Wednesday, 1.5.2011 “Real Estate for Real People”

Coming attraction 2011   Happy New Year to everyone! Now that 2010 is in the books, I am sure that you have noticed all the rosy predictions about our economy from national and local economists alike. Over the last week of 2010, the AZ Republic ran articles titled, “Economic signs strong for 2011” and “Economic forecasters optimistic about 2011.” I have read one glowing prediction after another about how the economy is going to rebound vigorously in 2011, and while I wish I could agree, I find myself wondering what these optimistic economists are seeing that I am not.   As stated many times, I am not being pessimistic. In fact, I wholeheartedly wish I could tell you that I see the same positive signs that the often quoted prognosticators are seeing. Nevertheless, I just don’t see anything on the horizon that would lead me to think we are about to see a robust rebound of any sort. In fact, what I see is, at best, more of the same for the economy. Additionally, I see what could be new and even bigger threats to the U.S economy and housing market.   Of course, no one can perfectly predict the future and I do not pretend to know exactly how anything is going to unfold. However, I think any objective appraisal of the bigger picture would reveal some pretty scary facts, that in my mind are cause for continued concern not renewed optimism. Look - we will get out of this mess one day, but as I have stated many times, we are not in any ordinary recession and all the so-called gov help is only making the underlying problem worse. Our economy is reeling from the effects of multiple massive popping bubbles (with a few more on the way). Bubbles do not re-inflate. Of course, the Fed is doing its best to re-inflate them, but they will have no luck. Instead, they will simply create new bubbles that will also pop. There is no getting around it.   So, while most of the pundits continue to sugar-coat problems, I emphatically believe that adults are better served with the truth than with some glazed over dose of false hope created by the same cheerleaders who have consistently gotten it wrong. I have given many examples of this over the last year, but here are a few more. In 2007, we were told by one often quoted local economist in his "Trends to Bank On" that "The Arizona trend” would continue to dominate and "there's got to be another 20 years of rapid growth, and then health thereafter." Oooops… Unfortunately, a lot of people bought homes in 2007, who are now seriously underwater because of advice like this. We heard from others in 2008, that “the real estate market was rocky, but near the bottom.” As it turns out, we are still looking for that bottom. In 2009, the overriding sentiment was that while it is “tough out there” we are “poised for a market rebound.” The same optimism was heard in 2010. Now once again, we hear how we are “on the brink of a recovery.”   Well, I guess any prediction can come true if we wait long enough. Look, I know that no one wants to keep hearing bad news or that things are tough, but to continue to deny the realities that confront our economy is delusional and does no one any good. So, while I cannot tell you exactly what lies ahead, I can tell you what concerns me as we move into another year.   What I see is a recovery that is not self-sustaining despite the greatest government intervention of all time. The extraordinary government bailouts and equally unprecedented fiscal stimulus gave us the weakest economic recovery coming out of a recession, ever. Now that the money has run out and the public’s appetite for more government spending has diminished, I see no true signs of recovery. Plus, I believe that all the government intervention (spending and money printing) has done nothing but postpone a day of reckoning.   While the U.S. government propped up the banks with TARP money, and then gave banks ultra-easy money terms to recapitalize, the number of bank failures in 2010 rose to 157, surpassing 2009, which saw a total of 140 bank failures. Furthermore, 903 institutions were on the FDIC's "problem" banks list as of September 30, 2010. Meanwhile, banks are not lending to the average Joe despite being flushed with cash. Why? Because they know what is headed our way and how many more loans that are currently on their books as “performing assets” are actually “dead.” In short, they need the money to cover massive losses that are coming down the pipe.   The goal of all of this intervention was to try to numb the pain until the global economy could heal itself, but sadly it hasn't worked. Globally, with only a few exceptions, things are pretty bleak. Europe’s economy is coming unglued as governments are insolvent. Japan is continuing to sink while China faces serious inflation issues that will negatively influence its economy.   