Tim's Atlanta Real Estate Blog: September 2008

So much for having time to digest and understand one of the most important bills that will have a huge impact on all Americans.

Rep. Michael Burgess mentioned that House Speaker Nancy Pelosi declared that she would use House Martial Law for the balilout bill.

That term scared me so I did some digging to find out what he was referring to.

Here is the explantion.  They used this back in 2006. 

This extraordinary procedure is known as a "martial law" rule because it suspends the normal procedures and safeguards and allows the House Leadership to operate in a more authoritarian fashion.  It enables the Leadership to seek to ram a bill or conference report through before the Members have the opportunity to fully understand what they are voting on.

Legislation that has far-reaching implications for millions of Americans deserves to be considered under a more democratic process.  Waiting until the last minute to reveal what is in these bills, and then "spinning" or potentially mischaracterizing changes in the bills without Members of the House or the public having an opportunity to obtain a more objective review of what the legislation does, is unfair to Members of the House.  It also is unfair to the millions of Americans whose lives could be affected by this legislation.  It represents a further step in reducing the degree of transparency and democracy in how this country is governed and how decisions are made.  At a time when our leaders preach the goal of promoting democracy abroad, they should not be reducing it at home.

And this is the system that we are trying to convince the world to embrace.

This guy seems to make a lot of sense.  He says that if this bailout passes, it's really going screw up the trust in the system which will really mess things up.  He seems to feel very strongly that we'll end up in a depression if this bailout is passed.

I'm no  expert but I never think much good comes of legislation that is passed under duress.  Everyone seems to think that this is really a big deal.  If it is, then I think we need to take our time and not just act on fear.

I've heard many versions of what happened to cause the current financial mess that we are currently in.  I'm not a big fan of President Bush anymore but I must say that he explained how we got here very well.  Probably many missed his speech on Wednesday night, so I wanted to post his explanation here.  Whoever wrote this speech, really understands what happened.

My problem is with the solution he proposes.  I think it might get the financial wheels unclogged but it won't really change the things that created this mess in the first place.  Here's the link to the full text of the speech.

...... First, how did our economy reach this point? Well, most economists agree that the problems we're witnessing today developed over a long period of time. For more than a decade, a massive amount of money flowed into the United States from investors abroad because our country is an attractive and secure place to do business.

This large influx of money to U.S. banks and financial institutions, along with low interest rates, made it easier for Americans to get credit. These developments allowed more families to borrow money for cars, and homes, and college tuition, some for the first time. They allowed more entrepreneurs to get loans to start new businesses and create jobs.

Unfortunately, there were also some serious negative consequences, particularly in the housing market. Easy credit, combined with the faulty assumption that home values would continue to rise, led to excesses and bad decisions.

Many mortgage lenders approved loans for borrowers without carefully examining their ability to pay. Many borrowers took out loans larger than they could afford, assuming that they could sell or refinance their homes at a higher price later on.

Optimism about housing values also led to a boom in home construction. Eventually, the number of new houses exceeded the number of people willing to buy them. And with supply exceeding demand, housing prices fell, and this created a problem.

Borrowers with adjustable-rate mortgages, who had been planning to sell or refinance their homes at a higher price, were stuck with homes worth less than expected, along with mortgage payments they could not afford.

As a result, many mortgage-holders began to default. These widespread defaults had effects far beyond the housing market.

See, in today's mortgage industry, home loans are often packaged together and converted into financial products called mortgage-backed securities. These securities were sold to investors around the world.

Many investors assumed these securities were trustworthy and asked few questions about their actual value. Two of the leading purchasers of mortgage-backed securities were Fannie Mae and Freddie Mac.

Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.

The decline in the housing market set off a domino effect across our economy. When home values declined, borrowers defaulted on their mortgages, and investors holding mortgage-backed securities began to incur serious losses.

Before long, these securities became so unreliable that they were not being bought or sold. Investment banks, such as Bear Stearns and Lehman Brothers, found themselves saddled with large amounts of assets they could not sell. They ran out of money needed to meet their immediate obligations, and they faced imminent collapse.

Other banks found themselves in severe financial trouble. These banks began holding on to their money, and lending dried up, and the gears of the American financial system began grinding to a halt......

YouTube is such a great thing.  No one can hide anymore from a bad prediction because somewhere, somehow, someone recorded it and put it on YouTube.

