Housing prices still falling

Home prices in 20 markets fell 2.2% in March and were down 18.7% in the past year. Can you say OUCH! How about UNDER WATER? Perhaps you'd prefer YIKES.

With interest rates at historical lows you'd think home prices would at least stabilize if not rise, but that news doesn't appear anywhere on the horizon.

The largest investment most families make is purchasing a home. There's no question - American families are poorer than they were last year or the year before. But how poor are they?

The value of US housing is around $20 trillion. That's nearly double the value of the GDP. It's a big number.

With housing prices down 18.7% in the last year Americans have lost $3.7 trillion. Since the peak in 2006 housing has lost nearly 40% of its value or $8 trillion. That's approximately $25,000 for every man, woman & child in the USA. If you're married with 3 kids then your share is 5 x $25,000 or $125,000.

With that much equity wiped out people have little incentive to stay in their homes.

Who knows how much further it can fall.

How low can it go?

I purchased a lot in a high end subdivision in 2005. I thought I was getting a deal since the people I purchased it from paid 50% more than I was paying. In fact, they had to bring money to the closing.

Figuring the worst of the subprime disaster was over I decided to see what the lot was worth. I checked on Zillow - good news it was actually worth more than I paid for it.

So I decided to proceed with my plans to list it. Now comes the interesting part. I googled realtors for the city and subdivision where the lot is located. There were a bunch of hits with beautiful web sites. (I'm easily taken in by a good looking website). But when I tried to contact these realtors I got no response - again and again. I can only believe that they've either gone out of business or real estate sales are now a part time / weekend thing for them and they have taken a job doing something else.

Finally I managed to get a live human being - although I'm not sure how dedicated he was to his profession. He suggested I list the lot for 50% of what I paid for it. I mentioned the Zillow estimate and he scoffed.

Thinking something must be wrong I decided to get a professional appraisal done. Sure enough it was within a few % of the Zillow estimate.

What has happened to the real estate 'profession'? They don't answer the phone, the don't return messages, they don't read email and they don't have a clue.

Real estate professionals - another victim of the subprime meltdown.

Individuals aren't the only subprime borrowers

This morning I read that the current administration's plans of spending trillions of dollars will leave our grand kids with the bill for getting us out of the recession and I started thinking about the finances of our cities and counties across the country.

Over the last couple of decades, while times were good, many municipal governments decided to expand services rather than use the surplus to pay down debts or heaven forbid save the money for future use.

The result is that many state & local governments are on the verge of bankruptcy. Sad but true. Now the only recourse is to cut services - dramatically. We couldn't afford the expansion of services in the first place and now we can't even afford some of the basic services.

I heard on the radio that one state couldn't afford their state-wide referendum. Isn't it a basic right - to have your voice heard by our elected officials. How can they know the will of the people without a vote? The state's budget is in the billions $ but they can't afford $5 million to count the votes. That's a sorry state of affairs.

But there is a solution and I think those tricky politicians may have been planning this for a while. The answer is hyper-inflation. Yes, the same thing that is going to get us out of the recession will get them out of hock. Yes, that's right - by pumping the economy full of money there is no doubt inflation will rear it's ugly head once again. Our government organizations at all levels have borrowed beyond their ability to repay - so they simply wait for inflation to kick in and they are able to raise taxes because we're taxed as a % of income or a % of value (property taxes) and as inflation increases our incomes and property values government is able to raise taxes while their payments stay the same.

Problem solved.

Fast Forward to New Years Day 2011

Say today is New Year's Day 2011. We've survived the worst recession since the great depression, but at a price. All of the billions and trillions of dollars the government pumped into the economy has caused inflation. Not just your ordinary run of the mill inflation but hyper-inflation. What's hyperinflation? That's when the value of your currency declines by 50% or more in a year. Actually the currency doesn't change, but rather what you can buy changes. The price of goods and services increases by 50% or more.

Think about the implications of it. For example, suppose you have a savings account for your child's college tuition. You started when they were born and saved as much as you could every year. Your child is a freshman in high school, they'll be going to college in 4 short years. You've saved $50,000 in that account. That's about $300 per month - every month. It took will power. You could've had a new fishing boat. Or you could've bought that wave runner or gone on that Disney vacation or any number of great things. But you saved for college so your kid could get a head start on life. You should be proud of an accomplishment like that.