Here at home, the U.S. Government’s debt to GDP ratio is at 73%, which is alarming enough, but it does not even include the Social Security or the Civil Service Retirement and Disability Trust Fund. Add these numbers in and the debt to GDP ratio would be around 90%. This country is broke and if the U.S dollar was not the World Reserve Currency, we would be in some serious trouble. However, there is evidence that the U.S. dollar could lose the status as the World Reserve Currency. If that were to happen, our standard of living would change dramatically for the worse. Meanwhile, as bond prices sink and rates move higher, investors around the world are starting to question the credit worthiness of the U.S. Even Moody’s, S&P and Fitch, who are riddled with conflicts of interest, can no longer ignore the massive problem at hand as they are threatening to lower the U.S. credit rating.   People often say that politics & real estate are “local.” Well the same can be said for the debt problem as municipalities around the country are going broke, as are the insurance companies that back the Muni bonds. This is not good news for the people who depend on the services of the towns and cities that are going BK, nor is it good for the investors holding the so-called safe investments.   According to Meredith Whitney, one of the most respected financial analysts on Wall Street and one of the few who predicted the financial meltdown and housing crash, “this issue has tentacles as wide as anything I’ve seen. I think next to housing this is the single most important issue in the United States, and certainly the largest threat to the U.S. economy.”   She goes on to predict that over 50 major U.S. cities are in serious trouble and nearing default. As the problem worsens (and it will), it will influence any recovery as it will cost millions of public employees their jobs and require another big bailout from DC adding more debt to the deficit. We (AZ) are so desperate that the governor sold off the state capitol, Supreme Court building, and legislative chambers to a group of investors. The state also eliminated Medicaid funding for most organ transplants. Get ready for more cuts. Our neighbor to the west (CA) is so deep in the red it has a credit rating approaching junk status. All over the country, the story is the same (and worse). Who is going to bail out the bankrupt cities? You guessed it – Uncle Sam –or in other words, you and me.   Perhaps the biggest bubble of them all, U.S. debt, which at this time last year was $13 trillion, is at nearly $14 trillion today. Of course, Politicians from both parties gave a lot of lip service to cutting deficits. But, what they're saying and what they're doing are polar opposites. The same clowns that promised (before the election) to show fiscal restraint just passed a package that will cost more than $900 billion over the next two years. Folks, we DO NOT have the money! New estimates show the deficit will come in at a whopping $1.34 trillion for 2011. NOTHING in DC is changing and because of it, the European debt crisis is a preview of what could happen here if we don't get our house in order.   Nevertheless, some people point to the stock market and say things can’t be that bad. Well, yes it keeps going up and all I hear on CNBC is how bullish all the advisors are about 2011. Yet to me, the market is going up for the wrong reasons. Just like the tech bubble and the housing bubble, I believe we are watching yet another bubble in stocks and commodities, one that is purposely being created by the Fed. It is worth pointing out that Wall Street brokers and many ratings firms have consistently failed to uncover market weaknesses until well after the stock market starts to disintegrate. Of course, that is after millions of average Joe’s lose untold billions of dollars in their 401k. Of course, the market might continue to rise on speculation that our economy is coming back around or over fears of inflation, but many of the same people who are bullish are the same ones that were telling people that Fannie Mae, Freddie Mac, Bear Stearns, Enron, Lehman Brothers, WorldCom, and (the list goes on) were all good investments. These are the same people that told us in 2007, that housing had bottomed and unemployment would not go over 5%. Not the best track record.   Now for housing – Obviously, the ongoing real estate slump certainly has the potential to be a severe drag on the economy and financial sector for several more years. Regardless of what lies ahead, the current state of the residential real estate market can hardly be labeled as a recovery. In spite of a short-lived boost in home sales sparked by the homebuyer tax credit early last year, there has been no improvement in either home sales or prices, in fact, prices are headed south again. As I have repeatedly predicted, home sales would suffer once the homebuyer tax credit expired in April! Surprising no one, (but the talking heads), total home sales remain almost 30% below the level seen before the end of the tax credit. Expect prices to continue rolling over again in response to the plunge in home sales.   