Tuesday, June 30, 2009

Chinese Communist Party Treats Equity Investors Better Than the U.S. Congress

If you REALLY want to know how sad the U.S. equity markets have become take a gander at one important tidbit of information for all stock market investors.

Mr. Ripley, a drum roll please....

Believe it or not....

The Chinese DO NOT tax capital gains on stock market profits.

On the other hand....

The Obama Administration not only does tax capital gains at an excessive rate but is planning a major tax increase. Mr. Obama wants to DOUBLE the current capital gains tax rate from 15% to 28%. In the best Orwellian language he can muster he calls this nonsense "Tax Fairness for the Middle Class."

By the way, the Chinese also have a flat 10% tax on all other types of capital gains, beating the U.S. there hands down too

Who would have thought that the Chinese Communist Party in Beijing would have a more logical, fair, and economically vibrant capital gains tax policy than the U.S. Congress in Washington?

The equity markets in the U.S. are becoming has-beens. Since 2000 the New York stock exchanges have been losing foreign stock listings while the London Stock Exchange has been gaining them.

Why? Sarbanes-Oxley, sure. But excessive tax policies on capital gains are a huge factor. Why are China's stock markets exploding while America's are imploding? Do you think it has something to do with the taxes paid (or not paid!) there?

Robert J. Abalos, Esq.

Wednesday, June 24, 2009

New Home Sales Fall Again: I Told You So

"Battered home builders in the U.S. got even more bad news Wednesday: new-home sales fell unexpectedly in May, showing the sector must continue searching for stability as it limps through the worst downturn in generations.

Single-family sales decreased 0.6% from the prior month to a seasonally adjusted annual rate of 342,000, the Commerce Department reported. That's below the 360,000 economists had expected.

Year-over-year, new-home sales were 32.8% lower than the level in May 2008.

"The numbers are not great; there's no question about it," said Leif Thomsen, chief executive of independent mortgage lender Mortgage Master."

Talk about underestatement! To read the rest of this article from CNN/Money go here.

There isn't going to be any quick fix to the U.S. residential real estate market anytime soon. I've been saying that for YEARS. I've been writing about it for MONTHS here. The problems are too deep, too many, and too grim for any minor fix (like Obama's $8,000 tax credit) to help.

By the way, new home starts are RISING at the same time new home sales are still falling---even with lower prices, extensive builder incentives, and ultra low cheap mortgage money.

Does it sound like the industry has learned its lessons yet?

Robert J. Abalos, Esq.

Tuesday, June 23, 2009

Existing Home Sales Rise But Prices Fall Sharply

"Existing home sales rose in May, as increasingly affordable home prices and a first-time tax credit attracted hesitant buyers.

The National Association of Realtors reported that existing home sales ticked up 2.4% last month to a seasonally adjusted annual rate of 4.77 million units compared to the downwardly-revised rate of 4.66 million in April.

The sales missed expert forecasts of 4.82 million annual units, according to a consensus estimate of analysts compiled by Briefing.com, and are off 3.6% from the 4.95 million-unit pace 12 months ago.

The median price of homes sold in May was just $173,000, a 16.8% year-over-year drop."

To read the rest of this story from Money/CNN, go here.

This news is non-news, meaningless static in the market. When prices fall, more things get sold. I've written about this before many times. This is also basic common sense.

The keys to a healthy real estate market will be PRICE STABILIZATION and rising builder profit margins. Both are obviously still falling sharply.

The fact that sales are up is good news for people buying and especially selling properties. Sales mean commissions. It also means excess inventory is being sucked up and used.

But this news today really has little impact on the overall problems facing the real estate industry. When prices fall, inventories grow because properties are held back from sale. Falling prices means more short sales which devastate the ability of mortgage lenders to issue new paper. These are the prime problems. Too many properties and too many problems getting new mortgages on them.

Falling prices also destroys personal wealth and more importantly the perception of it, crucial if the U.S. economy is going to show any type of rebound soon.

Robert J. Abalos, Esq.

Monday, June 22, 2009

20% of ALL U.S. Mortgages are Underwater and More Damage to Come

This is simply an amazing statistic.

20% of ALL the mortgages issued on residential property in the United States are underwater.

Think about this. One in every five homeowners has a property worth less than than the debt against it.

Whose fault is this? Not mine.

I warned people for four years that residential property prices were too high and a huge fall was coming. Cheap money aside, it was an AWFUL time to buy real estate.

Now what's next? A real estate market crippled by tight money due to inflation and the need to squash it out of the U.S. economy.

It's not just me saying this. Read this interview with Philadelphia Fed President Charles Plosser.

Or even better, watch this video of Plosser talking about the Fed's inadequate response to inflation.

Anyone who tells you the U.S. residential real estate market is going to improve sharply soon is pulling your leg. Or more accurately, attempting to pull your wallet from out of your pants leg pocket.

Robert J. Abalos, Esq.

Wednesday, June 17, 2009

Mortgage Rates Up: Ask Yourself Why?

