Tim's Atlanta Real Estate Blog: February 2009

What if the "stimulus" package is exactly opposite of what is needed? 

I ask myself: if all we need to do is spend our way out of this recession, why are we still bogged down?  It's not like Americans haven't been spending just about everything that they earn.  We've tapped our credit card lines and have borrowed against our homes.  The government has been doing their part too.  Is spending more money that we don't have going to really do anything?  What if the increased spending is actually making things worse?

I'm not an economist but I do like to study the topic of money. 

From what I've studied, things are pretty simple.  You need to spend less than you make.  What you have left over is savings.  These savings form  the capital needed to fund projects that produce things and create real wealth.  Savings can not be created by government decree. 

In an economy where savings are all spent on luxuries and consumer items, eventually the economy will deteriorate.

I came across a recent article that fully explains why savings and not spending is what is needed right now.

There are major consequences we will suffer if we don't do the right thing. 

Since it seems like there's no way that the stimulus package and additional packages will be stopped, I feel that it's important to understand the possible consequences so one can begin to prepare for the worse.

Here are a few snippets of what I think are the main points.  It might seem like I selected a lot of points but the original article is a really long read. 

The growing problem of unemployment that we are experiencing and the accompanying reduction in consumer spending on the part both of the unemployed and of those who fear becoming unemployed is the result of this loss of capital, not of any sudden, capricious refusal of consumers to spend or of banks to lend. Indeed, the kind of consumer spending that so many people want to revive and encourage, by means of "stimulus packages," played a major role in the loss of capital that has taken place and now results in unemployment and impoverishment.

Saving does not mean not spending. It does not mean hoarding. It means not spending for purposes of consumption. Abstaining from spending for consumption makes possible equivalent spending for production. Whoever saves is in a position to that extent to buy capital goods and pay wages to workers, to lend funds for the purchase of expensive consumers' goods, or to lend funds to others who will use them for any of these purposes.

It is necessary to stress these facts because of the prevailing state of utter ignorance on the subject. Such ignorance is typified by a casual statement made in a recent New York Timesnews article. The statement was offered in the conviction that its truth was so well established as to be non-controversial. It claimed that "A dollar saved does not circulate through the economy and higher savings rates translate into fewer sales and lower revenue for struggling businesses." (Jack Healy, "Consumers Are Saving More and Spending Less," February 3, 2009, p. B3.)

The loss of accumulated savings is at the core of the problem of economic depressions. Recessions and depressions and the losses that accompany them are the result of the attempt to create capital on a foundation of credit expansion rather than saving. Credit expansion is the lending out of new and additional money that is created out of thin air by the banking system, which acts with the encouragement and support of the government. The money so created and lent has the appearance of being new and additional capital, but it is not.

The fact of its appearing to be new and additional capital creates an exaggerated, false understanding of the amount of capital that is available to support economic activity. Like an individual who believes he has grown rich in the course of a financial bubble, and who is led to adopt a level of living that is beyond his actual means, business firms are led to undertake ventures that are beyond their actual means.

For an individual consumer, the purchase of an expensive home or automobile in the delusion that he is rich later on turns out to be a major loss in the light of the fact that he cannot actually afford these things and would have been better off had he not bought them. In the same way, business construction projects, stepped up store openings, acquisitions of other firms, and the like, carried out in the delusion of a sudden abundance of available capital, turn out to be sources of major losses when the delusion of additional capital evaporates.

economic recovery requires that the economic system rebuild its stock of capital and that to be able to do so, it needs to engage in greater saving relative to consumption.

Recovery will be achieved by the combination of more saving, capital, and credit along with lower wage rates, costs, and prices.

In addition, recovery requires the rapid liquidation of unsound investments. If borrowers are unable to meet their contractual obligation to pay principal and interest, the assets involved need to be sold off and the proceeds turned over to the lenders as quickly as possible, in order to put an end to further losses and thus salvage as much capital from the debacle as possible.

Recovery requires the end of financial pretense. There are banks that do not want to see the liquidation of various types of assets that they own, notably, "collateralized debt obligations" (CDOs). These are securities issued against collections of other securities, which in turn were issued against collections of mortgages, an undetermined number of which are in default or likely to go into default. The presumably low prices that such securities would bring in the market would likely serve to reveal the presence of so little capital on the part of many banks that they would be plunged into immediate bankruptcy. To avoid that, the banks want to prevent the discovery of the actual value of those securities. At the same time, they want creditors to trust them. Yet before trust can be established, the actual, market value of the banks' assets must be established, even if it serves to bankrupt many of them. The safety of their deposits can be secured without the banks' present owners continuing in that role.

