything left to defend.

What Greg was arguing against was an activist government, abusing eminent domain laws.  I was happy to read that locally, the brigands disguised as National City, CA Councilmen were defeated last week but the war in defense of private property rights will be a long campaign.

Mr Randazzo’s article however, demonstrates how that “social value” (op. cit.) can be distorted when the planners keep planning:

When looking at housing this way, the “ownership society” lauded by President Bush in the early 2000s, sounds like a good idea. Especially when considering the social values associated with homeownership, like being a good neighbor and having a stake in nuturing a community. However, while owning a home is rarely a bad thing, it might not be the great investment our parents told us it would be.

When you adjust these numbers for inflation, housing prices stayed nearly flat from the end of World War II until the mid-1990s. Only once the so-called 1992 Government-Sponsored Enterprise (GSE) Safety and Soundness Act opened up the floodgates of federal subsidies, later to be caffeinated by the Federal Reserve’s loose monetary policy in the early 2000s, did prices double nationally. Of course, that price jump was a bubble and prices have fallen nearly back to levels last seen in the 1990s.

Randazzo shows here, with charts, that activist economic planning, in pursuit of what would otherwise be thought of as a noble goal (a deed in every safety deposit box), distorted the market, detached housing from its traditional characteristic as a “store of value”, and turned it into a commodity ripe for speculation.

Eventually real housing prices picked up, doubling from 1996 to 2006 on the back of the housing bubble. But in trying to boost investment values, policymakers and poorly incentivized bankers drove prices unsustainably high, and the peak of growth was short lived as home values have steadily fallen back towards the pre-bubble trend line, as can be seen in the below graph.

Moreover, the government-encouraged speculation had an opposite effect when the final chair was pulled in the musical game:

This is not to say homeownership is a bad thing. And on an individual level, low- and middle-income families certainly were able to build equity during this period—which is a good mechanism for creating wealth. But a lesson from the evolving “foreclosure society” in the wake of the housing bubble is that what many thought was homeownership was simply a twisted form of renting. If the only means of getting a family in a home is to provide government subsidies that lower interest payments and down payments, then the homeownership is all a façade, and there is no equity growth.

To be sure, homeownership is a worthy and attainable goal, but not before a household has the means. A house is not a stock to be wielded as an investment, but rather it is a savings account that maintains its value with inflation.

Read Randazzo’s article here.  He is one of the few economists who is not only willing to point out the failed policy problems of the past but offer pragmatic policy solutions for the future.

Certainly, private ownership of real property is not only a virtue of American Exceptionalism but a demonstrable benefit to communities,  Those of us who practice the craft of trading and financing property, would do well to defend our clients against an activist government which would steal their property, and protest loudly when it tries to bestow premature gifts of property to their neighbors.

Ever wonder about the relationship between gold and real estate?

Jim Klein got me to thinking about a “store of wealth”, when I postulated that there is no gold bubble:

I think people can get snookered into thinking it’s a great “investment.” It’s protection, it’s barter; it’s a store of wealth. To me, that’s not what “investment” means, which is usually about income. I believe that in actual inflation periods, gold tends to appreciate on the low side, particularly when compared with many other assets. It does much better /anticipating/ inflation, as now.

I remembered hearing that term before, over on Seeking Alpha:

Gold and Real Estate have historically been the two ways to store real value as they are as real assets as you get. So what happens when the value of one real asset is artificially manipulated? We all know by now what caused the bubble in real estate, but, at the height of the bubble it was unknown to the market that it was a bubble on the verge of bursting

Real estate does have income-producing value though, as Sean Purcell pointed out to us years ago.  Also, the median-priced home is larger today than it was 40 years ago, because of change in retail demand.  Still, for fun, let’s compare the median price of a single-family home, in August, 1971 ($25,300) to the price of a single-family home, in February, 2011 ($202,100), in ounces of gold:

On August 1, 1971, the price of gold was pegged at $35/oz so it would have taken 722 ounces of gold to purchase a median-priced, single-family home.  Two weeks later, The United States terminated its participation in The Bretton Woods Agreement, creating a fiat currency.

