6
Your Home.
Were All Going to be Gazillionaires!
"… every
public spectacle begins with a lie.
Later it develops into mass illusion, self-congratulation,
hallucination, farce and … finally … disaster. Until the disaster comes, you never
quite know where you are. Because
for every imbecility that comes along, there are dozens of hallucinators who
are eager to put it over on the people … and at least half the population
is ready to believe it. (For) even
while the money flows… Americans get poorer every day."
- Bill Bonner
Per a conversation with a real estate
appraiser recently, I was very
emphatically informed that "many" are now starting to feel Real
Estate is no longer a speculative investment. It's been collectively determined that
all the kinks have been worked out and we no longer need be afraid. This conclusion appears to have been
reached because on the now common belief that risk has been watered down mainly
because debt is now so spread out amongst thousands of investors - and
countries, I might add - and, of course the (wink, wink, nod, nod) belief that The
Fed will not allow Fannie Mae and Freddie Mac to fall. The Fed will continue to pump money into
these two entities forever and all will be good. In my usual manner, let's follow this
conversation up with an experience that happened to me recently. First, let me set the stage - perhaps
you've been here as well - it's seems to be an increasingly common occurrence
now-a-days:
Ok, I'm at a
party. You know the one's, yet
another outdoor barbeque celebrating "whatever" that almost always
involves SAMS pre-packaged hamburger patties, hotdogs by the millions (for the
kids…) and a keg of some sort of ultra light colored beverage that began
to taste iffy after the second draining.
After the bellies are full of hamburgers, hotdogs and beverage, the sun
starts to go down, the Xmas lights in the tress start to fill the summer nights
cool air with talk of - you guessed it - "Mammoth Home Appreciation!"
There I am
sitting in my molded plastic chair absolutely stupefied at this unlikely turn of
conversation about the off the wall profits to made in
"Are
you kidding me with this!" I'm
about to shout, when the thunderbolt of realization hits me like a two
dollar-a-gallon gas price increase.
"I'VE HEARD THIS BEFORE!"
What I'm talking
about here people, is the unrealistic expectation on the rising of home values
(and personal "wealth," I might add) in
You see that one act of unselfishness
three years ago has been rewarded with tens of thousands of dollars of
"Phantom Appreciation" in home value and personal wealth.
"You
know, we can't sell now… but in a couple of years, when we move - just
think what we'll get for this place!
(Even though we haven't sunk a dime into it other than painting panda
bears and giraffes on the walls of juniors room)."
All this for just
being them. Being in "the
right place at the right time."
We homeowners are being rewarded for being responsible citizens,
parents, neighbors, etc. How lucky
and how fortunate for us.
AND
HOW VERY UNREASONABLE!
YOU'RE
NOT THAT LUCKY!
This
"phenomenon" is no different than the latest diet craze (read:
Adkins) that says very simply that YOU can eat anything you want - you know,
all the "bad" stuff you have been told to lie off of for decades -
and you will still lose weight.
"It's not your fault…" What else could be easier?!
It's
not that easy and you know it.
Latest
headline from the Denver Post, March 2005:
" Sixteen
Here we go
again. We ALL knew this was too
good to be true and here come the latest round of scandals.
1)
Inflated appraisals. Did you honestly believe your home has
really appreciated by 37.78%[1]
in one year! As most things
relating to human nature and its propensity for gluttony, when times are good -
or great! - As say the stock market boom of the late 1990's, people have an
uncanny ability to see or even mind the obvious. Not even the regulators we are paying to
pay attention. My argument is that
real estate brokers and appraisers are conspiring to inflate home values. More often than not, these 'friendships'
are pushing unsuspecting or just plain gullible buyers into homes they cannot
afford to begin with.
Home
appraisers have been complaining lately of being 'under intense pressure to
inflate home values.' Under the
threat of being 'blacklisted' if they cannot "get the deal done."
Being most
Americans are already up to their ears in debt to begin with, the share of the
mortgage market is shrinking. And
when things tend to shrink with Al LOT of people crowded into increasingly
confined spaces, then two things happen.
1) The lenders who are not willing to play this game fall off the map,
and 2) the ones still playing the game are competing for and increasingly
shrinking market. It's survival of
the fittest! So they have to employ
gimmicks, games, bait-and-switch, and the latest ploy: leaning on appraisers to
inflate the value of a home so they can push through a mortgage that would
normally be thrown out.
And at the center
of this deception and inflation game, we have little Mr. and Ms. American
Homebuyer. Content in the fact they
have bought a slice of the American dream - four walls and a roof. As pleased with themselves (thank you
very much) for buying an 'appreciating asset.' Everybody wins! The brokers get his commission, the
appraiser gets his fee and the borrower - Mr. & Mrs. American Homebuyer -
the BORROWER has paid for the 'peace of mind' of knowing that his home is worth
more than what they paid for it. Of
course when you pull back the rug to reveal the dirt swept under the carpet,
what we have here is actually a homebuyer that have over borrowed on and asset that is overvalued! As long g as the market continues to
'boom' then the rug will quietly be put back in it's original position. Let's just hope no one looks under
here….