Here's a funny video clip from a Financial News show back in December 2006, way back in the good old days.  This was back when many "experts" were saying that we probably hit bottom and things were going to be getting much better soon.  Of course, this was when prices were just leveling off before they went south.

I say that we will not have hit bottom until one guy is saying you should buy while everyone laughs at him for saying such a crazy thing.  I'm hoping that we aren't too far from that time.

One thing that hasn't happened yet is a big increase in interest rates. Once that happens, it's going to be tough to buy a house even if prices do come down. If you can weather a storm for a few years, this might be a great time to lock in a fixed rate mortgage. If you don't have to move, the value of your home doesn't really matter, but you'll have a nice low monthly payment. If inflation keeps going up, you'll be able to pay off the mortgage with cheaper dollars. This might be the magical point where prices are pretty low and interest rates are low. Usually it's one or the other. 

Broker Bryant reposted an article that he wrote back in July 2006.

He had great foresight back then.  He seemed uneasy about seeing buyers buying homes with no money down and very risky adjustable mortgages.  He  predicted that he thought many  buyers were putting themselves at  risk if there was a change in their financial picture.

But at that same time I'm sure many were thining that if they didn't act now, they would miss the boat.  They probably envied how people doubled their money in the past few years and if they waited that same $200,000 home would be $400,000 and they would never be able to own a home.

Here's a thought experiment.

What if back in 2006 you were able to see what is going on now in 2008. 

• Would you as an individual do anything differently? 
  
• How would you go about trying to stop it from happening?
   
• Would you see yourself as such a small, insignificant cog and just play along and try to make as much as possible before it was too late?
   
• Would you tell people that you can see into the future and risk being called a nut case?
   
• Do you think you'd be able to change history? 
  
• If you only worked with buyers, would you refuse to sell them a home knowing that they could buy it at half price in two years? 
  
• Would you then be blamed for causing the problem since you were scaring off all the buyers?

Can a butterfly in China keep a hurricane from happening in Florida?

This bailout negotiation on Capitol Hill reminds me of a short sale negotiation.  You can come up with any price you want between the buyer and seller but it's all meaningless if the bank doesn't approve it.  In the end, the bank has to decide which is best for the bank.  A loss now or a loss later.  Either way there will be a loss and the bank needs to decide what is best for it's shareholders.

Unfortunately, a big bank for the U.S. is China. They hold $593 billion in treasury bills, a big part of the $2.67 trillion in treasury bills held by Asian countries. If China gets nervous and starts to sell our treasury bills, all hell will break out. 

One of several articles on this subject caught my attention.  Here's what a former advisor to the Chinese Central Bank said:

``Our export-growth strategy has run its natural course,'' he said. ``We should change course.''

China should stop intervening in the foreign currency markets and thus allow rapid appreciation of the yuan, he said. While this would cause pain for exporters, China could ease the transition by using its strong fiscal position to aid those who lose their jobs. It also should stimulate domestic demand to offset lower income from overseas sales.

Without yuan appreciation, China will continue to accumulate foreign reserves, which means further accumulating ``IOUs from the U.S.,'' said Yu. ``This is paper and it may default and it will not increase China's national welfare.''

Many say that China can't let the U.S. tumble into a Depression because then who will buy and consume all of the stuff that they are producing in all of their factories?  From what I saw of the Olympics, there seems to be a lot of hard working Chinese over there who probably are able to consume stuff as well as any U.S. citizen. 

Like many short sales,  sometimes it takes a few weeks for the bankers to get together to make a decision.  Whatever  final bailout package gets passed, don't get too excited. It might be weeks before China decides what's best for them.  With advisors like Yu, I'm getting very nervous.

Here's a long detailed article that was in the Atlantic magazine earlier this year that explains the situation very well.

There's a lot of blame to go around for the financial crisis that we seem to be in.  Today there were Congressional hearings trying find out what happened and what can now be done.

The bottom line is that we all spent and borrowed more than we could afford.  Sure the banks made it easy for us to borrow money.  But no one forced us to take the money and spend it on big screen TVs, big cars and big fancy houses.  It was our choice.