Making the problem worse, is the fact that according to the Mortgage Banker’s Association National Delinquency Survey, the total delinquency for all mortgages is at a dreadful FOURTEEN PERCENT! Plus, there are approximately 2.5 million homes in foreclosure and 2.4 million that are 90 days past due. That is nearly 5 million homes that could flood the marketplace in the next year or two.   Moreover, across the county, the home-price plunge has left 23% of borrowers (out of 53.5 million) underwater – Of course, here in Phoenix that number is closer to 60%. Adding to the problem, some analysts estimate Shadow Inventory (homes the banks have foreclosed on, but have not listed) to be at 2.1 million homes, but others think it is closer to 5 or even 6 million. Add that to the 4.5 million homes listed for sale nationally and you have a huge supply of homes. Locally we currently have 42,500 active listing (including short sales with offers). Additionally it is estimated there are 40,000 homes that have a notice of trustee sale on them. This mean that sometime over the course of the next 90 days, those homes can be sold at a trustee sale. Of course, not all of them will go into foreclosure as some are short sales, but short sales represents a mere 30% of the total. Some of the trustee sale are homeowners trying to get a loan mod, but if the national numbers hold true then most of those will fail. Sadly, most of the 40k trustee sales are doomed for foreclosure, but even if we assume that only ½ of these end up in foreclosure, that brings our inventory to 62,500. This number is huge, but it gets even scarier when we factor in the shadow inventory (estimated by some to be as high as 25k in PHX). Magnifying the issue is the fact that there are many thousands of homeowners throughout the valley who do not have a trustee sale despite not making payments on their home. Many of these people do not have the home listed on the MLS nor are they attempting a loan mod. In short, no matter how one looks at the numbers they are staggering.   Plus, as the banks get ready to ramp up the trustee sales again, expect to see more foreclosures hit the market adding to the bloated inventory. I also expect there will be more homeowners recognize that all the gov intervention has failed and as a result, they will either throw in the towel deciding to short sale their home or simply walk away. Meanwhile, all indicators continue to show less buying and if mortgage rates continue to rise, buying will continue to slow. With more supply coming to the market coupled with less demand and continuing high unemployment combined with tough lending, I just do not see a foundation for a bottom.   In fact, in the last 6 months of the year (2010), I have watched as prices for homes at 150k and less fall an average of 10-15%. For example, a 2000 sf home in Anthem that would have sold in May 2010 for $160k is now sitting on the market at $140k with no buyer.   Keep in mind that I am just touching the surface in this article. There are plenty of other very serious concerns happening in this country and around the world. There are some pretty smart minds out there that are predicting a serious unraveling of the U.S. dollar which would have devastating consequences to life as we know it. As much as I want to be optimistic about 2011, and as much as I would like to cheerlead you through the year, I simply cannot. And, until I see the data that suggest that we have found a bottom in housing, I will continue to tell it like I see it.   In the end, you have to make decisions for yourself, but I believe that in order to make a correct decision, you have to work with accurate data. As pointed out earlier, many of the cheerleaders today were telling us that all was well in 2006. The same clowns that never saw the problem or worse, caused it, are now telling us that everything is going to be fine. Well, I for one am not listening and I suggest that you seek more knowledge about what is really happening in the world around you. If you are going to listen to anyone, I would suggest that it is someone who actually predicted the financial and housing crisis.   So as we head into another year, keep in mind that eventually, things will get better, but now might not be the time to get complacent. Instead, perhaps you would be better served by being diligent with your money, arming yourself with accurate information, and taking steps to protect yourself and family all the while remaining mindful of the fact that you are bigger than any problem that comes your way. Robert Holt, CDPE,SFR of The [HOLT] Group, RE/MAX Sonoran Hills. For more info or access to archived articles, please visit www.TheHoltGroupAZ.com or call 623.748.9583 & tell us your thoughts.