With tuition, room & board at $15,000 per year you figure you're ok. But wait, here comes hyperinflation. Let's see what happens to the value of your savings.

Year Old Tuition 50% increase New Tuition
High School Freshman $15,000 $7,500 $22,500
Sophomore $22,500 $11,250 $33,750
Junior $33,750 $16,875 $50,000
High School Senior $50,000 $25,000 $75,000

Now it's time to pay for college and all that hard earned money that you saved over the years won't even pay for one year of college.

College Freshman $100,000
Sophomore $150,000
Junior $225,000
Senior $400,000

The total cost of college education during hyperinflation? $975,000!! ALMOST $1 million. That's is what this rescue package is really costing the American taxpayer.

Sweet dreams.

The stock market dives

The headlines read, "Worst unemployment since the '40's'. I need to put the blame squarely on Congress. They insisted that our financial institutions were discriminating by not lending to poor people. They penalized them if they didn't make those loans. Then a year ago our fearless leaders get on TV and say there's nothing wrong with those loans, in fact, we should make more of them and the government should buy up any of the bad ones. If it wasn't so sad it would be funny. The housing bubble was driven by too much demand - econ 101 - supply and demand. When demand goes up and supply stays the same the price can only go up. And up it went, up and up and up. Now it is coming down, down, down. We put millions of people to work in the housing market and now they're out of work. When they're out of work they can't buy stuff and so corporate earnings go down. When companies start to lose money the lay off people. Those people can't afford to buy stuff so the cycle continues. It's a sad day when American's trust congress to determine what's best for business. It scares me to think that Americans believe the government is the answer - remember the words - I'm from the government and I'm here to help. Terrifying isn't it. The government isn't the answer, we are. We can do it better, faster, cheaper than the government could ever hope. Don't wait for the government, you won't live that long.

A startling statistic

You can't believe everything you read or hear on the TV/Radio so take this with a grain of salt. I heard that if mortgage rates went down to 2% as much as 40% of subprime borrowers still wouldn't be able to afford their mortgages.

Let's peel the onion a little bit. How could people have been approved to purchase a home that even if rates went to 2%, they couldn't afford. This is a an outrage. Why isn't the media making this front page news?

I have to ask myself, 'How did we get here?' I think the answer is simple. We were so eager to provide those less fortunate financially with the opportunity to own a home that we eliminated the basic rules of finance from the mortgage application process.

How did this happen? Look no further than Congress. They insisted the companies loan money to people who couldn't afford to pay it back. The finance companies and banks resisted so our Congress told Fannie & Freddie to buy up those worthless mortgages. Well as long as the government was buying the worthless paper the banks were happy to oblige.

Now it is time to pay up and who are the first ones to scream fraud? Congress.

Where's the outrage people? Let's get the lions out of Congress and return this country to the hands of the people.

Term limits of 2 terms. Make Congress pay into social security. Make them file their own taxes. Eliminate lobbying. How can a Congressman/woman justify a multimillion dollar salary from a lobbying firm. They are no better than whores.

Make them earn a living the same way you and I do. After their time in Congress they need to get a job. A real job. A legitimate job so that they become productive members of society instead of sucking the life out of hard working Americans.

Steelers with the Superbowl

What a game, what a game. With Holmes catch he deserved the MVP and QB Ben was no slouch. And how about the 100 yard interception returned for a TD. I'm glad they didn't call that one back, he deserved it. It looked like Arizona might just pull it off but in the end I think the best team won.

Now on to the topic of the subprime meltdown. I was looking through Zillow the other day and noticed that valuations have begun to climb. Check it out for yourself. Is it possible that these low interest rates are already turning the tide for home prices? I find it hard to believe that the Fed & The Treasury have been able to flood the market with enough money to replace the CDO market but this is a very good sign. Perhaps the recession will be shorter than many economists predicted. The stimulus package will focus on infrastructure with much of that going to construction which will put a lot of people back to work.

Why things will never be the same....