At the end of February, 2011, you might have paid $1,400/oz for gold.  You could purchase a median-priced, single family home then for 144 ounces of gold, about one-fifth the cost (in gold), from 1971.

What I’m missing here is the net operating income you would have derived from that single-family home, over the 40-year period.  I’d have to know what the rents were for each year, the property taxes and costs for fire insurance, maintenance, etc..  I suppose we could assume 1% of the value of the home for monthly rents, adjust it each year to the median-price, and deduct 25% of that income for taxes, maintenance, and expenses.

One of the great reasons to purchase real estate is that you can leverage it.  If we could assume that you purchased that home, in 1971, with just 20% down payment, financed the rest, and the rents covered the financing costs and expenses, and amortized the loan for you, we could say that you only paid 144 ounces of gold then, for 144 ounces of gold today but…

…you could live in that house today. Real estate then might be a real bargain today and, until they have a home brokerage counter in Wal-Mart, there is no bubble in real estate.

Oh…wait.

…then we can start talking about a possible bubble in gold.”–Gary North, on LewRockwell.com

Gold is an investment asset. It therefore will not become popular short of an economic collapse – hyperinflation followed by a depression. The average person owns no gold coins, nor will he anytime soon.

Where would he buy them? How could 100 million households buy a single gold coin per household? This would be impossible. There are only a few small coin stores in any community. They are mostly mom-and-pop outfits. The U.S. Mint could not meet the demand.

When Wal-Mart has a gold coin section in the jewelry department, then we can start talking about a possible bubble in gold. Not until then.

If you’re looking for the best primer for owning gold click the link above and read the whole article.  Of course, if you’re confident that the Fed will find a way to unwind QE II, and that the money center banks are all safe, and that we’re finished with bail outs, and that the Federal budget deficit is under control, you have no need to own gold as an an inflation hedge.  If you think ANY of those shoes could still drop, buy the yellow metal until you see it offered at Sam’s Club.

President Barrack Obama released his proposed 2012 budget yesterday. The jeers greeting this event, from all wavelengths of the political spectrum, suggest that, at long last, people have finally begun to take the measure of this pathetic little man-boy. Even so, there is at least one tax increase in the midst of the typically Obamaesque frenzy of insanely excessive “spandering” — spending in pursuit of political pandering.

Which tax? The mortgage interest tax deduction is on the chopping block at last — at least for the most prosperous Americans. This will be hugely beneficial to the rest of the economy, as CNBC points out:

If we eliminate the mortgage interest deduction, we can stop re-directing capital away from innovation. Working Americans will be free to spend, save, and invest according to their own perceptions of their needs and their sense of the future.

I expect that eliminating the government incentives for spending on housing would promote dramatic innovations, making Americans more productive and allowing the economy to grow with renewed vigor. Instead of building up a Ponzi-scheme illusion of bubble-dependent wealth, we can genuinely improve our lives by allowing wealth to flow to where individuals perceive it will be best used.

[....]

In short, let’s unleash the genius of free markets on the capital of the American people simply by refusing to load the dice in favor of housing. Isn’t time to at least give the market a chance?

This is not what we will hear from the National Association of Realtors, of course, nor from very wealthy crocodiles shedding very salty crocodile tears.

Oh, well. Here is the very best thing prosperous people can do for their country in this hour most dire:

Get you fat, pouty lips off the welfare tit!

If you want to be free, stop pointing a gun at your own head…

It’s pretty much become the mantra in real estate, that agents, most of ‘em anyway, never stop searching for the Holy Grail — which is of course the MagicButton (MB). Just keep pressin’ it and business overwhelms them. They’re idiots of course. I can say that with a straight face cuz when it comes to MB hunts, I qualified for ExpertGuide status decades ago.

In point of fact, there are plenty of MBs around. They’re free or at least relatively cheap. Problem is, one of the key factors agents demand is that their effort is kept to a bare minimum. What I’m here to tell ya, as a charter member of MBA — MagicButtons Anonymous — is that there are two hard and fast ‘laws’ involved in any MB in the real estate brokerage business.

1. Seriously focused and slavishly consistent effort.

Don’t wanna burst anyone’s bubble with that one, but even a sit-down El Toro lawnmower must be running, in forward gear, and at least steered by a human operator to cut more grass than is directly under it when turned on.