The ultimate solution will be for us to choose again to become thrifty, hardworking Americans who save and invest and take care of themselves.  The sooner we face that reality, the sooner we'll work ourselves out of this mess.  Yes, let's clean up the corruption and fix the system, but let's not fool ourselves that we can keep spending our way into prosperity.

Don Harrold, some guy who has been putting out some pretty good commentaries on YouTube, says it better than I can.

We are all hoping that the worst is past and we've reached the bottom.  Things can only get better, right?

I am an eternal optimist but I've been making the mistake of following two guys over the past year who have been calling for a lot more gloom and doom.  These guys have been on target with their predictions in the past so I have gained a lot of respect for them.  Unfortunately they are saying that we have quite some distance to go before things will turn around for the better. 

There are no painless solutions to our current financial crisis.  Depressing? Yes.  But 99% of the solution is understanding what the actual problem is that got us into this situation.

Last Thursday Glenn Beck had Peter Schiff on and then Ron Paul.  It was an interesting discussion.  I'm hoping that these guys are wrong but I'm trying to figure out how to prepare for if they are actually correct like they have been in the past.  Peter Schiff said in his book "Crash Proof" written at the end of 2006 when the price of Fannie Mae stock was at $60:

What will happen when Fannie Mae and Freddie Mac go bankrupt?  Will the federal government , with its implied backing of these corporations , step in and bail them out?  With what money? At what cost to the purchasing power of the U.S. dollar?

Take the time to watch the videos of the Glenn Beck show last Thursday. Do your research and find out what they have been saying over the last year.  Then go back and see what Bernacke and Paulson and many of the presidential candidates were saying over the past year.  See which views are matching our current reality.

Along my four mile commute into my office I pass by 10 gas stations.  This morning, all ten were completely out of gas.  For the past 10 days only about 3 of the ten have had any gas on any particular day. 

I'm down to having 270 more miles before I need to refill. I was going to show some homes to a buyer this morning but she called to postpone it until next week.  She wasn't quite certain about the homes we were going to see and she didn't want to waste her gas or mine.  She was having trouble finding gas over the weekend.

Ten days ago I thought for certain that things would be back to normal by now but it seems like it has just gotten worse.

I am now very cautious about making any low priority trips.  I'm looking at clients differently.  I'm deciding whether or not they are gas worthy.  I keep thinking about the episode of Seinfeld where Elaine was running out of contraceptive sponges.  She made sure her dates were "sponge worthy".

Are you rationing your miles and making sure your clients are "gas worthy"?

Here's the LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY TO PURCHASE MORTGAGE-RELATED ASSETS 

It's a really short proposal but it seems to give a huge amount of power to the Secretary of Treasury to basically do whatever he thinks is best and report back to Congress in three months.

The Secretary shall take into consideration protecting the taxpayer and providing stability to the financial markets.  That seems pretty weak to me.  He isn't charged with the responsibility of protecting the taxpayers, just to consider them. 

Here's the thing I see as most troubling:

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency

It just don't like things like this with such broad, sweeping powers being rushed through without a full explanation of what we should expect.

It's like they are saying "Trust me, we're in big trouble and have to act before we are all destroyed."

Why should we trust them now when just a few months ago I thought I remember being told that the economy is strong and we had nothing to worry about.  If they would maybe tell us the whole story on what's really going on, maybe I would trust them a little more.  Or maybe I would run for the hills.

If you have a boat that was built in a way that allowed water to leak in, do you figure out how best to get rid of the water or do you figure out how to build a better boat? 

If all you knew about boats was the one you currently were on, then you'd focus on improving bailing techniques.  If instead, you knew the basics of boat construction and saw the inherent flaw in the structure of the boat and saw that it was impossible to fix, you'd focus on creating a new and better boat.

Until you get a basic grasp of what kind of monetary system we currently have and understand how it developed, you're never going to have a clue about what we are up against with this current financial crisis.  If the whole system is flawed, the big question becomes "What is a better system and how do we get there?"  not "How do we fix the current system which is probably unfixable?" 

Here is a quote made by Robert Hemphill, credit manager of Federal Reserve Bank, Atlanta GA.