"Mortgage applications in the U.S. fell last week to the lowest level since November as a jump in borrowing costs discouraged refinancing and threatened to deepen the housing slump.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan dropped 16 percent to 514.4 in the week ended June 12, from 611 the prior week. The group’s refinancing gauge declined 23 percent, while the purchase index fell 3.5 percent."

To read the rest of the article from Bloomberg, click here.

So why are mortgage rates rising? HINT: Look at the chart above.

The answer to today's quiz is simple. Inflation fears based on excessive government spending. The U.S. government will have over a ONE TRILLION DOLLAR DEFICIT JUST THIS FISCAL YEAR.

That's $1,000,000,000,000. Lots of zeros, even for Washington.

That's not just total Federal spending---which would be large enough. That's the portion of the budget the government is going to borrow and finance with you (YOU!!!) paying the interest.

No wonder mortgage rates are rising and will continue to rise for some time to come. The trend is definitely up no matter what the Fed does. The reason is simple. Bankers aren't going to loan money on 30-year notes at current low rates. This is how they got burned in the 1970s. Borrowing short and lending long.

Sorry Uncle Sam. Not again.

Robert J. Abalos, Esq.

Tuesday, June 16, 2009

Inflation is a Monetary Phenomenom

Lots will be spoken about inflation in the months ahead. Most of it will be wrong.

Inflation is a monetary phenomenom. It is caused by poor money supply management by the Federal Reserve and nothing more. Yes, short term demand and supply issues can cause prices to rise or fall, such as a shortage of oil will cause gas prices to rise. BUT THAT IS NOT INFLATION. All market equilibrium forces that cause prices to rise are not inflationary. These are simply normal adjustments to the supply of goods and the demand for them.

Inflation is a systematic, long-term, and across the board increase in prices due to the fact that currency has less value. Think of inflation like the tide of the ocean. When it rises ALL prices rise regardless of the demand for an item or its supply because the medium of exchange, the currency, has less value per unit. Inflation acts like a cancer on the currency, eating away at its value much like rust chews on a piece of iron until there is little left.

Real estate investors often speak of inflation in glowing terms for two reasons.

First, they get to borrow using today's dollars and get to pay them back in tomorrow's inflated and lesser valued ones. True---but the corresponding balance sheet entry is that the value of the asset supporting the mortgage also is worth less in inflation adjusted terms. Coupled with implications of financial leverage means that this transaction is a money losing equation for the mortgagor. You get to pay back one inflation adjusted dollar to buy an asset denominated in many more.

Second, inflation disguises the actual yield investors earn on real estate buys. We have all heard stories of people bragging, for example, that they bought a home for $100,000 in 1978 and sold it for $600,000 in 2009.

Great deal, right? NO.

$100,000 in 1978 is the same as $326,543 in today's dollars. (See the effect of inflation?) Turning $326,000 into $600,000 over 29 years is a 2% rate of return. And this does not include property tax payments, maintenance, sales fees, assessements, and more.

Inflation is the great hidden tax, the largest destroyer of wealth possible because it affects everyone, rich and poor, savers, spenders, and investors.

I urge you to understand the monetary roots of inflation and don't get distracted by all the talk of this price rising or that price falling. Inflation is, at its core, a reflection on the currency or, in our case, how many dollars are chasing the same number of goods and services for sale.

The impact exploding inflation will have on real estate investors in the next few years will be crippling on your capital gains, operating expenses, and borrowing costs.

Robert J. Abalos, Esq.

Monday, June 15, 2009

Hyperinflation Warning

A picture is worth a thousand words.

So much much is a graph of the U.S. money supply from the Federal Reserve Bank of St. Louis worth?

This is the ROCKET SHIP TRAJECTORY growth of the U.S. money supply under Bernanke and Obama. Shocking to see in picture form, isn't it?

Can you spell H-Y-P-E-R-I-N-F-L-A-T-I-O-N?

The notion that Bernanke is going to sop up all this extra capital in circulation is a joke. He could never raise interest rates high enough with all the political pressure coming from the White House and Congress. Plus Fed monetary policy has never been that precise. The tools just aren't there. He's been given a teaspoon and asked to move a Lake Michigan into a bucket.

It is clear Obama and Bernanke are going to monetize the national debt. Even Dallas Fed President Richard Fisher is warning that it is possible, even likely. All those perky little dollars won't be slowed down by velocity controls or any other measure. Of all people Canada's finance minister Jim Flaherty is warning that the U.S. budget deficit is a threat to world economic recovery---and especially Canada's.

Take a look at that graph above again. Does this look like prudent management of the money supply to you?

Robert J. Abalos, Esq.

Friday, June 12, 2009

Angela Merkel for Chairman of the Federal Reserve Board

"U.S. Federal Reserve officials are not likely to considerably increase purchases of U.S. Treasuries and mortgage-backed securities when they meet in late June, the Wall Street Journal reported on its website."

To read the rest of the story from Reuters, go here.

Inflation fears are already pushing up mortgage rates and bond yields. Even gas prices are rising since their prices are quoted in dollars. The dollar is declining rapidly due to concerns about the potential of hyperinflation and the massive, no MASSIVE, increase in Federal spending through the Congress and the Fed.