2. If there are no results — defined as ever increasing bank deposits — then the only magic involved was the almost seamless transfer of money from the agent’s pockets to the marketer hawkin’ the MB.

What are some of the free MBS?

The one with the bestest cliché value is the leveraging of your sphere of influence. Though I’ve not liked the whole ‘sphere of influence’ approach much, it’s mainly due to how brokers use it to make a few bucks off their hopeless rookies before givin’ them the boot. In reality, most agents simply don’t have a sphere containing viable buyers/sellers. Still, if worked well and consistently it should, and probably will produce some results. Since you already know these people, the fear of rejection shouldn’t be a factor — or so the thinking goes.

Another one is farming. I’ve literally seen an idiot 23 year old succeed at this one. He had two cheap suits and a coupla sports coats, while driving a truly crappy lookin’ ’59 Ford — original paint job and all. Truth be known, the main ingredient to his farming success, (besides his relentless consistency) was he was too ignorant to realize his countless shortcomings. He thought farming was THE MB of all time. What a moron.

This next one is radioactive for most — cold calling. This is a sensitive topic, an understatement if ever there was one. The honest agents who eschew this MB outa hand simply say they hate the seemingly never ending rejection. Fair enough. This year a fellow San Diego agent will make about 16,875 cold calls. He’ll earn about $540,000 give or take. For those doin’ the math, let me. That’s $32 a call. Oh, you’re in East Toilet Seat, Iowa? At 10 bucks a call that’s still a decent income — almost $170,000. How many strangers would you call for $10-32 a pop? Just askin’. This guy rarely works more than 45 hours weekly, and even more rarely on weekends. And it’s free. In a recent conversation with him, he laughed as he told me, “I love all the weenies out there who’re too sensitive for all that horrible, self-esteem robbing rejection.” Ruthless, insensitive jerk.

Farming not for you? Try knockin’ on doors in the neighborhood of an impending open house on a weekly basis. This was a specialty of mine, taken from one of my first ever mentors. There’s a weird psychology involved for which I’ve never had a satisfactory explanation. But home owners near an open house who’re even kinda sorta entertaining the idea of moving, are often prodded to pull the trigger. Again, don’t know why it works, but it sure did.

MBs with a price tag.

The obvious one is the IDX — an MLS based home search for the public on your very own website. This approach above all shows any objective observer how little most agents are willing to work. Think about it. A mechanism that literally brings buyers into your laptop. Yet there are a shamefully small number of agents who close more than a few transactions from an IDX yearly. The tech guys don’t help matters, what with all their internecine pillow fights about what works best or at all. Yet regardless of the number of leads, one wonders how it’s possible to do virtually no business from it. Agents are resourceful though, and find a way.

A thought to ponder.

Though blogging is dead according to many, (not by enough in my opinion) it’s virtually free except for the time required. The problem with most real estate agent’s blogs, at least from where I sit, is that they don’t say much, and don’t say it very well. Cupcakes are fun, but not as a diet staple. Provide solid info, expertise, and insight, and over time folks will contact you. At least that’s been my experience. Having a crummy blog with worthless, self-serving info is worse than not having one.

All that said, it continually confounds me as I learn of various agents who proudly wear the crown of online virtuoso, who garner incomes impressive only to those scraping by. They’re able to generate thousands of leads annually, not to mention multiples of that number of people who visit their site monthly to read their posts. Yet they do what would generously be described as pedestrian business. Why is that? I don’t have a freakin’ clue. I just know it’s true more times than not by a wide margin.

Ponder This

The MB that’s easily installed in any of these, and all those strategies not mentioned here, is the application of the two aforementioned laws. Maximum efforts directed at what produces results is THE MagicButton guaranteeing you success every time it’s tried. Before you start screamin’ how stunningly obvious that is, ask yourself why real estate agents as a group don’t even come close to making the national median income?

Apparently it’s not so obvious. I’ll make this statement without any wiggle words or phrases. I think it’s true for maybe 80-90% of the real estate markets in the country. (Some are just too horrible now.)