Wednesday, 2.23.2011 “Real Estate for Real People”

Pollyanna doesn’t live here!   Over the last several years that I have been writing this weekly article I have received countless supportive emails and calls from people of all walks of life expressing their gratitude for the info I provide. However, every now and then I get an email from someone who feels that I am just fear mongering in an attempt to get homeowners to sell their homes at “any” price. The most recent email I received came from a writer critical of the fact that I had not sung the praises of the elected officials who diverted us from the abyss with the likes of “TARP” and the Auto company bailouts. Because I have not given them credit for “saving” us, I must simply be trying to make a political statement. He did want me to know how the massive bailouts (like TARP) that saved his pension are now being paid back with interest. Finally, he stated I should limit my discourse to the subject of real estate implying that I do not have the knowledge to speak of economic matters. Finally, he did want to declare that he was not a "Hollywood liberal" from California, but instead a retired, 23-year veteran from the Midwest who voted for Reagan and Bush1.   Well, I would like to thank this writer for taking the time to send me his opinion. I would also like to thank him for his service to this country. My father was retired military who served in WWII so I know the sacrifice. I would also like to thank him for giving me something to write about this week, as I had not found anything that I fancied until I read his email.   To start with let me address the notion that I am not qualified to write on the subject of economics and finance. While I do not profess to know it all (no one could), I do hold college degrees in economics and finance. Furthermore, I traded 30-year bonds on Wall Street for a major Investment Bank.  Plus, since the meltdown in 08’, I have immersed myself back in the world of finance seeking the truth about where we stand financially.   As for the assertion that I am making a political statement – well I am! My statement is – most politicians are too incompetent, too beholden to special interest (Banks) and most possess too little backbone to deal with the serious issues at hand. If the writer had read more of my articles, he would know that I am not prejudice against any one political persuasion. I think both Republicans and Democrats are equally at fault.    As for being a fear monger, well I take that as a compliment. Am I trying to scare people? Yes, I am! Had more people been a little scared of consequences in 2005, there would be far less financial misery right now. Maybe if more people recognize the truth now, there will not be as much misery in the future.    There are plenty of people telling us how great the government is for saving us from oblivion and how “Happy Days” are here again. Of course, most of these same people never told you about the tech bubble, or the housing bubble or the financial crisis or the looming bond meltdown or…   As I have often said, when there is good and encouraging news in housing and the economy I will be happy to report them. But even the so-called happy numbers that we see from time to time must be taken with a grain of salt. As an example, I choose not to listen to the cheerleaders who are jumping for joy as they report the unemployment rate has fallen to 9.0%. This is a bogus number and anyone with a calculator can see why. The so-called improvement is due to people falling off the dole and as a result, they are not being counted. It is not that these poor folks found a job – it is that they stopped looking. How do I know? Because The Labor Department reported that ONLY 36,000 jobs were created in January. At that rate, it would take 250 months (20 years) to get a new job for everyone that has lost one in the last 3 years.   Meanwhile, not only is the U.S. broke with $14 Trillion in the hole, now every state in the Union is running a deficit (except 4) and most of those are so far in the red that they are on the brink of bankruptcy. It has NEVER been this bad in the history of our country. I will touch on this subject in more detail in future articles, but suffice to say, it is UGLY and if you are not being affected by it yet, then just wait – you will.     The writer also wanted to know why I do not give the politicians, namely Bush and Obama, more credit for saving us from financial destruction. My answer - they do not deserve it. The reckless spending that has been going on for 30-plus years only skyrocketed under the “conservative” Bush and has hit warp speed with Obama. The incestuous bailout of their partners in crime (the banks) have only made the problem far worse – NOT better. Once the morphine (loose monetary policy) wears off, the pain will be even worse.   Despite all the rhetoric, the clowns in DC only continue to demonstrate gross levels of incompetency in dealing with the deficit. The $100 Billion reduction the Republicans were suggesting has now been reduced (by both Republicans and Democrats) to 32 Billion. That is equivalent to an individual making $50k a year, but who spends $100k in credit card debt saying “I will cut my spending down by $2000, but I am not going to pay off any of the debt.” That is INSANE!   Keep in mind that as a result of the massive implosion of debt at all levels of government, it will crush the bond market and drive interest rates through the roof. So even if you are lucky enough to keep your pension and local/state services, you will be touched by this crisis via higher interest rates. So as your dollar continues to get devalued and as commodities for everything that you and I need the most (from gas to food to clothing) go through the roof, all because of the policies of Ben Bernanke, the only thing not going up is housing.   