In 2004, I sold my residential investment property over concerns of a market top. In 2005, after that property rose nearly $100,000 more in market value, I registered with over 100 banks and asset management companies to become an REO broker readying myself for the next big wave in real estate. Eventually it occurred, and in 2006 I sold my first bank owned property. Today, after selling over $55 million in bank owned properties, the market once again is not seeming normal by any stretch of the imagination. In fact, it feels like 2005 all over again except with prices having already dropped 40 to 60% in most markets from the market peak of that year. It seems the housing craze of that time period is once again upon us.
How could this be? Didn't we learn our lessons back then and make some dramatic financial reforms to avoid another mess like the last one? Well, it appears not and to me this "false" sense of an improving market is even worse than the last one. It is taking a financially and emotionally "beaten and battered" homebuyer and "tricking" them into getting back into a "game" that likely shouldn't be played at this time. I refer to it as a game because to me this market is being rigged by the abundance of cheap money once again.
When a game or market is rigged, usually no one but the one in control wins. In this case, I seriously doubt even the rigger (our government and the Federal Reserve) can come out on top here either. They don't recognize or don't want to acknowledge the seriousness of the economic perils that this country faces. So, they try to stimulate growth by encouraging spending with cheap money whether in housing, autos, or anything else. The problem with spending at this point is it is not sustainable should that spigot of cheap money get severely reduced or cut-off entirely, and it will.
Seriously, what individual or financial institution would be willing to carry a 30 year mortgage on a home at an interest rate of 3.5% today even with a well qualified buyer putting 20% down? Forget the loans being made to low-income and zero-down payment buyers. The risk/reward tradeoff of this market is not in balance. The market has shifted away from a real capitalistic or free-market approach of assessing this trade-off to one that is government controlled. When the Federal Reserve fed funds rate is 0.25% for what banks will be charged for use of funds to lend, and then the government, through the "ownership" of Fannie Mae and Freddie Mac purchases home mortgages from these financial institutions, we have a housing market imbalance of catastrophic proportions. There are no real checks and balances in this scenario.
Of course, everyone will say this has been going on for years ever since the establishment of these government sponsored enterprises. Fannie Mae was established in 1938 and Freddie Mac in 1970 to coincidentally "prevent a monopoly" by Fannie Mae. The end result is we still have a monopoly by our government as both entities are now fully backed by taxpayers. How can any institution appropriately assess risk when they have the hand of the taxpayer absorbing any and all losses? When our government can no longer play this game of charades who's going to be there. How will housing survive?
Here's a thought. Through huge government deficit spending since the 1980's and the sponsoring of these secondary housing market entities, we experienced years of growth through consumption and a mis-allocation of financial resources to markets that may not have been there had there not been such vehicles to spur this growth. Maybe a 'true" market would've allocated financial resources to more city high rise residential "projects" rather than suburban sprawl. Maybe we all can't afford these larger suburban homes and eventually they will be priced down to a level that we can, similar to how a condo in a city might be priced and possibly lower given the cost to commute, cost of services to service, etc.
In any case, like 2004 I may be early in understanding when this market will peak and continue it's slide down but I do know like back then that this market is not real and anyone in the game better have a strategy beyond the foreseeable future. Yes, the government could keep mettling with things and keep the crisis at bay for some time. However, eventually a "true" market will right this ship and this storm will pass leaving a wake of destruction once again in its path. Unfortunately, this housing cyclone has not been reduced from a Category 5 even after wiping out a huge amount of property wealth with the first phase. We're still living in the eye!
Sunday, July 8, 2012
Friday, July 6, 2012
Housing From A Wal-Mart Perspective
I've commented about the housing market previously and it seems it warrants another reminder to those that seem to be buying based on speculation rather than actual need. Since we have low housing inventory, huge buyer demand and prices are on the up-swing many are believing this is the bottom of the market. I hear comments all the time and read various articles that there is no better time to buy real estate, the market has hit bottom and housing is recovering so don't miss out as prices "can't go any lower!"
Be careful about what you hear and read these days. We are in unprecedented times and all I can say is the market cycles that our parents and all of us in the mid-point of our lifespans have experienced earlier on have no bearing on the realities of today. Just like your stockbroker provides disclosures on stocks that "historical performance" is no guarantee of future performance so needs to be said about housing, and those of us in the business as real estate professionals need to be upfront about this.
In the near-term, housing may seem like a "sure bet" for further price appreciation but what about after that. Interest rates will rise again and real wages will not likely keep pace nor be even close to the rising cost of credit. I actually believe real wages will continue to fall as more and more Americans are willing to work for less pay just to survive these difficult economic times. The debt load of this country alone means there is a huge burden yet to be reckoned with. Yes, even greater economic consequences lie ahead. This to me does not translate into a time to be speculating on housing. If interest rates go up and wages fall, I can assure you housing prices can go much lower.
Let's look at a simple mortgage loan calculation: A $100,000 loan fixed for 30 years at a 3.5% interest rate today yields a monthly payment of approximately $448 per month. When interest rates rise to 7% (most likely even higher), which they will once the full risks of this country are factored into our ability to repay our debt (at all levels), that same payment jumps to almost $659 per month or a 47% increase. It takes a 32% decrease in the original $100,000 loan amount to $68,000 to keep the payments steady at $448 per month. So, unless real wages can grow through economic prosperity rather than inflation prices could easily take another huge tumble from here. It's not unfathomable for that drop in housing to be another 50% from today's prices.