When these various requirements have been met and the process of financial contraction comes to an end, the profitability of business investment will be restored and recovery will be at hand.

Unfortunately, they are not likely to be stopped. If they are implemented, especially on the scale already approved by Congress, the effect will be a decumulation of capital up to the point where scarcities of capital goods, including inventories of consumers' goods in the possession of business firms, start to drive up prices.

Higher prices of consumers' goods will result not only from scarcities of consumers' goods (which, of course, are capital goods so long as they are in the hands of business firms), but also from scarcities of capital goods further back in the process of production. Thus a scarcity of steel sheet will not only raise the price of steel sheet, but will carry forward to the price of automobiles via the higher cost of producing automobiles that results from a rise in the price of steel sheet. Likewise, a scarcity of iron ore will carry forward to the price of steel sheet, which, again, will carry forward to the price of automobiles. And, of course, the pattern will be the same throughout the economic system, in such further cases as oil and oil products, cotton and cotton products, wheat and wheat products, and so on.

Once inventories become scarce in relation to the spending for goods, all of the funds that the government has been pouring into the economic system become capable of launching a major increase in prices. This rise in prices can take place even in the midst of mass unemployment. This is because the abundance of unemployed workers does nothing to mitigate the scarcity of capital goods that has occurred as the result of the attempts to stimulate employment.

What if last September the Chinese threatened economic warfare with the US?  What if the Chinese threatened to stop buying our Treasury Bonds if we didn't bailout all of the toxic assets that they got stuck holding?

Could this be the reason for the emergency meeting in September that Paulson and Benanke had with top Congress people where they were told that if something wasn't done immediately there might be marshall law on Monday?  Maybe that's why they had to set up the TARP so the Treasury had complete control of the funds and they could keep secret exactly where those funds were used.

AIG is in the news.  It sound like they need billions more to survive.  What is so special about AIG?  I never really knew much about them.  Did you know about all of the ties they have with China?  Here's a great post from the Market Ticker that explains it.

Here's another recent news story about Hilary Clintons recent trip to China.

"The truth is the Administration needs China's help. America's stimulus is very expensive and the U.S. wants China to help finance it," Andrews reported. This is what America has become-a country that sends its Secretary of State abroad to beg for money from foreigners. In this case, it's a communist dictatorship that forces women to have abortions, tortures Christians, and threatens the freedom and democratic government of Taiwan. 

So the cost of the "stimulus" is more sacrifice of American independence and sovereignty, as well as our own values, ideals, and commitment to human freedom. It is a sad day both for America and China. 

Clinton was shown saying, "We are relying on the Chinese government to continue to buy our debt." The almighty dollar takes precedence over everything else, even as it falls in value and the dangers of hyperinflation and national bankruptcy loom. The tragedy is compounded by the fact that pandering to the Chinese will not solve anything. This policy, set in motion by big banks and corporations and pursued by Democratic and Republican Administrations, is what got us into this predicament in the first place.

Clinton's comments, which concern the overall economic policy of the new administration, are far more significant than the Obama mortgage plan. Clinton is getting to the heart of the issue-how the mortgage plan and the stimulus are being financed.

Here's a video of a news story that ran on Friday on the CBS evening news.  It shows how both Obama and Clinton have changed their tune about China since the election. 

 

Watch CBS Videos Online

Many say that we need to bailout "all" struggling homeowners or else "Innocent Bystanders" who did the right thing will get clobbered due to foreclosures bringing down the value of everyone's homes.

This has been a troubling conundrum for me and I think I have a good compromise.

We need to start "The Bank for Innocent Bystanders".

Let's face it.  Trying to fight the market and keep home prices high is like trying to stop a leak in Hoover Dam with your finger.  The market is just too big to manipulate forever.

We are in the midst of a  bubble and it's natural for prices to come down to more historically affordable levels.  Prices must find a level where the average person can afford the average home.

Many people leveraged themselves into a home that they really couldn't afford.  They hoped to cash in on the seemingly automatic price appreciation in homes.  

Many people saw an opportunity to refinance and cash out their new equity in order to buy stuff.  They made their bets and loss.  They enjoyed the temporary pleasures and now have to pay the piper. 