2)
"Asset-based loans." Once upon a time LONG AGO, a lender
usually based his willingness to loan YOU money based on you ability to repay
said loan. Ah, the good old
days… Well when were all
trying to get rich this notion of ability to repay is antiquated to say the
least. Why bother when the asset -
in this case the property itself - continues to go up in value (partly because
of reason stated in #1). Well a
funny thing happens when the inanimate object itself - the property being lent
on - takes precedence over the individual(s) ability to pay the loan back. The individual - himself - has become the
disposable asset. YOU’RE THE
MEAT HERE! That’s All!
Here’s
a quote from a mortgage analyst - who for obvious reasons after your read this
smugness, asked not to be named - that I think perfectly illustrates this
point:
“If you can fog a mirror, you can
get a home loan.”
What
we have been hearing about recently in the rumor will that is the internet, is
a deliberate practice of approving borrowers for loaned on properties they have
no business buying in the first place.
Here's how it works. A lender in the good-ole-days
contemplated your loan request on your income, credit score and your general
ability to repay this loan in a timely manner. Not so in the heady days of
2004-05! This antiquated notion as
bee supplanted by the now common belief that the lenders should be basing their
lending decisions on the equity of the home itself! Sometimes almost exclusively on the equity itself!
Do you understand what this means?! You the homebuyer have become the patsy
in this stacked scenario. They are
setting you up to fail! In fact, -
I would suspect in some cases - they want you to default.
Now this is simply rumor and conjecture,
but I, Gary Crook, have spent a lifetime studying human nature. While humans continually surprise me,
for the most part - I've gotten pretty good at this game. So if we put ourselves in the shoes of
Mr. Unscrupulous Broker and look at the 'big picture' as a possible business
model, we have an interesting and potentially profitable scenario
developing.
First we get our boy, we'll call him
Arnold out to appraise the property on
Now this is an extreme case, however
there is the very real possibility this broker is only interested in the
property itself. A possible
business model for this deception has been rumored to be (especially in the
case of mobile homes and manufactured housing, condo's and the like where the
seller still hold the note) to deliberately get an unqualified buyer into a
property they cannot afford simply to take it back through foreclosure and
resell it again at inflated values.
This has been an 'unspoken' business model for many a mobile home
manufacturer, now apparently this has wormed its way into the sub-prime home
market. All with the approval of
the feds. They are not breaking any
laws, but does that make it right?
However, like the stock market boom of
the late 90's and the story previously, their are some major difference between
the 90's speculation on stocks and the 2004-05's speculation of real estate
values. 1) The stock market boom
was largely financed with IRA's, 401K's and equity ALREADY in the bank. While many people got wiped out, for the
most part they only hurt themselves.
Now, 2) the real estate boom of 2004-05,
has - by contrast - been largely funded by debt! Debt capitol such as mortgages, second
mortgages, c4redit lines on appreciation (inflated) and other loans. This is huge!
But, until the inevitable day of
reckoning arrives and kicks the carpet up to reveal all the dirt you should
probably continue to hear wonderful stories of riches and backslapping
recollections of "investor prowess."
And if you really
pay attention, you will continue to hear conversations like this in elevators,
fast food lines and in hundreds of cell phone conversations as soon as the
pilot says it's ok to turn on your electronic devices: "We bought this
house two weeks ago (or years - it really doesn't matter, were all going to be
gazillionaires!) for 180K and can you believe I just heard the Jones's house
down the street just went for 320K!
……. And it's a smaller house!"
Now to try and bring
this full circle, if you'll indulge me, I'd like to take you back in time to
the heady days of the "Summer of Love." The blazing hot summer of 1999. The
I leave my house
on a balmy summer evening in
Anyway,
let me give you a snippet of that conversation:
"Yea, I just bought another 100
shares of XYZ.com (made up .com to protect the "taken") on MARGIN
(!). My cousin's girlfriend works
there. She doesn't make a lot of
money now, but she's got a ton of options.
With all the options she has…. Man, on paper this chick is… loaded! ……
…
What was saying again?
Oh, yea, anyway, she just bought a new
Ford Explorer and was able to use her options as collateral for a down
payment. This XYZ.com place is
unbelievable. My cousin told me the
other day they were going out to go see the (insert favorite basketball team
here) play and had to go home first to get her shoes! Must be nice to not have to wear shoes
to "work" (yes, he actually used "air quotes" here). Man he was pissed though - my cousin -
because they had floor tickets and parking was going to be murder. Apparently she does this all…
the… time… (trails off)
…
What was I saying again?