I'm not saying "don't buy." I'm just reminding everyone to know why you're buying and to not factor in anticipated future housing price gains into the equation. It would be better to factor in a further decline of 30% or more into your analysis before making such a decision. If you can stomach a "paper loss" of that magnitude knowing you have a lifestyle home you enjoy, are willing to stay put for the long haul, and can very comfortably afford the payments, then by all means buy. If not, renting and waiting for a better time to buy is not a bad thing. For real estate investors, rents can go down too especially if real wages decline thereby reducing your return on your investment property. Plus, with higher interest rates, if you had to sell, future investors would pay you much less for that property.
With all that said, I'm buying a home now but only for the exact reasons I've stated above. I can lock in a monthly mortgage payment that will definitely suit my needs for ten or more years at a payment that I could afford if I had to be a Wal-Mart greeter or a McDonald's drive-through attendant. Not that I'm planning a career change any time soon but I am considering possible worst case scenarios. Real estate may be my passion and livelihood today but it doesn't always mean there will be a market for me to which I can make a living!
Be careful about what you hear and read these days. We are in unprecedented times and all I can say is the market cycles that our parents and all of us in the mid-point of our lifespans have experienced earlier on have no bearing on the realities of today. Just like your stockbroker provides disclosures on stocks that "historical performance" is no guarantee of future performance so needs to be said about housing, and those of us in the business as real estate professionals need to be upfront about this.
In the near-term, housing may seem like a "sure bet" for further price appreciation but what about after that. Interest rates will rise again and real wages will not likely keep pace nor be even close to the rising cost of credit. I actually believe real wages will continue to fall as more and more Americans are willing to work for less pay just to survive these difficult economic times. The debt load of this country alone means there is a huge burden yet to be reckoned with. Yes, even greater economic consequences lie ahead. This to me does not translate into a time to be speculating on housing. If interest rates go up and wages fall, I can assure you housing prices can go much lower.
Let's look at a simple mortgage loan calculation: A $100,000 loan fixed for 30 years at a 3.5% interest rate today yields a monthly payment of approximately $448 per month. When interest rates rise to 7% (most likely even higher), which they will once the full risks of this country are factored into our ability to repay our debt (at all levels), that same payment jumps to almost $659 per month or a 47% increase. It takes a 32% decrease in the original $100,000 loan amount to $68,000 to keep the payments steady at $448 per month. So, unless real wages can grow through economic prosperity rather than inflation prices could easily take another huge tumble from here. It's not unfathomable for that drop in housing to be another 50% from today's prices.
I'm not saying "don't buy." I'm just reminding everyone to know why you're buying and to not factor in anticipated future housing price gains into the equation. It would be better to factor in a further decline of 30% or more into your analysis before making such a decision. If you can stomach a "paper loss" of that magnitude knowing you have a lifestyle home you enjoy, are willing to stay put for the long haul, and can very comfortably afford the payments, then by all means buy. If not, renting and waiting for a better time to buy is not a bad thing. For real estate investors, rents can go down too especially if real wages decline thereby reducing your return on your investment property. Plus, with higher interest rates, if you had to sell, future investors would pay you much less for that property.
With all that said, I'm buying a home now but only for the exact reasons I've stated above. I can lock in a monthly mortgage payment that will definitely suit my needs for ten or more years at a payment that I could afford if I had to be a Wal-Mart greeter or a McDonald's drive-through attendant. Not that I'm planning a career change any time soon but I am considering possible worst case scenarios. Real estate may be my passion and livelihood today but it doesn't always mean there will be a market for me to which I can make a living!
Sunday, June 24, 2012
Time to Manage the Managers
California government has 120 legislators and one governor yet they collectively introduce over 4,000 new bills during each legislative session covering a two-year period. My last tally for the 2011-12 session put the number of Assembly Bills at 2,700 and the number of Senate Bills at 1,580. This follows a combined 4,294 for the 2009-10 session and 4,865 for the 2007-08 session. So many of these proposed new laws and regulations do not even address the most pressing issues at-hand that the people of California say they want fixed. So many are frivolous, unnecessary and ridiculous yet they waste valuable time of our leaders and their staff not to mention burden our society with costly regulation when passed. Given the volume of these bills, the magnitude and complexity of some of the issues, the capacity for abuse and self-interest, and the sheer burden of implementing new laws and regulations tells me something has to be done to slow down this regulatory machine!
There is no better way to rein in new laws and regulations than to force our legislators to prioritize and further restrict each member to a very limited number of bills they can introduce each session (which currently stands at 40 per member per year). Large and small businesses regularly plan, evaluate their priorities, allocate resources and then focus their attention on addressing the biggest issues or challenges they face. If they don't, they risk business failure. It seems our legislators have lost sight of self-governance because they do not have the real pressures that businesses, self-employed or every household faces - how to pay for what they want! We need to get them back on track.
I would propose that the people of California establish a constitutional amendment that limits legislators in their capacity to introduce new bills as follows:
There is no better way to rein in new laws and regulations than to force our legislators to prioritize and further restrict each member to a very limited number of bills they can introduce each session (which currently stands at 40 per member per year). Large and small businesses regularly plan, evaluate their priorities, allocate resources and then focus their attention on addressing the biggest issues or challenges they face. If they don't, they risk business failure. It seems our legislators have lost sight of self-governance because they do not have the real pressures that businesses, self-employed or every household faces - how to pay for what they want! We need to get them back on track.
