I've been thinking

Here are a few thoughts for the day:

I have been examining my pro-capitalist stance with all this mortgage stuff. There is one ingredient that should be in this mess that is not. What's missing is transparency. For capitalism/free markets to work, you need buyers and sellers who actually know what they are buying and selling. This mortgage-backed security stuff is missing transparency. It's not really mortgages that are being bought and sold. It's mortgage-backed securities. It's mystery meat from your high school cafeteria. It's various wild, weird, wacky stuff that is hard to realy get a grip on. It's too complex. The free market has been usurped by marketing. Form over substance. It's nuts.

The financial world is out of whack.

The other issue is inflation. All this money going for bail outs for lenders/big-time Wall Street investment companies, and yes, the silly voter stimulus package has to come from somewhere. The short version is that the Federal Reserve is just going to print more money. We'll borrow from China and elsewhere. We'll print billions of dollars to pay them back. Then there will be lots of extra dollars floating around. There will be so much money out there that we will be in a big inflationary situation next. It might take two to four years, but it's the only thing that can happen. We may well end up back in double-digit inflation.

So far as local real estate investing goes, maybe take advantage of deals for buy and hold (rentals). If getting loans fits your program, now is probably not a bad time to borrow, if you have good credit. Try to get fixed-rate loans. In the back of your mind, remember that before too long, we're going to be in an inflationary time. It's too early to act on it, but not too early to think about how you will approach inflationary times in your business.

Ben Bernanke and the Fed: Masters of 3-Card Monte

You have probably seen this game on TV. The guy on the street offers to play a game with a passer-by where there are three cards, one red and the other two black. He moves the cards around and asks you to pick the red card. The first time or two you get it right, then the street guy offers to let you win some money at this. Before you know it, you've lost all your money. Often times there is a shill or confederate involved.

Well, in my opinion, we are getting into the same thing with the Fed. Today it was announced that JP Morgan bought Bear Sterns, a big investment bank that was about to go bankrupt. (People lost confidence in them and more or less made a run on the bank to get their money out. Bear Stearns is an investment bank, and for that reason, deposits, investments, etc. didn't have FDIC insurance. If the bank bit the dust, the customers would not get their money back through Uncle Sam.) The Fed is lending this private company, JP Morgan, money to buy the company at $2 per share. Last week it was worth $30 a share and earlier this month it was worth $70 a share. (One of the guys at Bear Stern said the building alone is worth $8 a share...talk about a motivated seller!) Anyway, the Fed is lending the money through a back-door method since there charter doesn't allow them to take collateral directly. They are taking bonds as collateral. Funny thing...these bonds are those good-old mortgage-backed securities that nobody really wants now because people are in default on a lot of the mortgages.

This is the 3-card Monte part: How different is it to take the bonds as collateral instead of the bonds themselves? I am not a banker, BUT to me it seems like a difference without a distinction. This will make things interesting down the road. What will the Fed do with this collateral? My guess is...NOTHING. They want the mortgages (and the houses that would be foreclosed on) even less than the banks. They are even less prepared to take care of a bunch of re-po'd houses than the banks, that's for sure. And as a quasi-governmental organization, I don't think they really want the doo-doo on their fingers that comes from kicking citizens out of their homes. The Fed is supposed to HELP people with their foreclosure problems (or at least be trying to prevent an economic collapse), not foreclose on them.

If the intent was to actually secure the loan to JP Morgan (and others who will soon come to Uncle Sugar for a hand out), they made a foolish move in accepting collateral they would never want to own. They will never hold Morgan's feet to the fire if they, too, can't perform. My feeling is that there isn't really any intent to collect on that loan. It's just to make the hand-out appear to be a loan, and thus more palatable to the public at large. I also think it is a trial balloon. If there is no outcry (which there won't be), we will be paying for more of these mega-loans, one way or the other.

So what's the big picture? I'm not sure yet. I think we will end up gumming things up by trying to fix them. I think the law of unintended consequences will kick in, and at some point, we will find ourselves in more trouble than we would have been if we let the market thrash these banks. Being greedy, they would involve themselves directly or indirectly with making loans to people who won't or can't pay, and the market needs to correct them.

Louisville KY Real Estate: Want To Hear Something New?

Yes, my panties are in a bunch over the mortgage mess. It's something that is in the news all the time. It affects our business. But hey, I'm getting a little tired of writing about it so much. Can't help it. If you want to hear something different, do me a favor and email me or leave a comment as to what you want to hear about. Or else I'll just jaw-jaw about it some more...Thanks.