Oh yea, anyway, the company she works for
has some new product that's still "secret" (again, with the air
quotes) and is supposed to make the stock skyrocket. Appears this new "secret" was
accidentally leaked to the press and the stock has taken off. I have no idea what this product is, all
I know is I bought this stock a week ago at $80. Now it's trading at $90. Everyone say's it got nowhere to go but
up. My cousin bought it way back in
March at like $50 and is making a killing.
He says he's holding on to it and is going to buy some more. That's all I needed to hear,
The insanity went on longer, but I'll
spare you more details. My point of
this time travel experiment to the summer of 1999 and my barbeque eavesdropping
of the summer of 2004, is not only that we have two different conversations 5
years apart and they both involved food and took place during the summer. But, they do have one very important
similarity in common "HYPE!" and very unrealistic expectations and
values.
Cummon! "Twentysomethings" buying
Internet stocks (or ANY stock for that matter) on MARGIN to begin with and the
hyped values of a workplace that doesn't even require shoes; combined with 120K
profit in only two years on a home in
Something REALLY stinks here and A LOT of
people nationwide are going to get hurt and hurt bad. And instead of just Wall Street not
being your friend this go around, you have of course, the Federal Treasury and
our boy Alan Greenspan, the collective efforts of central baking systems (not
only nationwide but worldwide.
Read:
To further
illustrate this point, if you'll indulge me, I'd like to quote one of the most
eloquent and prolific writers on this subject. Heeeeeeeerrrrrr's Bill Bonner of The Daily Reckoning, circa March 18,
2005 or there abouts:
" Everyone
loves a good fraud. And no fraud is
so lovable as getting something for nothing. That is what the supply-siders (economic
theorists) seemed to promise.
Government could spend more… and cut taxes at the same time. For a while, it even seemed to
work.
But real booms
need real money. Typically, a
person saves money when he is wary and spends it when he is flush. The spending is real. The money is real. The boom in sales is real. The profits are real.
But a boom built
on phony money is itself phony.
Every step of the way takes him in the wrong direction. The demand is an illusion. The spending is a mistake. The money itself is suspect. And the resulting business profits are not
merely temporary; they are nothing more than next years sales disguised as this
years earnings.
A man who borrows
money to begin his spending spree contributes nothing to the economy. Every dollar he spends must someday be
withdrawn. It must be paid
back. Imagine that he borrows $1
million. In a small town, even that
sum might be enough to set off a boom.
He buys a new car. He goes
to a restaurant. He gives money to
church and charities. He takes a
holiday. He orders a new suit. He builds a new wing on his house. Soon, his money is out of his
pocket. But it is not gone. It has found a new home in pockets all over
town. And now the butcher, the
baker, the builder, the travel agent, and many others are planning little
additions of their own standards of living.
But imagine the
disappointment when, the following year, the man that spent so freely no longer
comes around. He is not seen at the
tailor, or at the travel agent, or at the restaurant, or the car dealer. He is not even seen so frequently at his
old haunts. It seems to all of them
that something has happened. Not
only does he not spend as freely as he did the year before, he barely spends at
all. For now he must cut back his
regular spending by enough to pay back the $1 million - plus interest. In other
words, net spending in the town will
actually go down, over a multi-year period, by the amount of interest he pays (assuming the loan came from
outside the community)."
What does this
have to do with the treasury, the homebuyers and investor citizens you
ask? Well, besides the collective
assumptions of buyers on the unrealistic appreciation expectations of their
purchases, you've got the USA Treasury and this administration itself baiting
buyers all the way.
First off there
has been NO economic recovery!
Merely smoke and Mirrors and slight of hand. Re-read Bonners quote again for
clarification, if need be. And this
is NOT new nor is it unique to this administration or to the
In order to stem the economic decline, in
March 2000, (but really came to a head on September 11, 2001), the treasury
department of the United State started flooding money into the market via the
bonds it sells to banks and other lenders.
What does that mean to me you might ask? Well it kind of goes something like
this:
The federal government makes money
available at very low rates - to loan lenders such as mortgage companies and/or
banks, etc. In this case rates went
all the way down to 1% for almost four years. These lenders get the loans - short term
- at 1% and turn around and lend it to, in this case, homeowners for say, a low
of 5%. They make their money on the
"spread" which in this case is 4%. The same goes for credit card issuers,
except they get the money at 1% and turn around and lend at a low of 7-8% on
up. It's a good deal, if- and only
if - interest rates stay low and the assets purchased and consequently backed
by the loan itself do not decrease in value.