I would propose that the people of California establish a constitutional amendment that limits legislators in their capacity to introduce new bills as follows:
- At the beginning of each legislative session, the governor and legislative leaders establish the top five priorities of the state - whether that is job creation, spending cuts, building infrastructure, revising the tax code, etc. Whatever they deem the voters want they establish as the top five priorities. The more top priorities the easier it is to dilute the focus on the real concerns of the voters and pass bills that don't matter.
- Limit each legislator to a maximum of ten bills per session of which eight or 80% much directly impact one or more top five priorities. If the bill doesn't have a direct, concrete and measureable impact on those priorities it gets "killed" automatically unless the legislator introduces it as a non-priority bill.
- The remaining two slots of each members' maximum ten are open for introduction as non-priority bills. Here each legislator can address the "priority" issues they each face within their own districts irrespective of what the states issues might be. This is where they can take care of dog licensing laws or monitoring the habitat of the Red Legged Frog.
- The last part of the amendment would require that outdated laws and regulations be removed or appealed. This can be done by requiring each legislator to propose one removal or appeal for each four new bills they introduce. In other words, they must look to address the top five priorities of the state in "reverse" as well.
Monday, June 18, 2012
The Tsunami of Ponzi Schemes
Madoff is a drop in the bucket. Even Social Security pales in comparison to what is transpiring before our very own eyes. It takes no special investigative unit of the government to uncover this massive fraud nor a congressional inquiry to analyze how this could happen. No, this is the grand daddy of all ponzi schemes and it's in plain sight yet so many continue to play despite all the warnings and the magnitude of the problem. Buyer beware because the time will come when there is not enough to support the bottom rungs of the US debt pyramid and the collapse will be catastrophic.
Think about it! The US continues to sell bonds, notes and t-bills ("treasuries") at an enormous clip building a mountain of debt nearing $16 trillion with no end in sight. The funds from these treasuries are used to pay-off maturing treasuries keeping those holders happy and satisfied with their return on their investment. In the meantime, the culprit of this massive fraud continues to sell even more treasuries to splurge on a lavish lifestyle (military, bailouts, social services, massive government, etc.) to which it can ill afford. Like every ponzi scheme there is no basis for paying back the earlier investors (e.g., sufficient invested capital for which revenues can be generated) other than through the continual flow of funds from new investors. As long as new investors keep the blinders on this "bonzi" scheme (as I will call it) it can continue to prosper as a "sound investment" but the time will come...
If you're in these, you better get out. And now is the time! The 10-year US treasury bond is at an interest rate of 1.6% after hitting an all-time historic low of 1.47% this month. Keep in mind that treasuries filter everywhere within our society so you better know where your money is and how it's invested. For example, many mutual funds hold treasuries while they search for new investments consistent with the main objectives of the fund. Banks hold treasuries while they evaluate the lending potential of new borrowers. Corporations hold treasuries as they look to obtain nominal returns whilest they pursue their primary mission for their existence. You may even have some United States Savings Bonds lying around the house from birthdays or Christmas - time to cash those in. I'd rather be early to the exit like I was in the housing bubble than to be caught in the tsunami of this debt bubble.
Time to learn what's in your investment portfolio and begin to divest yourself of holdings that are exposed to US government debt. The end result of this ponzi scheme will leave investors holding the bag. There won't even be the satisfaction that the culprit in this case will serve time in prison - they'll be free to do it again!
Think about it! The US continues to sell bonds, notes and t-bills ("treasuries") at an enormous clip building a mountain of debt nearing $16 trillion with no end in sight. The funds from these treasuries are used to pay-off maturing treasuries keeping those holders happy and satisfied with their return on their investment. In the meantime, the culprit of this massive fraud continues to sell even more treasuries to splurge on a lavish lifestyle (military, bailouts, social services, massive government, etc.) to which it can ill afford. Like every ponzi scheme there is no basis for paying back the earlier investors (e.g., sufficient invested capital for which revenues can be generated) other than through the continual flow of funds from new investors. As long as new investors keep the blinders on this "bonzi" scheme (as I will call it) it can continue to prosper as a "sound investment" but the time will come...
If you're in these, you better get out. And now is the time! The 10-year US treasury bond is at an interest rate of 1.6% after hitting an all-time historic low of 1.47% this month. Keep in mind that treasuries filter everywhere within our society so you better know where your money is and how it's invested. For example, many mutual funds hold treasuries while they search for new investments consistent with the main objectives of the fund. Banks hold treasuries while they evaluate the lending potential of new borrowers. Corporations hold treasuries as they look to obtain nominal returns whilest they pursue their primary mission for their existence. You may even have some United States Savings Bonds lying around the house from birthdays or Christmas - time to cash those in. I'd rather be early to the exit like I was in the housing bubble than to be caught in the tsunami of this debt bubble.
Time to learn what's in your investment portfolio and begin to divest yourself of holdings that are exposed to US government debt. The end result of this ponzi scheme will leave investors holding the bag. There won't even be the satisfaction that the culprit in this case will serve time in prison - they'll be free to do it again!