Many homeowners stay in their home of years and years.  They might even own their home with no mortgage at all.  To these people, the price of their home at any given time really doesn't matter to them.  They have no plans on moving.  Their home is a place to live, not an investment or a piggy bank.  Should these people be forced to pay higher taxes so that we can bailout the people who bought a home that they shouldn't have?

Many  people decided to play it safe and rent instead of buy.  They had to bear the insults and mockery of others who said they were foolish by throwing their money away on rent.  Should these people be forced to pay higher taxes so that we can bailout the people who took the risk of buying a home instead of renting?

Low home prices now can reward these low risk renters by giving them a new opportunity to become a homeowner at an affordable price.  How can that be a bad thing? 

The big problem with low home prices is  that it hurts "Innocent Bystanders" when they need to sell their home.  If prices have dropped, they won't have enough to pay off their mortgage.  If they let it go to foreclosure, they'll have a big black mark on their credit so they won't be able to get a mortgage on their next home. 

That's where my idea of "The Bank for Innocent Bystanders" kicks in. 

This bank will take into consideration what has happened to these people and give them mortgages and other loans in spite of their one unavoidable foreclosure.  What the exact lending guidelines would be would be up to the shareholders of this new bank.  They could determine who they thought was a good risk and who wasn't. 

Instead of people paying higher taxes in order to bailout the speculative risk takers so that "Innocent Bystanders" don't suffer, let's allow people to choose instead to invest in a bank that would lend money to "Innocent Bystanders" who suffered foreclosures through no fault of their own.

This will keep most of the pain of the losses where it truly belong: the people who took too much risk and the banks who lent them the money. 

Lessons must be learned and the best teacher is pain.  Pain is a very valuable feedback mechanism.  It teaches you what not to do.  If you didn't have severe pain when you touched a hot stove, you might keep your hand on it until you had severe burns and complete loss of it's function.

Let the people and banks who made bad decisions feel the necessary pain so that this all doesn't happen again.  If we don't learn from all of this and just try to go back to the way things were that created this mess, we might end up in a severe depression and maybe a nonfunctional financial system.

Rick Santelli on CNBC this morning went off on a rant about the new foreclosure plan put out yesterday by President Obama.

Wow!! He was on a roll.  He reports from the floor of the Chicago Exchange right there amongst the traders.  It sounded like many on the floor agreed with what he said.

This is a very entertaining clip to watch.  Slowly but surely, more people are starting to wake up and really get ticked off at what's happening. 

 

Here's Rick Santelli and Steve Leisman going at it on the Kudlow Show later on in the day. I love the debate.

Here's a panel discussion where they have 7 people chiming in on the topic. 

This is exactly what we need to happen. We need to really debate this issue. I love it.  I can watch this stuff all day.

Karl Denninger at The Market Ticker explains the reason we have illiquid assets. Even a caveman can understand it.

Very simply, illiquid assets are created when a buyer and seller can't come to an agreement on price.  The gap between the bid and ask price is just too large.

What's creating this gap that can't be bridged?  Answer this and you can have a chance at finding the solution.

Let's say that a bank has a mortgage backed security that is worth 50 cents on the dollar.  As long as the  bank thinks that the government might come in and eventually bail them out at 80 or 90 cents on the dollar, they will never agree to sell at 50 cents.

With the government constantly changing the rules of the game, an investor has to price in the possibility that the government will change the game to their detriment after they make their investment.  So instead of offering 50 cents, they might feel they need a safety cushion and only offer 30 cents on the dollar.

If both parties weren't calculating the possibilities of bailouts or rule changes, both parties would be able to find a price that worked for them and the markets would magically unfreeze. People would be able to make rational decisions and get moving again.

Watch this video as Karl Denninger explains it.

Lately, it seems that  the consensus opinion is that buyers should be encouraged to put 20% down.  I disagree.  With uncertain times, I think it would be prudent to keep as much of your cash in liquid form as possible. 

Brian Brady's featured post today touched on this topic and I wanted to share my thinking on the matter.

Let's say that you are buying a home for $300,000.  You have the funds to put 20% down ($60,000) but you wonder if you should maybe use an FHA loan and  put down only 3.5% down ($10,000).  Let's say that the higher payments with less down are still affordable to you.

Is it better to have your extra $50,000 stuck in your equity in your home or is it better to keep your $50,000 stuffed in your mattress where you have access to it at any time?

I like to be positive but I also like to be prepared for a worst case scenario.  What if you lose your job next month?  How long can you keep paying your mortgage? 