Ah the good old days. Money was plentiful and credit was easy. Where have they gone? Why was it that way then and not now.

The answer is CDO's - collateralized debt obligations. Money was plentiful because every time a mortgage was written it was packaged up and sold as bonds. But not any longer. The market for CDO's has vanished and along with it trillions of dollars of liquidity and readily available credit.

But what about the banks? We can't expect the banking system to make up for losing the multi-trillion dollar CDO credit system.

Yes, contrary to popular press the banks are lending, albeit with tighter lending standards, but once the money has been loaned it has to be repaid before it can be loaned again. Think about it. In the old days (last year) the mortgages would be sold as bonds and the money would be available for another loan - sometimes in as little as 30 days. But now, that mortgage has to be paid off before it can be loaned again. Say, aren't most mortgages at least 15 years?

So how long will it take to right the ship that once was the mighty USA? Well my friends a lot of that depends upon our leaders. And unfortunately many of those in the house and senate don't know anything about banking or finance - and some should be in jail for their actions. Yes, it could be a long, cold winter of discontent. Let's not even begin to think about getting back to where we were. Let's think about how we can just stop the ship from sinking.

But wait, there is good news - the Fed and the Treasury. Like knights in shining armor there is a chance they could come riding to the rescue. How you say? Well behind a stimulus here and a stimulus there could be hidden a dramatic increase in the money supply. I'm not talking about the trillions in bailout handouts. I'm talking about paper currency - printing it - lots of it. If the banks can't loan additional money because it is sitting in your house then what is a Federal Reserve Chairman or a Treasury Secretary to do? Print money.

Will it work? Yes. But is there a price to pay? Yes, inflation, not today but someday.

The inauguration is greeted with a 332 point drop in the Dow

We have a new president but we still have the same economy with the same issues as before. It appears that we are now entering the 2nd phase of the meltdown -where the impact of the financial meltdown reaches well into the rest of the economy. It hits the neighborhood restaurant that was barely making it before. It hits the retail stores who were counting on a good Christmas season and didn't get it. It hits the car dealer because people aren't buying cars. It hits far, wide and deep. It strikes fear in the hearts of men. And that is the problem. Fear. People are afraid and so they don't want to spend money. They don't want to take risks. They won't open a new business. They don't want to buy that new piece of equipment that will make their business more competitive. It is the fear that is holding the economy in this downward spiral. So what's going to get them out of it? It all goes back to the housing market. People need to feel safe and secure about their largest investment. We need to stop the free fall in housing prices, but how? It's easy give anyone who wants to purchase a home an interest free loan plus the rate of inflation up to $100,000. It was increase the demand for housing which will stop the free fall in housing prices. When people feel good about their home and its value they'll stop being afraid. They'll know the bottom has arrived.

A New Year

Ahhh, 2009. At last. 2008 wasn't a very good year by any means you measure it. With nearly $7 trillion of equity wiped out in the stock market you could say it was the worst year in the history of the US. We've now gone through the first phase of the meltdown - layoffs in the financial services sector, foreclosures, tightening credit, bank and financial institution failures. So what does the future hold? The second phase where the ripple effect from the first phase moves across the rest of the economy. Some of the first to be impacted will be the industries that rely on discretionary income - restaurants, entertainment, charity, etc. Hopefully the second phase will be quick and we'll be finished by the end of 2009 so that we can move to the third phase - rebuilding. Although the second phase may be quick it won't be painless. Just the opposite, it could be quite painful for many Americans. We've already seen the first signs of the second phase with the auto industry. As consumers purchase less it will impact virtually every segment of our economy. Those who are strong enough to survive will emerge stronger. Those who aren't will fail. There is a bright side. We have historically low interest rates. If you own a home this is a good time to refinance. If you own assets such as land this is a good time to borrow against those assets - you may never see rates this low again in your lifetime. Eventually the low rates will rise and that will be because the economy is heating up. Let's hope we don't Greenspan the economy by raising rates too many times too quickly. When rates begin to rise you'll know the soothsayers believe the worst is over. Another bright spot is the cost of gasoline. At $1.50 a gallon it will help many Americans balance the family budget.