Saturday, May 26, 2012
Flip or Flop That House
When everyone is looking to be in on the game you know something is wrong with the game itself - it means it's likely rigged or being manipulated by a select few unbeknownst to so many. I've commented before about the housing market and the "frenzy" that is underway. Buyers are bidding up property values above list prices and trying to partake in the house flipping craze to make some money. It seems every investor has a contractor and every contractor from a general to an electrician has become apart of the "flip this house" mania.
Afterall, there's good money to be made on the flip of a house when you can be paid for your time and labor and make a profit selling at a higher price based upon the actual improvements to the property. Investors love the above market returns on their cash particularly when there's no good alternatives (very few want to buy a longer-term CD paying less than 2% interest rate or invest in a stock market that has jumped 88% since March 2009).
Unfortunately for everyone playing the game right now, the inventory of "good" properties to be flipped (lower valued, fixers, REO's, etc.) has decreased dramatically requiring flippers to take a much greater risk on higher valued properties and/or bid up those newly listed good ones that fall upon the market. It wasn't but a few months ago that there were 20 homes on the market well below $100K in a nearby remote community of Pollock Pines. Today, there are only two available properties below $118K. This is a trend consistent with most markets.
NAR recently reported that the national median home price in April increased 10.1% from a year earlier. Of course, it's not just house flippers that are driving the market forward and up from what many believe (or hope) could be the bottom for this long housing market recovery. Not only are investors looking to flip homes but they are jumping in on the rental market and buying investment properties. Additionally, first-time homebuyers as well as seasoned homebuyers are taking advantage of these historically low interest rates and high affordability opportunities to be homeowners. All seems normal one would think.
My only caution is be careful on what you're doing and have a plan (with some back-up plans to boot!). Make certain you're not overpaying for that property based on selling it at an inflated value or anticipating fewer repair costs. Remember, you make money on the "buy" price not the hoped for "sell" price. And, if investing for the long-haul, make certain the property cashflows and that you're going to get a renter that cares for the property and won't take advantage of you upon a job loss or economic strain they experience. Lastly, if you're looking to be a homeowner, buy for the utility value and the affordable housing cost (e.g., a standard of living that you can sustain for a long-time) not with the mindset "that house prices can only go up from here."
Remember, there are no guarantees that housing is on a longer-term upward trend especially with the economic backdrop that this country is facing at present. I continue to believe deflation is the greatest risk and that makes housing a much less attractive investment for the long-haul. It seems there is alot more flopping that is likely to happen before anyone flips for joy in this real estate environment.
Afterall, there's good money to be made on the flip of a house when you can be paid for your time and labor and make a profit selling at a higher price based upon the actual improvements to the property. Investors love the above market returns on their cash particularly when there's no good alternatives (very few want to buy a longer-term CD paying less than 2% interest rate or invest in a stock market that has jumped 88% since March 2009).
Unfortunately for everyone playing the game right now, the inventory of "good" properties to be flipped (lower valued, fixers, REO's, etc.) has decreased dramatically requiring flippers to take a much greater risk on higher valued properties and/or bid up those newly listed good ones that fall upon the market. It wasn't but a few months ago that there were 20 homes on the market well below $100K in a nearby remote community of Pollock Pines. Today, there are only two available properties below $118K. This is a trend consistent with most markets.
NAR recently reported that the national median home price in April increased 10.1% from a year earlier. Of course, it's not just house flippers that are driving the market forward and up from what many believe (or hope) could be the bottom for this long housing market recovery. Not only are investors looking to flip homes but they are jumping in on the rental market and buying investment properties. Additionally, first-time homebuyers as well as seasoned homebuyers are taking advantage of these historically low interest rates and high affordability opportunities to be homeowners. All seems normal one would think.
My only caution is be careful on what you're doing and have a plan (with some back-up plans to boot!). Make certain you're not overpaying for that property based on selling it at an inflated value or anticipating fewer repair costs. Remember, you make money on the "buy" price not the hoped for "sell" price. And, if investing for the long-haul, make certain the property cashflows and that you're going to get a renter that cares for the property and won't take advantage of you upon a job loss or economic strain they experience. Lastly, if you're looking to be a homeowner, buy for the utility value and the affordable housing cost (e.g., a standard of living that you can sustain for a long-time) not with the mindset "that house prices can only go up from here."
Remember, there are no guarantees that housing is on a longer-term upward trend especially with the economic backdrop that this country is facing at present. I continue to believe deflation is the greatest risk and that makes housing a much less attractive investment for the long-haul. It seems there is alot more flopping that is likely to happen before anyone flips for joy in this real estate environment.
Friday, May 11, 2012
Politics is Polarizing America
Okay, I promise not to make this another blog on the letter "P" although it would be possible! Last week, I attended my first rally and opportunity to lobby at the State Capitol on behalf of the California Association of Realtors(r). I've never before felt the need to actually help push forward "an agenda" at such a level of government. It was always my belief that politicians are smart folks and they can decipher between what is "right" and was is "wrong" or what makes good sense for the people of the state or the country for that matter - that they have the capacity to rise above all of the self-interest, greed, economic waste, manipulation and trickery. However, over recent years I've learned how naive I've been.