In 2010, we witnessed the WORST year on record for housing. There were fewer new homes sold than anytime in the last 47 years or since 1963 (whichever you prefer). Meanwhile, there were over 1 million homes foreclosed despite all the wonderful government programs and despite the Big Boys halting foreclosures in Oct 2010 while they waited on the news media to talk about something else – like maybe Egypt. But, now that no one is “talking” about banks doing anything ILLEGAL – foreclosures are back with a vengeance. Of course, there have been no arrests, instead the perpetrators have been bailed out and paid massive bonuses with our money. So tell me why I should be so happy about the so-called success of TARP? And, if that was not enough, the problem is even uglier and more disgusting when you look into the two monstrosities that you and I now own – Freddie Mac and Fannie Mae.  It is via these entities (who are being supported/bailed out with BILLIONS of taxpayer dollars) that continue to bailout the banks. It was bad enough that we (the taxpayers) bailed these clowns out with TARP after they made insanely reckless and BAD bets. And, now that TARP is being paid back with taxpayer money via Freddie and Fannie just adds insult to injury.   What makes it worse is the fact that the financial system was not going to fail. Maybe B of A or Wells or Chase or Citi would have failed, but the system would not have failed and any honest assessment of the situation would lead to this truth. The above mentioned entities plus those like Goldman Sachs did not go under for ONE reason – corny capitalism. There is more than enough investor money on the sidelines that would have created new banks in a Wall Street minute. Of course, the stock price of the before mentioned companies would have gone to zero and therein lies the problem. The guys giving all the political donations would have lost a house or two in the Hamptons – can’t have that. No, according to those that run our country it is better to let millions of people pay for the sins of a few.   As for the writer’s contention that I am trying to get homeowners to sell their homes at “any” price, well again, that shows some naïveté since once again the banks remain in charge. As anyone knowledgeable of real estate and especially short sales knows, the bank must approve the price of a short sale. The price is based on market comps for similar properties in the same area. In the end, homes sell for what buyers are willing to pay for them as long as the bank agrees. Contrary to what anyone thinks, prices will not go down because I or anyone like me tell people the truth. The truth is the truth and while it might take some effort to uncover it (i.e., the truth about TARP) it is still there no matter how some slick PR firm or government report tries to cover it up. As Mark Twain said “There are three kinds of lies: lies, damn lies, and statistics.”   The truth is we are still in a mess and for those that wish to live in denial of this fact, then my weekly articles may not be for them. And, if these articles “scare” a few folks then great! We need to be scared so we can avoid what might hurt us if we are not careful. The same fear that prevents me from picking up the rattlesnake can save my life. Because I know the truth, I can avoid being hurt.   As I have stated previously, each person should do their own research on the state of the economy and the mess we all face. However, to fully understand the scope of the problem you need to look past the rosy prediction and propaganda from the same people that never recognized any of the previous issues until it was too late. Thankfully there are some very smart, very grounded and very realistic individuals on both sides of the political aisle that are trying to warn the American people that there is a big storm ahead.   My only mission with these weekly articles is to make sure I tell the truth as I see it based on the knowledge I hold from having an extensive background in finance/economics and of course real estate. For far too long, we have all been told that the debt of the country does not matter, that everyone (regardless of being able to afford it) should own a home, that real estate never goes down and U.S treasuries are the safest investment in the world. None of those things are true. Some never were and because of our runaway debt the latter is no longer.   I make it my duty to provide the facts, like the truth about unemployment, the housing mess, how broke we are as a nation and the truth about TARP. If some of these facts scare you, then good, I am doing my job. If you decide to do something about it, then even better. I have often said that now, more so than any other time in the last 50 years calls for proactive action. After all, it is your own hide that you are saving. There is NO bailout for us little folk (they are reserved for the big boys).   Lastly and most importantly, I write what I do because I have witnessed far too many people, both young and old, smart and not so much, republicans and democrats, those that did the “right” thing and those not so much, who are getting crushed by same entities who paid TARP back and by the same political leaders who profess to help. Sadly, it is getting worse not better. I know to some it might seem like I am peddling fear, but because I have seen so many people hurt by others who are supposed to help, I think it better to err on the side of realism – after all being Pollyannaish (unreasonably or illogically optimistic) only works in fairytales.  Robert Holt, CDPE/SFR & Christina Holt, GRI/CSSN/SFR of The Holt Group, RE/MAX Sonoran Hills. Please visit www.TheHoltGroupAZ.com or call 623.748.9583 & tell us your thoughts.