If you only put 3% down you'd still have immediate access to the $50,000 stashed in your mattress.  That would allow you to continue making payments for around 30 more months without dipping into any other reserve funds. 

But what if that $50,000 instead was tied up in the equity of your home?   Can you get a loan against your equity if you just lost your job?  How long can you keep on making your mortgage payment?

Then when you can't make your payments anymore, the bank will foreclose and sell your home on the court house steps.  Say good-bye to your $60,000 in equity.  The bank will probably buy it back for just the amount of  money that is owed on it.  Maybe if the bank had a bigger loan on it, the bank would try to sell it at a higher price.

With such uncertain times, I think that it is only prudent to keep as much liquid cash as possible in a reserve fund.

Low interest rates also make it more attractive to finance as much as possible.  I think it's crazy that the banks are lending money at 4.75% for 30 years.  Would you be lending money out at those rates with so much uncertainty?   Money is on sale right now so you might as well take advantage of it.

Just make sure that you keep the extra money that you didn't put down on the house in a very liquid reserve fund.  Don't go out and spend it. 

Putting more money down on  a house will make a banker very happy.  It gives them more security.  But giving them more security leaves you with less.       

Here's an update from Ron Paul on the Stimulus Bill.  No one had access to the final bill until midnight last night.  No one really had time to read it.  Many items were leaked to the press ahead of time by various staffers so it ended up that some of the media people knew about key provisions before most of the Congress people.

I like how he says that he likes how Republicans have talked  a tough talk lately when it comes to spending but why haven't they been talking this way for the last 8 years. 

I like Ron Paul a lot.  He's one of the few politicians who I really admire.  He at least gives me a glimmer of hope that good people can actually get elected.

This is a tough market to sell your home. Right?

You definitely need the experience and resources of a trained professional. Right?

Then how come a former client of mine just got their home sold by themselves for a pretty good price in about two months?

I sold a home to  a young couple about five years ago for $267,000.  It was down in the Toco Hills area of Atlanta.  They called me up  a few months ago telling me that they were opening up a new chiropractic office up in Roswell and they wanted to start looking at homes closer to their office. 

We spent a couple of days looking and found a really nice home.  Unfortunately, they needed to sell their home first.  Unfortunately for me, they wanted to try to sell it themselves in order to maximize their equity that they would net out.  They said if it didn't sell in a month or two that they would call me to get it listed.

I wished them luck and figured I'd be hearing from them.  They were pricing it at $335,000 while I thought it probably should be around $319,000.

A few months later they called me and told me their good news.  They had their home under contract for $315,000 with no agent commissions at all.

I was really excited for them.  They said they had made some flyers, posted it on some websites, had some open houses and just spread the word around.  It truly amazed me that in this difficult market, they were able to get their home sold at a pretty good price. 

The final unfortunate thing as far as my part is that they then also decided to rent an apartment for a couple of years so that they could have  a reserve to fall back on until their new business got established.

They are a really nice couple and I really admire their hard work and diligence.

I usually recommend that sellers try to do it themselves at first.  At least stick a sign in the front yard and see what happens.  If they happen to get a buyer who's interested, I offer to help take it from contract to close for a small fee.  I love helping people save money. 

A few times like this one, I end up with nothing.  But I'm sure that when they are ready to buy in a couple of years, I'll get the call. When their business takes off and they can buy a million dollar home, I'll be there for them.

 

 

What if our economy was built around the swimming pool industry? Building swimming pools requires designers, laborers, pumps and filters, and a whole chain of maintenance people.  It creates a lot of jobs.

Politicians might campaign on the slogan,   "What this country needs is a swimming pool in every back yard." People need to be happy and healthy, don't they?  Wouldn't this come under the Constitution's "promote the general welfare" clause?

What if we gave nice tax breaks to people who owned swimming pools?   The bigger the pool, the bigger the tax break.  Special tax credits would encourage people to build lavish pools.  Many people would build pools just because the tax benefits made them so cheap. 

The swimming pool industry would keep growing and become a bigger and bigger part of our economy.  More of our collective resources would be driven into the building and maintaining of swimming pools.  Many jobs would be created, especially jobs that didn't require much training or education.  The health of the economy would eventually become dependent on swimming pools.  The swimming pool index would be closely followed.

Sooner or later, everyone who wanted a pool would have a pool.  The slowdown to the swimming pool industry would ripple through to other parts of the economy.  