"If all the bank loans were paid, no one could have a bank deposit,
and there would not be a dollar of coin or currency in circulation.
This is a staggering thought. We are completely dependent on the
commercial Banks. Someone has to borrow every dollar we have in
circulation, cash or credit. If the Banks create ample synthetic money
we are prosperous; if not, we starve. We are absolutely without a
permanent money system. When one gets a complete grasp of the picture,
the tragic absurdity of our hopeless position is almost incredible, but
there it is. It is the most important subject intelligent persons can
investigate and reflect upon. It is so important that our present
civilization may collapse unless it becomes widely understood and the
defects remedied very soon."

Please take some time to learn about the monetary system that we currently have.  At first it might seem boring or too complex to ever understand. But like any complex system, there are usually some simple underlying principles that everyone should be able to comprehend.  The rest is just details.

I found a great video that I think is very worthwhile to watch.  Don't be put off by the simplicity in the beginning.  It keeps building.  You need to watch the whole thing so you can see how the debt monster will eventually wipe us all out.  The scary thing is, the debt monster isn't science fiction.  It is here right now and growing stronger and stronger.  We need to figure out how to destroy it instead of continuing to feed it more and more and have it become a bigger and bigger problem.

Sometimes it's difficult to get a grasp on what is happening in the financial markets.  You get bogged down in the details and you forget about the big picture and what is at the core of the problem.

Take 5 minutes to watch this video that was on CNN this morning.  It's the best and most concise explanation about what's going on in the financial world.  It's not what most people want to hear but the sooner we face the problem head on, the sooner we'll get past it.

If have another 9 minutes and want more insight into the current situation and what might be in store for us in the future, watch this video from the Glenn Beck show last night.

Have you ever driven through a neighborhood and seen one agent with most of the homes for sale? Your first thought might be that they must know a lot about the neighborhood. You might think it would be a good thing to deal directly with that agent if you decide to buy a home in that neighborhood. 

If you want to get a good deal, stop! Think about it for a second. Are they really going to be motivated to negotiate a great deal for you?  It's just going to bring down the prices in the neighborhood and make their other homes for sale look overpriced.  What if the agent lives in the neighborhood?  Do they want prices in their neighborhood to go down?  A listing agent  wants to develop a reputation for being able to get top dollar for homes in the neighborhood. I've heard many sellers grumble about their neighbors selling for too little and the agent who let them.

Always consider the motivations of everyone involved in a transaction. You need to align yourself with someone who benefits when you get a good deal.

A buyer's agent who cares about their long term business  wants you to get the best deal possible.  Why?  When you go to buy a bigger home in a few years, wouldn't you call the agent who helped you get a great deal on your current home?  Isn't it going to be easier to price your home competitively if you bought it at a low price to begin with? 

Use the neighborhood expert for as much information as possible but make sure you recognize that you getting a great deal might not be in their best interests. It just goes against their human nature. 

I've had agents give me grief about saying this kind of stuff. I had one agent email me and say that he was going to report me to the board because I was portraying fellow agents in a negative way which is against the REALTOR's code of ethics. I only write about this because I have heard agents talk about this exact dilemma.  If telling the truth is against the code, then it might be time for me to hand in my  REALTOR pin.

Last night I read a featured post here about why Fannie Mae and Freddie Mac are so important to us and that the government bailout was a necessary and good thing.

I've been trying to think through the ultimate ramifications of these bailouts.  Deep down I know it's not good for the long term, but it's hard for me to explain the details of why I feel that way.  I'm just not that economically savvy yet.

But this morning I came across an article that explains it perfectly. Please go and read the complete article.  It asks some basic core questions. 

How many more bailouts have to occur before someone asks the questions no one wants to ask? Is this a systemic problem and where does it end?

If the problems we are now witnessing are systemic and can potentially develop into a far worse crisis than anyone expected, what level of loss should the public be responsible for? Should we the people be on the hook for an unlimited amount of liability while not participating in any of the reward?

 The dollar has always represented safety, but can it maintain that trust if we just continue to print, borrow and move dollars around from balance sheet to balance sheet ad infinitum?

My opinion is that we are stuck between a rock and a hard place.  If we continue the bailouts, we'll eventually have hyperinflation like Germany in 1923.  If we do what's necessary, we will have another depression.  The best that the Fed can do is to get us to either place slowly so the pain doesn't hurt as much and we slowly get used to it.

As an individual, I'm getting my financial house in order.   I'm getting out of debt and living within my means. I just hope the government wakes up to reality and starts operating within their means so it doesn't drag us all down together.