Louisville KY Real Estate: What Happens in Cleveland Stays in Cleveland? Only if They Can't Get Loot From Lenders

Ahhh yes...who doesn't remember with fondness the first time they saw the motion picture classic Godzilla -vs- King Kong?



Well, in case you didn't see it the first time, you can see it played out in real life up in Cleveland, Ohio. As kind of reported by MSNBC, in one corner is a whole slew of evil lenders backed by the power of L.O.O.T. In the other corner is the power of the local government. The Cleveland folks are honked-off because the city is getting stuck with costs of boarding up, demolishing, etc. houses that have been foreclosed on, etc. (at least until they can find some unsuspecting investor/buyer to pin it on...but even that strategy can't work so well anymore since there are fewer investors). They also don't cotton to the declining property values that are the result of too many houses for sale and not enough buyers. That is bad for property tax revenue. They are suing based on a public nuisance law, you know the one that says if a home owner moves out of a house and it causes problems, the people who lent the purchase money should pay (?!?!?).



But never fear! Old Milton Friedman was right: when government gets too much power, corporate interests focus on getting involved with it. One-stop-shopping, don't you know. Again, humongo multi-national lenders will not be deterred by the minimal power the city government can wield. They will have their lawyers quash this attempt. If it starts getting a little too popular, they will exert influence at the federal level, rather than playing "whack-a-mole" with every small-medium-large city government in the nation.



So, in the final analysis Godzilla -vs- Kitty might be the better movie comparison:

PS: Mayor Jackson of Cleveland was quoted as saying "We have to hold accountable those who are responsible" (as he presented his reasons for suing lenders).

Does this include people who signed promises to pay loans back but didn't? How about the big institutional investors who wanted to buy C and D paper to theoretically pump up the return on Grandpa's retirement account? Does this include the Federal Government who encouraged lenders to make home ownership available to people who weren't likely to repay the loans? Does this include real estate/mortgage salespeople/brokers who helped people believe they could get into these homes they really couldn't afford? Or is accountability just for those mega-lenders with really deep pockets who offered the crummy loans whom we think we have at least some chance of getting loot from? Just wondering.

Louisville KY Real Estate: Alert The Media: I Have Something Nice to Say

Well, I just read the article in the Louisville Communist-Journal about the new program to get info to folks in default on their mortgages (here). Overall, it sounds OK. They have folks on phones explaining to defaulting homeowners about what their options are. Can't argue much with that.

I wonder if they also explain that when you sign a contract there CAN be unwanted consequences for non-performance?

OK, I guess that last part wasn't very nice.

Did Coffey Count Chickens Too Soon?

OK, I just read the Senate Republicans blocked the Democrats' effort to add $40 billion to the tax rebate. Did I jump the gun? Time will tell.

2/11/2008 Update on the Update: The McConnell amendment included the veterans, food stamps, etc. I guess I was right...Forget about the counting chickens too soon stuff

Dave's Crystal Ball Is Working

Today's Communist-Journal had a story (however, I had to go here to find it online) today about the Senate adding $40 billion (that's 40,000 millions of dollars) to the economic stimulus flap doodle tax rebate. Not to sound all Rush Limbaugh-y, but I told you so. Has anyone else thought that if they can afford a rebate, maybe they took too much to begin with? Nawwww, it's only money. We have lots of paper and ink, so we can always just make more. I even heard Congress is thinking of changing the name of the Department of the Treasury to The Department of Printing. Gives a whole new meaning to the phrase "freedom of the press", doesn't it?

Be Safe Out There

"Always bet on black."

-Wesley Snipes, noted economist

Well, in the big picture, I think the economy will bounce back. It's a safe bet we won't stay in the red forever. It will take longer than it should because both major political parties will race to proove that they are the most generous by giving away taxpayer money in order to get votes during this upcoming election.

My feeling is that from here on out, it might do us well to do things like not use leverage like crazy. And as a corrollary of that, focus on cashflow first, then things like taxes and equity build up. Get properties (like these)that lots of decent tenants would want to live in. Maintain those properties. Go for making more money on each rental instead of haveing alot of rentals, each of which makes you about $10 a month. Remember; the goal is to make alot of money, NOT just to be able to say you have a lot of properties.

Louisville Real Estate: Which candidate is best for us?

I watched the Republican debate tonight. Sad, sad sad. We have McCain, who is a "loose cannon" and closet Democrat, Romney who is flip-flopper, and Huckabee who thinks the government is to be a tool to implement the social gospel. The only one who makes any sense is Ron Paul and thusly was marginalized.