It's a very sad day in America when I feel I have to push an agenda for an organization in which I don't always agree with their political, economic and industry positions. However, to actually get politicians to make the "right" decisions for the betterment of all, I'm forced to join the lobbyist bandwagon like so many others. I need to be apart of the process to educate lawmakers and inform them of the "pros" and "cons" about proposed bills concerning homeowners and the real estate industry at-large. It's not enough that they should do their own due diligence and decipher the risks, benefits and rewards for making the right decision. No, because it's about the other side that is lobbying and pushing forth their rationale and agenda for a particular bill or policy that mandates influential action on both sides of the argument.
The lobbyist business in Sacramento is huge! "Business groups, corporations and unions paid lobbying firms almost $42 million to influence state lawmakers in the first quarter of 2012" according to the Sacramento Business Journal. Never before have so many competing interests been at risk by costly new regulation, less state resources and fewer tax dollars to disburse. So, what you get is division among people that digs deep to the core of our beings...a threat to our own livelihood. Politics in America is all about self-interest and greed so everyone must fight for themselves or jump on the shirt-tails of others to save their way of life. So, I've joined the "Realtor Party of California" until I run for governor to correct this wrong!
It's a very sad day in America when I feel I have to push an agenda for an organization in which I don't always agree with their political, economic and industry positions. However, to actually get politicians to make the "right" decisions for the betterment of all, I'm forced to join the lobbyist bandwagon like so many others. I need to be apart of the process to educate lawmakers and inform them of the "pros" and "cons" about proposed bills concerning homeowners and the real estate industry at-large. It's not enough that they should do their own due diligence and decipher the risks, benefits and rewards for making the right decision. No, because it's about the other side that is lobbying and pushing forth their rationale and agenda for a particular bill or policy that mandates influential action on both sides of the argument.
The lobbyist business in Sacramento is huge! "Business groups, corporations and unions paid lobbying firms almost $42 million to influence state lawmakers in the first quarter of 2012" according to the Sacramento Business Journal. Never before have so many competing interests been at risk by costly new regulation, less state resources and fewer tax dollars to disburse. So, what you get is division among people that digs deep to the core of our beings...a threat to our own livelihood. Politics in America is all about self-interest and greed so everyone must fight for themselves or jump on the shirt-tails of others to save their way of life. So, I've joined the "Realtor Party of California" until I run for governor to correct this wrong!
Saturday, March 31, 2012
The 6 "P's" of Regulation
We have regulations upon regulations upon regulations and there is no end in sight. Regulation is intented to Protect someone or something and Penalize those that fail to follow the rules. Unfortunately, too much regulation Proliferates government, kills business Profits and is counter to Productivity and Prosperity. There needs to be a healthy balance. Unfortunately, the pendulum has swung so far in the wrong direction that America as we know it is facing a 7th "P" or more appropriately a double "P", and that is Pending Protest.
I know protests are nothing new...America has seen protests! We have protests by unions, minorities, students, communities and the like for many reasons but we've not seen the biggest protest yet to come. Common folks of the lower-to-middle working-class, entreprenuers, those that have created the largest constituency of small business in the world, folks that are the backbone of America will rise up and begin to take a stand. To me, it is inevitable that the "commoners" begin to stand united against more government and more regulation. It is at this point that change for the good in America will truly begin.
You see, these are the hardworking citizens that don't have the time to protest. They feel they're better off continuing to bust their butts because the need to survive and the opportunity to possibly overcome regulatory obstacles have been somewhat disdainfully manageable albeit costly in the past. However, we are now reaching the point where this is no longer true, and when the backs of America are broken you can bet there will be plenty of time for protest. This huge, mostly silent voice to-date has yet to show it's united face!
I know protests are nothing new...America has seen protests! We have protests by unions, minorities, students, communities and the like for many reasons but we've not seen the biggest protest yet to come. Common folks of the lower-to-middle working-class, entreprenuers, those that have created the largest constituency of small business in the world, folks that are the backbone of America will rise up and begin to take a stand. To me, it is inevitable that the "commoners" begin to stand united against more government and more regulation. It is at this point that change for the good in America will truly begin.
You see, these are the hardworking citizens that don't have the time to protest. They feel they're better off continuing to bust their butts because the need to survive and the opportunity to possibly overcome regulatory obstacles have been somewhat disdainfully manageable albeit costly in the past. However, we are now reaching the point where this is no longer true, and when the backs of America are broken you can bet there will be plenty of time for protest. This huge, mostly silent voice to-date has yet to show it's united face!
Sunday, March 11, 2012
We Need Another Billion People Fast!
The world's population exceeded 6 billion in late 1999 and it will hit 7 billion soon. By 2020, estimates put the world's population at nearly 7.47 billion. That's an earth-load of people but not necessarily a lot of population growth in relative terms. The world's population over this period of time is growing at a clip of approximately 1.18% annually. Fairly enemic when compared to how much we expect our stock portfolio to grow annually or our business revenues or our country's GDP for that matter. So what does this mean besides there being a lot of mouths to feed?
Well, I'm no economist but this seems to be the pace at which I would expect real economic growth the world abound to grow over the long-haul. Real economic growth should approximate its mean which to me is tied to population growth and nothing more (not GDP or any other manipulated index). The reason being is this is a zero-sum-game on earth: nothing more is created without something being used - creating people comes at an expense too but that's for another discussion (well briefly, in theory, there is no real growth at all on earth as earth and all it has to offer is finite).