To fully understand the implications of
decreasing assets it's important to understand that in today's fiat currency
environment where the money itself is NOT backed by an asset of it's own (like
the days of the GOLD standard - abandoned in the USA in 1971), but merely the
"word" of the issuer (in this case the United States Treasury) it
becomes vitally important that these assets do NOT lose their value. Otherwise the US Treasury Department
itself does not get its money back.
So now-a-days you see money is a commodity like any other. It is no different than oranges, pork
bellies, wheat, oil - you name it.
And the "price" of money varies just like other commodities
due to supply and demand. Kinda
like loan interest rates adjustments, gas fluctuations, credit card interest
rate fluxuations, etc. In this case the
Now this scenario is all fine and dandy
if the rates stay low, but what happens when they rise above the loan amount
itself? Well two things
happen: 1) the lender starts losing
money, because the original loan amount from the treasuries has gone above the
fixed rate loan amount for say a house.
And because economics is what it is, your home value starts to drop
because others have stopped buying since the "cost of money" has
risen to such a degree as to "cool the market" thus making home
values decrease. 2) Now if these
values decrease rapidly enough that the collateral (i.e. your home) cannot
support the loan (read: your home loan is upside down) than the bank will call
in the differential in one lump payment or force you to refinance more of the
discrepancy via at the new higher rate to make up the difference. If you cannot pay (or your credit or
debt burden has gotten so bad that you no longer qualify for the new loan -
which many will not be able to because the home industry is certainly not the
only ones extending "cheap credit" to record household debt), then
you will be foreclosed on. Plain
and simple - Don't let the door hit you in the ass. Now if this happens in large enough
volume, then the bank will be forced to dump yours and hundreds of other
depreciated homes and other mortgaged property on the market at pennies on the
dollar - thus collapsing the housing and credit bubbles.
Here's a quote for
the "The Economist," on this very subject. Bare in mind this magazine originates in
the
"At the same
time, by blaming
economic and financial imbalances.
And do you think
the government is going to step in and save you from this madness. Think again Pollyanna. They've got their own balloons to
contend with: collateral asset depreciation, wayward banks, pension plan
defaults, Medicare, Medicaid, Social Security (this does not even include the
trillions "barrowed" from the various trust funds that are not part
of the official Deficits numbers), military expenditures, Iraq and Afghanistan,
a sinking dollar and loss of foreign investor confidence and twin deficits
(federal and trade - this is the biggest one of all) - this, of course, is just
a VERY small sampling of inflated problems in the United States.
For an example of how bad it can really
get, here's an actual example OF THIS ripple effect in action. This actually happened.
This excerpt is taken
from Dan Ascani's, "Gold in a Deflationary Global Economy." I think this is a very well written
historical example of the Asian monetary Crisis of 1997 and the very real
possibility of a similar undertaking in the
" The problem in Asia in1997 began
in
Now let's bring this home with an
hypothetical scenario (because that happened 'over there' and has no relation
to us… right), if you will indulge me again:
First, Mr. White-collar CPA has been laid
off and had his job moved to
Now this is clearly unfair... After all - turning a blind eye to
admittedly the possibility of poor parenting decisions - Mr. White Collar CPA
was the victim here right? After
all the American Consumer is 2/3 of the spending in the
Is the Federal Government going to step
in and stop this "one-time" calamity in this "Soft Patch"
of a market we have.
"Well,"
you say, "Surely with Alan Greenspan at the helm, and the 'measured rise'
in interests rates' this won't happen?" One VERY important thing to remember
about Mr. Greenspan is he could give a Rats Ass about the American individual
or your precarious budgetary predicament.
Alan Greenspan's ONLY concern is the central Banking Systems of the
That's what we have
here people. Due to the large
excesses that have precipitated the "unparalleled recovery," we are
in the very beginning stages of a "correction" or punishment, if you
will. Here are the hard
realities: You are NOT going to get
rich off your home. You are not
going to be able to continue to get more credit to fund your
"get-a-ways," the government - due to all this flooding of the market
with cheap money - cannot fix a problem that started 50 years ago (It's not
that easy!), there will be rampant inflation, then spiraling deflation because
of all of the extra money pumped into the economy a'la September 11, 2001. The Fed will raise rates rapidly at the
EXACT same time they devalue the dollar sharply because foreign investment is
running to the hills.
So let's all get
real and see this for what it is.
You see the heady days of the late nineties are still here, but her true
face is starting to show. The bags
under the eyes, the wrinkles in the corners of the mouth and bloodshot eyes,
the extra ten (or twenty, thirty, fifty, etc.) ponds are starting to
"show," and then there's this aching in the pit of our
stomachs… The party's ending
and it's time to go home and regroup.
-Gary
Crook, Summer 2004
* This is NOT copyrighted material
[1] Appreciation rate for the
state of Nevada (NV), as stated by the OFHEO (Office of Federal Housing