If you can’t do 2-4 transactions a month in your market, you’re either a rookie, simply don’t wanna do that much business, or haven’t invoked the two laws. Most of us, at one time or another, including me at times, have allowed those with the loudest voices online to convince us they’re also the most successful. Some are, some aren’t.

Soberly ask yourself these questions:

If you’re doin’ what they say and it isn’t working, why are you still doin’ it? Stop. Most of ‘em are so fulla crap their eyes turned brown long ago.

If it’s working for ya, but not as well as you KNOW it’s workin’ for them, why aren’t you putting in the effort and consistency to produce the same results?

Find out what method fits you — AND produces results.

Then work your butt off doing it day in and day out.

Ponder This — THE formula for every MagicButton that’s ever worked.

Proven strategy(s) + massive effort + unrelenting, unwavering consistency = elite income.

90% of real estate agents think they know a better way. We all know how that’s been workin’ out for ‘em, right? And that’s a thought well worth pondering.

Didn’t I just tell you mortgage rates will be rising,  ten days ago?

I sure did, and I think I offered a pretty solid, fundamental explanation of how the bond bubble will pop.  That hiss you heard, directly after my post, was the rapid escape of helium from the bond balloon.  Back then, the 4.0% FNMA bond was trading at 102.75, while today, that bond is trading at 101.50, after reaching a low of 101.25.

What’s that mean to your customers?

The very same $300,000 loan, they could have locked in with no points, on November 8, 2010, will cost that customer about $5,000 extra, in closing costs, today.

I “feel” they’ll have a shot at getting close to that no-point pricing before the month is over.  Let me explain the difference between “feeling” something and “being pretty certain about” something.  I’m pretty certain that the sun is setting over the yardarm of below 5% mortgage rates but I’m having a little difficulty reading the sun dial.  I know it’s sometime between 3PM and 8PM for this mortgage rates rally.

Still, before the last ray sinks into the sea, we’ll see some rallies.  Here’s why I “feel” that way:

• The Fed is buying between $600B and $900B worth of bonds.  It is resolute that this sort of monetary policy is what is needed to lower unemployment.  So certain is it that it is fighting back against political criticism of QE2.
• The GM public offering was received very well yesterday.  Investors jumped at the chance to own the electric car company so much that GM expanded it’s offering and is trading higher, post-offering.
• The Irish bond bailout appears to be happening.

Traders are calming down, and trusting the power of central banks’ and governments’ bailouts again.  A trader’s loyalty is about as reliable as a lap-dancer’s love but, for the near-term, bond traders think  QE2 just might drive bond prices higher.  They ain’t selling too much and they ain’t buying too much.  Expect them to watch what happens through next week, then pile on the bond train, hoping to make a quick buck.  That’s good for mortgage rates, in the short-term.

Eventually, the bond traders will flatten Bacon, the dam will crack, and mortgage rates will be a lot higher than today.  There will be some opportunities to hold out for a better rate, though.

I think I feel that there’s a chance it just might happen this way…kind of…but don’t hold me to it.  I’m definitely not certain.  Call it a hunch.

   I happened upon an HGTV re-run the other morning while waiting, impatiently, for the French press water to boil. I stood before the ubiquitous 42 inches of plasma in our kitchen (itself, a residential multi-plex food prep/family room, laptop wireless docking station, and occasional espresso/dessert/wine/tapas bar for ourselves and the ever present house guest, or two, or six…) and recalled a simpler domestic time, back in….

The Day

   In the 1960s, the Petro family kitchen was barely big enough for two grouchy adults, three kids, and an AM radio. Our infrequent household guests were offered Maxwell House and served spaghetti and meatballs on big clunky plates. We had one army green rotary telephone attached to the wall, used mostly for sending and receiving bad news. When it rang, everyone’s heart dropped.

   Our dearly beloved Emerson TV/HiFi cabinet was reminiscent of a thick mahogany coffin. It had its own dedicated wall, in it’s own dark paneled viewing room beneath one of my mother’s oil paintings. The setting was proper, solemn, and predominately prime time. Back then, ‘wireless’ meant, well…it meant there was simply never any wire when you needed some. It was more of a bad thing than a good thing. You know what I mean. 