For this discussion, I want to focus on real economic growth and how it is measured and why it should match population growth. "Real economic growth" seems to be a fairly simplistic concept for the most part. "Growth" as the word implies is an increase from what it was previously to something greater like a seed maturing into a rose bush. "Economic" then is simply a measure of demand (in the form of a currency) whether that be within one's household, a corporation, the United States or the world at large. We all know what is real and what is imaginary or at least I once thought that. It's amazing how big something can get that it actually masks itself to us and almost becomes our new reality. It seems to me that today's world economy has become just that: a disguise of prosperity.
Breaking all of this down to my own situation I would have to say I'm not "growing" but contracting (and yes, since I've hit the proverbial age of 50 I actually might be physically shrinking too!). This has been largely due to a drop in my annual earnings and then by my desire to deleverage my personal balance sheet (i.e., payoff debt at this time rather than spend or save any extra dollars). For instance, every time I borrow money to purchase something when I don't shortly thereafter pay that money back, I temporarily increase my economic capacity at the expense of future economic capacity. At some point, my borrowing has to get paid back which in theory reduces my consumption during the payback period.
Of course, in reality my earning capacity could potentially always grow in relative dollar terms and thus my financial capacity to acquire could in theory never contract or decline. However, remember as one person, I can only consume so much of anything. At some point, there is a limit and thus my "real economic growth" gets smaller and smaller on a percentage basis over my life span and this holds true for the world at-large as well.
Accordingly, real economic growth should equate to population growth over the long-term (after factoring out inflation which is simply an element of perception. We already know this is a zero-sum game and nothing can be truly increased - it's simply "inflated in value" based on perception that it has decreased in some manner - however, nothing concrete overall was created by this inflation element so it gets adjusted here). That's as simple as it gets. The problem is this growth gets skewed by inflated demand as a result of other influences or factors that during shorter periods of time have an immeasureable imbalance, but smoothed out over a much longer time horizon, it does not alter its trajectory. The world's current combined debt is a great example of one of these influences.
Real economic growth over the past 30 years has been masked by this deluge of borrowed money by the developed world thereby creating an economic bubble inconsistent with how real economic growth should mature. We might be at a crossroads of sorts while the world deals with its excess spending unless we somehow add a billion people fast to prolong this mess for the foreseeable future. After all, we keep "kicking the can down the road" with shorter-term interim solutions so I just want to kick so far that all of us are dead before this ever surfaces again - adding a billion people today just might do that!
Author Note: This is a fairly fictitious post for the most part. The intent was to boil supply and demand down to its vary basic elements as there is a finite amount of both in this world. I know innovation, higher productivity, extracting more resources and all of that does increase per capita income/GDP and all of that…and we are nowhere near peak capacity or full utilization of our resources or efficiency of our resources, etc. and our appetite for more McDonald hamburgers for that matter! What I concluded was demand was the final determinant of growth and population growth is the bottom line once other channels for growth are saturated or maxed out.
Well, I'm no economist but this seems to be the pace at which I would expect real economic growth the world abound to grow over the long-haul. Real economic growth should approximate its mean which to me is tied to population growth and nothing more (not GDP or any other manipulated index). The reason being is this is a zero-sum-game on earth: nothing more is created without something being used - creating people comes at an expense too but that's for another discussion (well briefly, in theory, there is no real growth at all on earth as earth and all it has to offer is finite).
For this discussion, I want to focus on real economic growth and how it is measured and why it should match population growth. "Real economic growth" seems to be a fairly simplistic concept for the most part. "Growth" as the word implies is an increase from what it was previously to something greater like a seed maturing into a rose bush. "Economic" then is simply a measure of demand (in the form of a currency) whether that be within one's household, a corporation, the United States or the world at large. We all know what is real and what is imaginary or at least I once thought that. It's amazing how big something can get that it actually masks itself to us and almost becomes our new reality. It seems to me that today's world economy has become just that: a disguise of prosperity.
Breaking all of this down to my own situation I would have to say I'm not "growing" but contracting (and yes, since I've hit the proverbial age of 50 I actually might be physically shrinking too!). This has been largely due to a drop in my annual earnings and then by my desire to deleverage my personal balance sheet (i.e., payoff debt at this time rather than spend or save any extra dollars). For instance, every time I borrow money to purchase something when I don't shortly thereafter pay that money back, I temporarily increase my economic capacity at the expense of future economic capacity. At some point, my borrowing has to get paid back which in theory reduces my consumption during the payback period.
Of course, in reality my earning capacity could potentially always grow in relative dollar terms and thus my financial capacity to acquire could in theory never contract or decline. However, remember as one person, I can only consume so much of anything. At some point, there is a limit and thus my "real economic growth" gets smaller and smaller on a percentage basis over my life span and this holds true for the world at-large as well.
Accordingly, real economic growth should equate to population growth over the long-term (after factoring out inflation which is simply an element of perception. We already know this is a zero-sum game and nothing can be truly increased - it's simply "inflated in value" based on perception that it has decreased in some manner - however, nothing concrete overall was created by this inflation element so it gets adjusted here). That's as simple as it gets. The problem is this growth gets skewed by inflated demand as a result of other influences or factors that during shorter periods of time have an immeasureable imbalance, but smoothed out over a much longer time horizon, it does not alter its trajectory. The world's current combined debt is a great example of one of these influences.