If you think higher oil prices, inflation, and rising unemployment are going to help real estate sales and home prices, think again. The point to Obama's stimulus plan was to help the U.S. economy not to weaken it further but that is precisely what is happening.

Obama claimed his stimulus plan would cap unemployment at 8%. It is now 9.4% and still rising.

The situation is now so grim that the BRIC nations are now seeking control at the IMF and want to "diversify out" (meaning replace) dollar based currency reserves. The U.S. Dollar, long the gold standard in international transactions will soon be replaced by the Euro. The impact this will have on the United States and especially real estate markets will be staggering.

German Chancellor Angela Merkel recently bashed the Federal Reserve and the European Central Bank in the harshest terms imaginable calling their policies of flooding the world markets with cash a failure. Here you can read some of her brilliant comments.

She's right. When her tenure in Germany is up I suggest Obama appoint her Chairman of the Federal Reserve Board here in Washington. We need her common sense and strong will at this point in our economic history. By the way, here is another blogger who agrees with me.

Robert J. Abalos, Esq.

Wednesday, June 10, 2009

No Housing Market Recovery Coming Before 2012 or Even Later

The mainstream media is already hinting that the worst of the U.S. housing market's troubles are behind us and recovery is just around the corner.

Yeah, right. This is the same mainstream media that didn't see the U.S. recession or its housing problems coming in 2004....2005....2006....2007....

There will be no U.S. housing market recovery until at least 2012 or even beyond. The fundamentals of the market are poor and still deteriorating and there is NO catalyst in sight that will lift housing prices or rents higher for the next few years.

Face facts, people.

Real estate values are a reflection of national income. The more people earn, the more they can buy real estate. A simple proposition. So how do you expect an economy losing 350,000 jobs a month to show income strength? 1.6 million jobs, that is 1,600,000 jobs, have been lost since Obama became President. SIX MILLION LOST JOBS since December 2007. Think about the effect this has not only on national income but debt service and fiscal spending on welfare and unemployment programs.

The overhang on housing inventory is so massive it cannot be counted. Bank REOs are crushing their balance sheets. But the biggest hidden measure of how much excess housing there really is out there is the simple fact that many homeowners just aren't listing their homes right now for sale. Why sell in a down market? Rent them out instead and eat the negative instead. The moment prices start to rise, whenever that is, you will have a flood of new listings to choose from which will depress prices for years to come. Just like there is pent of demand, there is pent of supply too.

You can't have a recovery in the residential housing market without a recovery in its bigger brother, the U.S. commercial real estate market. Defaults are still rising there and will continue through at least 2013.

I could go on and on but I won't since I have better things to do. The mainstream media will focus on housing sales, claiming they are rising, and will break out the champagne and celebrate the end of the housing recession . Great news, but so what? Measuring sales volume out its context is meaningless. Sales at what cost? What profit margin for the seller? I could sell a huge number of BMWs at $500 each but is this a great business model? The point is to make money selling things and not sell them at losing prices.

Ask General Motors about this business model. They had lots of sales, TENS OF BILLIONS OF DOLLARS OF THEM EVERY YEAR, making GM the #1 car seller in the world, and the company did not make a profit since 2004. Understand why they filed for bankruptcy? They sold lots of cars---and lost money on every sale.

The mainstream media will tout the end of the recession years before it ends, much like they failed to recognize the recession years before it arrived. Industry cheerleaders will concentrate on the good news, of which there will be some, while ignoring the bad news, which is plentiful and often more significant. And of course the get-rich-quick real estate guru frauds will be pushing their "Make a Million" home study courses and seminars no matter what the market is, always claiming it is the best time to invest in real estate in the last fifty or five thousand years no matter what the fundamentals of the market actually are.

Take a look around. Read the actual numbers, not the media reporting on them. Talk to people. Get real. This economic recovery hasn't even been born yet, let alone learned how to walk.

Robert J. Abalos, Esq.

Sunday, June 7, 2009

Romans 12:9-21: Great Advice for Real Estate Investors and Others

9 Let love be genuine. Abhor what is evil; hold fast to what is good. 10 Love one another with brotherly affection. Outdo one another in showing honor. 11 Do not be slothful in zeal, be fervent in spirit, [1] serve the Lord. 12 Rejoice in hope, be patient in tribulation, be constant in prayer. 13 Contribute to the needs of the saints and seek to show hospitality.

14 Bless those who persecute you; bless and do not curse them. 15 Rejoice with those who rejoice, weep with those who weep. 16 Live in harmony with one another. Do not be haughty, but associate with the lowly. [2] Never be wise in your own sight. 17 Repay no one evil for evil, but give thought to do what is honorable in the sight of all. 18 If possible, so far as it depends on you, live peaceably with all. 19 Beloved, never avenge yourselves, but leave it [3] to the wrath of God, for it is written, “Vengeance is mine, I will repay, says the Lord.” 20 To the contrary, “if your enemy is hungry, feed him; if he is thirsty, give him something to drink; for by so doing you will heap burning coals on his head.” 21 Do not be overcome by evil, but overcome evil with good.

Robert J. Abalos, Esq.