   I steeped the morning nectar and settled in to watch an older segment of  House Hunters. At once I was cyber-sucked back to a virtual real estate WTF of a housing market long since past; a pseudo-realistic scenario starring three perfectly staged, non-foreclosed, dream homes, a deer-in-headlights couple with one in the oven, and a Stepford wife Realtor named Roxanne.   I laid back, clicker loose in hand, and unwillingly suspended my post-housing bubble disbelief.  I gazed on as my iPhone pinged an endless wave of inedible Spam (the even worse kind).

   Roxanne, the star of this particular episode, was strikingly unfamiliar. What is with all the famous nobodies on the tube today? If you’re a casual, part-time channel surfer, as I am, then it’s even more confounding.

   Back in the Day you had your Lawrence Welk, your Walter Cronkite and your Johnny Carson. Three totally different dudes on three separate channels. There was no confusing any of those guys with each other. And for the record, there always was, and ever will be, only one Johnny. (Sorry, Sirs Depp, Knox, Knoxville, Winter and Walker.)  Only God knows how many Roxannes there are.

   And nobody judged anybody on their dancing ability, either.  In those days you were either a dancer or you weren’t.  And  what does dancing have to do with anything anyway?  You had your  Ted Mack Amateur Hour and that was enough.   All the talent in America; dancers, singers and jugglers, could easily fit into one 60 minute segment per week, including commercials. And real commercials, too. Commercials about liquor, tobacco, and Corvairs. Commercials about shit that could kill you. There were none of these new age mother and daughter vignettes walking along a beach, holding hands, discussing their less than fresh moments with each other at sunrise.  There was no such sharing back in the Day.  You had your Ozzie and you had your Harriet.  He drank Cutty. She used Kotex.  End of story.

   Now compare it all to today: Heidi, Spencer, Speidi,  Kate, plus Eight, that Octo-mom lady, JLo, LiLo,  ShiLo, Brangelina, TomKat… Im telling you, It’s a big multi-media mess. Throw  in all the Jennifers, Jessicas, and Kristen/Kristins and it’s downright confusing. Which one is married to Ben Affleck again? And what happened to him anyway? From what I’ve gathered from my weekly cocktail dose of  TMZ and Entertainment Tonight, there are at least fifty nobodies more famous than him these days, including his baby brother, whoever he is. My guess is big Ben is wandering around with all those misguided Vanessa avatars from the 1990s. He’ll no doubt be back soon.  Dancing.

   And it doesn’t help that I always get the names wrong.  I seem to have inherited this middle aged trait from my father who went to his grave thinking our current President was some guy named Bako Moreno (and he was a Democrat).  My pop was a man who epitomized the Day. He never cared for ‘any of that RoeBuck’s scented coffee.’ Sanka was good enough for him. He was a man of very few channels.  Good solid channels with simple numbers like 2, 3, and 5. None of that artsy fartsy upper band HD nonsense.

They Tried to Make Me Go….

   And then there’s rehab. I basically made the decision to quit drinking on my own, for free, sometime during the previous century so this is another present day televised phenomenon I don’t quite get. Now Charlie Sheen, hookers, and jail time? For some reason,  I get that.  But moving on…..

   Anyway, back to House Hunters and all those other real estate shows on the upper band cable channels that were the rage five years ago.  It all seems passé now.   Nothing is more painful than watching a pre-meltdown episode from the glory years of this early housing Millennium. No negotiation, no short sales,  just yakety-yaking nobody Realtors showcasing pre-bubble properties and making fake ass, full price offers. I watched the Roxy Realtor dissolve into a commercial break with un-smart flip-phone in hand, and in the 60 seconds it took the ghost of Billy Mays to totally piss me off with that orange crap he’s always hawking, she was magically back with a signed and fully accepted contract from an invisible seller.  Voila!  Another lockboxed, no haggle deal on the books. (BTW, good luck with that B of A.) 

   It’s  painful to watch, I’m telling you.  Almost as visually painful as The Early 1970s Porn Network on Channel 669,  or so they tell me.  And if  a time stamped imprint of a bearded Billy Mays between money shots isn’t enough of a buzz kill, all that other unruly Nixon era hair surely is.  Anyway,  I know it when I see it….you know what I mean.