Real economic growth over the past 30 years has been masked by this deluge of borrowed money by the developed world thereby creating an economic bubble inconsistent with how real economic growth should mature. We might be at a crossroads of sorts while the world deals with its excess spending unless we somehow add a billion people fast to prolong this mess for the foreseeable future. After all, we keep "kicking the can down the road" with shorter-term interim solutions so I just want to kick so far that all of us are dead before this ever surfaces again - adding a billion people today just might do that!
Author Note: This is a fairly fictitious post for the most part. The intent was to boil supply and demand down to its vary basic elements as there is a finite amount of both in this world. I know innovation, higher productivity, extracting more resources and all of that does increase per capita income/GDP and all of that…and we are nowhere near peak capacity or full utilization of our resources or efficiency of our resources, etc. and our appetite for more McDonald hamburgers for that matter! What I concluded was demand was the final determinant of growth and population growth is the bottom line once other channels for growth are saturated or maxed out.
Let’s say earth resources could only produce iPhones and we innovated and innovated and worked harder, etc. and we could produce iPhones by the trillions. Well, who would buy those iPhones once they were produced and everyone had one. No one as there was no one else to sell them to. So, my theory was true growth comes from population growth (and a small small portion of replacements that fail and not under warranty…ha ha). Everyone can only consume so much and in this case only be able to use one iPhone at a time.
Wednesday, February 29, 2012
Housing Market Hit Bottom?
The million $ question I know. Well, it used to be that high...so let's go with the $500,000 question today! If the current flurry of offers, low inventory and market trends are any indication then it would appear we have hit something on the downwardly moving housing elevator. Locally, it's almost like we've entered a period of housing "frenzy" with multiple offers at list price or above. Whether this floor is the bottom floor or just another stop along the way is yet to be seen. Everyone certainly wants to believe that we have hit bottom and that it can't go any lower.
Certain housing market indicators and economists might support this conclusion. The C.A.R. Housing Affordability Index, a measure of minimum annual income needed to qualify for the purchase of the median house price in an area, reached 55 in California and 70 for the U.S. at the end of Q4 2011. These levels are at the highest points since C.A.R. began tracking them back in 1988. N.A.R. chief economist Lawrence Yun recently stated "with a sustained downtrend in unsold inventory, this would bring about a broad price stabilization or even modest national price growth, of course with local variations.”
I'm all for a stable housing market...but a "normal" housing market in which both buyer and seller have equality in negotiating a purchase and sale transaction under the backdrop of a more certain and stable macro economic picture works best for me. Unfortunately, it seems we have entered a period of "frenzy" once again which is unsustainable and at a minimum, not foretelling of a housing bottom. The frenzy that I'm referring to is the feeling of "missing out" on these low interest rates and "low" housing prices such that near-term stablization and even price appreciation starts to occur, but the 800-lb Gorilla (the U.S. Federal Budget Deficit, entitlements and heavy consumer debt loads) is still sitting on the front lawn.
Until we ship this giant beast off to another country or at least shave it down to the size of a leashable "monkey" then there isn't any chance we have stopped but to catch our breath on this deflationary housing elevator ride down. Unfortunately, we may still have the majority of our trip still in front of us.
Certain housing market indicators and economists might support this conclusion. The C.A.R. Housing Affordability Index, a measure of minimum annual income needed to qualify for the purchase of the median house price in an area, reached 55 in California and 70 for the U.S. at the end of Q4 2011. These levels are at the highest points since C.A.R. began tracking them back in 1988. N.A.R. chief economist Lawrence Yun recently stated "with a sustained downtrend in unsold inventory, this would bring about a broad price stabilization or even modest national price growth, of course with local variations.”
I'm all for a stable housing market...but a "normal" housing market in which both buyer and seller have equality in negotiating a purchase and sale transaction under the backdrop of a more certain and stable macro economic picture works best for me. Unfortunately, it seems we have entered a period of "frenzy" once again which is unsustainable and at a minimum, not foretelling of a housing bottom. The frenzy that I'm referring to is the feeling of "missing out" on these low interest rates and "low" housing prices such that near-term stablization and even price appreciation starts to occur, but the 800-lb Gorilla (the U.S. Federal Budget Deficit, entitlements and heavy consumer debt loads) is still sitting on the front lawn.
Until we ship this giant beast off to another country or at least shave it down to the size of a leashable "monkey" then there isn't any chance we have stopped but to catch our breath on this deflationary housing elevator ride down. Unfortunately, we may still have the majority of our trip still in front of us.
Sunday, February 19, 2012
Budgeting Our Way To Greece
President Obama has just released his 2013 Federal budget with a whopping $3.8 trillion in proposed spending. This figure is only matched in U.S. history with his 2010 budget submission but granted that was at a time when we were fighting two wars and the severe effects of the Great Recession were taking a stronghold into our everyday lives. A projected $900 billion shortfall in 2013 between spending and receipts translates into much of the same; we need to borrow just to pay our current bills.
When will it stop? What president and congressional leaders of this country will step forward and actually make the severe cuts that are needed to halt this catastrophic borrowing year-after-year. The George W. Bush Administration added $5 trillion to our nation's debt load during his tenure as President when initially campaigning on a promise to be the first president to "reduce our national debt by $2 trillion over the next ten years." Neither Republicans or Democrats can find a way to turn the spigot off.