I try not to be a conspiracy nut, but am I the only one who thought the media focused almost entirely on McCain and Romney? Huckabee kept voicing his need for attention and was repeatedly neglected. Paul was consistently overlooked, and I'm sure it's because ofthis:

1) He promotes personal responsibility, and

2) Americans sure don't anything to do with THAT!

So which guy or gal do you think is the right one to lead our country, at least from the stand point of the real estate business point of view. See the upper right hand corner to vote in my online survey.

Latest Statistics On Real Estate Listings and Sales for Louisville, KY

Here are the latest statistics from the Greater Louisville Association of Realtors:

LISTINGS

Jan. 14 - 27, 2008
1380
Last year
1239

SOLDS

Jan. 6 - 19, 2008
380
Last year
386

Short version: About the same number sold as same period last year. Listings are up some. This would point to a buyer's market, still. Like I said, time to be buying rentals.

Remember when I said "Everybody's a Victim..."?

OK, the foreclosure mess has found a new class of victims...CATS. Yes, fluffy kitties given up when foreclosed homeowners move into rental properties. It's almost like the artist who set this web site up was sitting around thinking "what will I do with these 743 paintings of cats no one seems to want to buy?...I know I'll make it topical! The Katrina Kats Project didn't go over too well, but I'll bet this mortgage thing will sell a few!" So here we are: Everybody and their pets are victims! It's official; it's the end of the world. Beam me up, Scotty!

Santa or Satan Follow-up

Dr. Evil Lender Will Fight For His Rights

See my previous post on George Bush and the Meltdown from December 19, 2007 to get yourself up to speed. I'll wait...

OK, done? Good.

Here's the thought for the day: If these contracts between lenders and borrowers, which are completely legal, can be modified by the coercive force of the U. S. Government, what will stop Uncle Sam from sticking his nose into other contracts? Once he gets a taste of this, how likely is it he will back off and not use this power again? I think it would prove too tempting for our pandering politicians on Planet Washingtron to resist. Looks like it could be a slippery slope, but wait...

If in theory, in some "pretend" world, there was a conflict in which you pitted the interests of maybe 1% of the population that had no money due to setbacks in the world of real estate versus the interests of the biggest muli-billion dollar, multi-national banks on the whole planet...Who do you think would "win" that conflict?

My betting money is on the banking lobbyists and the attorneys retained by the mega-lenders. Freezing ARMs at teaser rates for 5 years sounds good while trying to round up voters, but won't do anything good for the banks. I am sure highly effective lobbyists are out there even as you read this, greasing palms and negotiating to prevent anything from happening that might harm the interests of the lenders. The banks' super-nerd attorneys are burning the midnight oil preparing constitutional challenges, etc. to anything that might unwind these deals. My goodness, man! There are CEO stock options, golden parachutes and whatnot at stake here! We can't allow these deals to go bad! No, the Clintonian (and other campaigns) sound bites will turn out to be just sound bites. The only reason to make "stick up for the little guy" noise is to get his vote. Their words will get them elected, after that they will be "safe" from the voters and do what they need to do to keep the corporate contributors happy.

PS: If they DO get these loans frozen, it's gonna get even harder to borrow money. What lender wants to lend money and have Uncle Sam be ready, willing and able to come in and destroy their profit?

PPS: What problems would occur if the US government set precedent by doing this and decided it was therefore OK to stick his nose into other legal contracts? Discuss amongst yourselves.

Mayor Jerry Abramson Johnny-On-The-Spot: NOT

I was looking over the Louisville Communist-Journal today when I saw this article about Big Jer (above, in all his sartorial splendor) making a big speech while on Planet Washingtron to a national mayor's meeting. I found it really interesting that he said

"Here's an idea: There is a local mortgage crisis, so lets have a festival and build us some more museums! That always helps!"

OK, he didn't really say that. But he did say this:

"Poor residents have been victimized by predatory lending practices for many years..."

The article went on to say "In a few weeks Louisville will unveil a campaign to assist people facing foreclosures -- the result of a summit city officials had last fall with local lenders and counseling agencies." And went on to inform us "The city also is planning to set aside $350,000 to help residents facing default on their loans. The city will make available emergency loans of up to $5,000 per qualified homeowner. City leaders across America, Abramson said, 'need to create confidence among your constituents that you are there and are engaged.'"