Politicians would feel the need to do something.  They couldn't stand by and watch  people lose their jobs.  They'd want  to take  very bold action to stimulate the swimming pool industry and thus the overall economy.  The government might  then embark on a huge public swimming pool building works program.   If individuals aren't going to spend the money for new pools, then it's up to the government to step in and do the spending for them.  Someone has to take the dive and make a big splash.

Maybe they would also give big tax credits  of up to $15,000 to any home owner who decided to build a new swimming pool in their own backyard.

Eventually, taxes would have to be increased in order to pay for all of these swimming pools and tax credits that were given out. People would pay so much in taxes that there wouldn't be much money left to cover  the basics of life, let alone the maintenance of all of the swimming pools.  People would be pool rich but would go hungry.  Many pools would fall into disrepair and be breeding grounds for mosquitoes.

What originally sounded so good ended up having negative consequences.  Of course, all of the officials couldn't have seen it coming.  It was a once in a lifetime event that we would all have to work together to solve. 

 

The world has limited resources.  How we allocate these resources determines what kind of life we end up living.  When government gets involved, resources are allocated not by supply and demand signals of the free market, but by political decisions or by arrogant bureaucrats who believe they are smarter than the collective wisdom of the people. 

Yes, housing is a good thing.  It really sounds great for the government to get involved in helping the housing industry.  But for every dollar that is directed by the government to be spent in one area, it's a dollar that isn't being spent on something that could possibly be much better. 

It comes down to which is better at allocating resources, the free market or the government? 

Are home warrenties worth the money?   Some people swear by them.  I personally swear at them.  

Home warrenties are an insurance policy that covers many items in your home. They cost about $400/year.  When something breaks down, you call their 800 number and they send someone out to try to fix it.  Usually you pay a $50-$70 trip charge, kind of like a deductible. 

They say they will either fix the problem or replace it.   Sounds pretty good.  Especially since they don't send someone out to inspect the condition of your home and they don't care how old your home is.  

But let's be real.  Insurance companies have to make money and they don't do that by paying out any more claims than they really have to.   So one needs to know what the exceptions to the coverage are.  

I guess the bottom line is to see what customers are saying.  Just do a Google search and you'll find plenty of customer reviews for various plans.  It seems that there are a lot of unhappy campers.   http://www.consumeraffairs.com/insurance/am_home.html     http://www.consumeraffairs.com/news04/2008/03/home_warranties.html     http://www.consumeraffairs.com/homeowners/old_republic.html  

Here is a link to a site by a guy who worked on the inside of one of these companies.  It explains a lot.  He explains how the system works.   http://www.syix.com/emu/html/ahs.html  

Here is a sample contract.  I challenge you to read it completely and to understand exactly what you are buying, and more importantly, what you are not buying.   I don't know about you, but it makes my head hurt.   

I personally have experienced these plans.  I bought an older home with a 25 year old hot water heater.   I thought a $400 home warranty would be a bargain because I was probabaly going to have to get the hot water heater replaced.  I waited for two years before the hot water heater started to leak.  It was on a Friday night.    The bottom line is that the plumber they sent charged me $1350.  The home warranty company paid $400 for the actual hot water heater but none of the other stuff such as disposal fees and code upgrades.  With the weekend coming up and a wife and kids wanting to take showers, I wasn't in a position to negotiate fees.  I sucked it up and paid.  

The next week I had a plumber over for another problem.  I showed him what the other plumber had done.  He said that it was probably a $900 job.  That's how much I ended up paying even after the home warranty company payed $400 for the hot water heater.    I thought I could beat the system and get something for nothing but I should have known better.  

Since then, I've read about how to beat them at their own game.  I learned a lot from this post here on ActiveRain by Beverly Cohen.  She says that one should be ready to take the home warranty company to court if they don't pay.  There are several big reasons why the company will probably be willing to pay you off instead of having to go to court.

Here's another good strategy by another ActiveRain blogger, Russel Ray.  He says to write them a letter demanding your money for your claim and also note that you are sending the same letter to the state insurance commissioner.  He says it gets immediate results.

If you enjoy the game of trying to get paid by insurance companies, go ahead and buy one of these policies.  But if you're like me, when I have a problem, I just want it fixed and I don't want to worry about being ripped off. I would just take that money and start your own reserve fund.  Make monthly payments to it just as if you were having to pay a condo HOA fee. 

Also, use a site such as Angies List or Kudzu to put together a list of good service people who you can call when something breaks down. 

If you don't have a few thousand dollars available to cover an immediate emergency, then you might want to reconsider whether or not you should actually be buying a home right now.