We are on a path of destruction that likely the majority of the people of our nation are completely ignorant too. In many ways, I believe that comes from our leadership as they seem to turn a blinds-eye to what road we are traveling. Just improve the economy and it will take care of itself many at the Capitol seem to believe. However, once the wheels of motion on the credibility of our country turns and our good faith promise of having the ability to pay our debt is viewed from a true lenders perspective, they will cut-off our "line of credit" and start demanding performance in the way of austerity and debt reduction. Sound familiar?
The austerity, riots, chaos, death and destruction in Greece seems so far away and so unrelevant to a country the size of the United States. And, with our economy improving, many feel that we are on the road to recovery, the last thing on their minds is a "return to the abyss." Unfortunately, that is where we are headed. So, when our national debt begins to approach $20 trillion by 2015 there will be grave concern from main street to Wall Street to the White House and it's not going to be pretty. I just wish we didn't have to wait so long to actually start to fix the problem.
When will it stop? What president and congressional leaders of this country will step forward and actually make the severe cuts that are needed to halt this catastrophic borrowing year-after-year. The George W. Bush Administration added $5 trillion to our nation's debt load during his tenure as President when initially campaigning on a promise to be the first president to "reduce our national debt by $2 trillion over the next ten years." Neither Republicans or Democrats can find a way to turn the spigot off.
We are on a path of destruction that likely the majority of the people of our nation are completely ignorant too. In many ways, I believe that comes from our leadership as they seem to turn a blinds-eye to what road we are traveling. Just improve the economy and it will take care of itself many at the Capitol seem to believe. However, once the wheels of motion on the credibility of our country turns and our good faith promise of having the ability to pay our debt is viewed from a true lenders perspective, they will cut-off our "line of credit" and start demanding performance in the way of austerity and debt reduction. Sound familiar?
The austerity, riots, chaos, death and destruction in Greece seems so far away and so unrelevant to a country the size of the United States. And, with our economy improving, many feel that we are on the road to recovery, the last thing on their minds is a "return to the abyss." Unfortunately, that is where we are headed. So, when our national debt begins to approach $20 trillion by 2015 there will be grave concern from main street to Wall Street to the White House and it's not going to be pretty. I just wish we didn't have to wait so long to actually start to fix the problem.
Tuesday, January 31, 2012
Realtor Compensation Calculations
The National Association of Realtors(r) recently reported that its membership base in December 2011 is 1,009,940 members. Of course, this is much lower than the peak of 1.37 million members in October 2006. It seems that many Realtors(r) are holding onto their membership (and therefore, real estate license) despite the state of the housing market. This is quite interesting when you look at the overall compensation that can be generated per agent using some broad market statistics on a national level.
NAR Research reported that existing-home sales finished 2011 at 4.97 million units at an estimated median price of $165,200. Assuming a full commission of 6% is paid on each sale then the total pool of commissions to be split by the group is $49,262,640,000 or the equivalent of $48,777.79 per Realtor(r). Of course, we know that their are tens of thousands of real estate agents that are licensed to sell real estate that are not members of NAR so this gross commission figure gets reduced quite substantially. Further, we all know getting sellers to pay a full 6% commission on a listing is a hurdle that can seem like climbing Mt. Everest on a regular basis. Banks have certainly figured out that they don't need to pay REO brokers their half of the 6%. Most banks are paying 2% or less to agents handling foreclosed homes which happens to make up a good percentage of the total existing-home sales annually.
Oh, and let's not forget that a portion of those commissions have to be split between the real estate agent and the brokerage house that he/she works for. Granted most agents will not work for much less than an 80/20 split in their favor but that's another 20% that comes right off the top. Then you factor in expenses of the trade such a marketing, dues, gas/vehicle expenses and that number shrinks once again. It's not surprising to me when I hear statistics that the average real estate agent earns less than $25,000 or so per year in this industry. I think that number is right about what the average retail worker makes per year. One could hardly say this industry has the pay grade of a true professional!
NAR Research reported that existing-home sales finished 2011 at 4.97 million units at an estimated median price of $165,200. Assuming a full commission of 6% is paid on each sale then the total pool of commissions to be split by the group is $49,262,640,000 or the equivalent of $48,777.79 per Realtor(r). Of course, we know that their are tens of thousands of real estate agents that are licensed to sell real estate that are not members of NAR so this gross commission figure gets reduced quite substantially. Further, we all know getting sellers to pay a full 6% commission on a listing is a hurdle that can seem like climbing Mt. Everest on a regular basis. Banks have certainly figured out that they don't need to pay REO brokers their half of the 6%. Most banks are paying 2% or less to agents handling foreclosed homes which happens to make up a good percentage of the total existing-home sales annually.
Oh, and let's not forget that a portion of those commissions have to be split between the real estate agent and the brokerage house that he/she works for. Granted most agents will not work for much less than an 80/20 split in their favor but that's another 20% that comes right off the top. Then you factor in expenses of the trade such a marketing, dues, gas/vehicle expenses and that number shrinks once again. It's not surprising to me when I hear statistics that the average real estate agent earns less than $25,000 or so per year in this industry. I think that number is right about what the average retail worker makes per year. One could hardly say this industry has the pay grade of a true professional!
Subscribe to:
Posts (Atom)