Ok, here's the bug up my tailpipe, summarizing the article:

a) Preditory lending has occured here for years

b) He's the self-proclaimed "Mayor for Life", so he shoulda known about the above

c) He/Metro apparently didn't do much until they had a meeting a few months ago

d) The math works out to helping about 70 homeowners with that $350K. Not alot, considering there thousands of people defaulting on loans here.

e) Finally, a confession of sorts: the goal is to get your voters to feel like you (mayors) are "engaged". The unspoken part is that the goal doesn't have to be to really fix a whole lot. At this point, there isn't really a whole lot the local government can do, anyway. What we are going for is the good old "perception is reality" concept.

This leads us to the final analysis: fixing this whole thing is now a political issue. We are in the middle of a big presidential primary and the federal government will pass short-term feel-good legislation to delay the pain until after the election. Local government can only stand by and try to look like they are at least trying to do something. Again, it's about looking good for the next election, even if what you do doesn't actually fix anything, even if it's just a local election.

I still think the market will correct itself faster and better if we just let it take its natural course and keep government out of it. In fairness to Jer, there's not much he can do about all of this except try to look good through it and just don't let it get any stink on him before the next election. Looks like he's already got a grip on this concept.

Happy days are here again!

OK, I know it sounds like I've lost my mind, but these are great days for real estate investors.

If you read the papers and listen to the infotainment news programs, you would think this economy is done for. I don't know about you, but I have yet to see people jumping off bridges, guys in suits lining up at soup kitchens, or trying to sell apples on street corners for a nickel apiece just to get by. The economy has no doubt hit a rough patch, and it IS time to use common sense. However, I think think a little dose of reality therapy has been in order, anyway. Folks have forgotten you can't borrow your way to wealth by getting 95% LTV ARMs on investment property (and actually sleep at night) since they end up with neither cash flow nor equity.

Here's the part that's good for us: Everyone else seems to think it's "game over", and some sellers are getting a little desperate because, in the words of Zig Ziglar, their "thinkin' is stinkin'". Right now is the best time in a while to get into buy-and-hold real estate investing. I've heard it said that you want to sell when it's hard for folks to buy, and buy when it's hard to sell. Right now, sellers are having a harder time selling, even if it's just in their own minds.

For you conservative folks looking for a way to build for retirement, here's a thought: Find a great deal, fix what needs fixing, rent or lease option it, and start over looking for another one. Since real estate values may be in a state of flux, this works kind of like dollar cost averaging in mutual funds. Do yourself a favor, too, and when you borrow, don't over leverage and don't take excess cash from closing. Just take whatever you need to buy that next one, and forget about buying that jet ski, RV, or whatever. There's time for that later. Your job is to take advantage of the current market and not end up being that guy selling apples on the corner. BTW, don't quit your day job.

Everybody's a Victim

OK, I'll try not to do this too often, but I gotta say it: is the highest ambition of the average American to be viewed as a victim? It just seems like no matter what the situation, folks just can't bear to admit that they have taken part in causing their own problems. (Yeah, I know, sometimes people don't cause their troubles, but that is not the topic of discussion today.)

The reason the local attorneys running their "Help Me Find Someone to Sue" ads continue to run these ads is because they are making money at it. And they are making money at it because people see the ad and pick up the phone. And they are picking up the phone because they see they have a shot at getting paid to play "Lawsuit Lotto". It doesn't cost anything to spin the wheel. There is nothing to lose. Greed makes the game work, just like in Las Vegas.

I am a mind reader. I can hear your thoughts. You are thinking "Hey, Dave, what does this have to do with real estate in Louisville, KY?" Here's the deal...all this sub prime meltdown stuff is getting on my last nerve. The borrowers think they are victims. The salesmen types think they are the victims. The banks think they are victims. The institutional investors think they are getting the short end of the stick. Here is the moment of clarity: Most everyone knew it wasn't going to end well, and they did what they did for their own benefit. Some would even call it greed. Just like in Vegas, even with a fair game, the fun doesn't last forever.

Yes, I think the people who acted illegally should be punished. However, a bad outcome doesn't mean we have to get out the torches and the pitchforks and try to hurt folks (or institutions) because something bad has happened. I also think that if we stay away from Uncle Sugar handouts we will do better. In the end, the free-market economy and dare I say it's name...CAPITALISM
will actually fix most of this stuff in the most efficient and effective manner.

So what do YOU think? Post a comment.

P.S. Just for the record, anyone who ripped off people who seriously just didn't understand (which probably isn't the majority of folks who got those overleveraged ARMs) needs to be sent to h*&l wearing gasoline shorts. Thanks.