Monday, August 31, 2009

No Sustained Rally Possible Without Real Revenue Growth

With all the stock markets down sharply as I write this today, one simple fact seems to be sinking in to traders worldwide.

You cannot have a sustained market rally without genuine revenue growth.

This includes real income gains for both individuals and corporations.

Since the spring of 2009 we have been in the midst of a bear market rally and it's been nice trading stocks higher for some quick speculative gains. But is was not the start of a new bull market and the reason is obvious. You can only cut expenses so much to show earnings growth. At some point you actually have to sell new products to new customers at higher prices than forecast.

And that hasn't happened yet in the commercial corporate world or in any real estate market within the U.S. which are still suffering and in many cases continuing to decline.

The excellent article reprinted below from The Wall Street Journal explains much of what I have stated in the past. Until the real incomes of individuals and businesses rise and keep rising the stock and especially real estate markets will trend downwards or sideways.

Unfortunately the Obama Administration and their apparatchiks at the Federal Reserve have no plan for increasing personal or corporate incomes. Higher taxes, higher interest rates, more regulation, and their Big Government approaches to most social and business issues do not bode well for rising incomes.

In fact, the only institution that will be earning more money in two years will be the Federal government. The Treasury will collect a bundle in new taxes---while the incomes of those people and corporations that pay those taxes will suffer.

As investors in real estate and presumably stocks realize you cannot see another sustained bull market until real incomes increase. Wall Street and Capitol Hill can play all the accounting games they want but the markets, in the end, see through the smoke and mirrors.

My advice here is simple. Trade in and out on rallies but don't go long with any buy-and-hold sentiment towards ANY equity, including real estate purchases, until the trend on incomes is positive, strong, and growing stronger.

Robert J. Abalos, Esq.

Can Rally Run Without Revenue?

by Tom Lauricella
Monday, August 31, 2009

provided by

Investors Wonder Whether Profits Based on Cost Cutting Can Long Endure

As stock investors turn their focus to earnings prospects for the second half and 2010, they are zeroing in on one of the market's biggest challenges: lackluster corporate revenue.

The market barreled ahead this summer and is hovering near its high for the year, fueled in large part by stronger than-expected second-quarter earnings. But a significant driver of the good news was cost cutting. Many companies posted disappointing sales.

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In the short-term, earnings prospects may remain favorable for the market. Aggressive expense control and modest inventory restocking could boost third-quarter numbers, while the fourth quarter has easy comparisons against an awful 2008 that will give the appearance of healthy profit increases. But in 2010, the ability of stocks to sustain or extend their advances will have to come from a revival in sales, strategists say. In an uncertain economic environment, that won't be an easy task.

"You can not simply cut costs forever to have sustainable earnings. You need revenues to grow them over time," says Dirk Van Dijk, chief equity strategist at Zacks Investment Research. However, "it's going to be really, really tough" to increase revenue in the current economy, he says.

For now, stock prices suggest many investors are comfortable knowing that at least the decline in profits has been halted.

Heading into September, a notoriously bad month for stocks, the Dow Jones Industrial Average is up 8.75% for the year at 9544.20. That is just off from the best levels seen since early last November. Though trading volume has been light in recent days, the market has been able to hold on to a rally that sent the Dow industrials up 12% since mid-July and up 45.8% from the March 9 low.

According to Goldman Sachs Group Inc., 46% of companies beat Wall Street's earnings expectations by a wide margin, but only 23% significantly bettered revenue forecasts. Sales among companies in the Standard & Poor's 500 stock index fell 16% in the second quarter from a year earlier, following a 14% decline in the first quarter.

David Kostin, an equity strategist at Goldman, points to a decline in a key line item on corporate income statements known as "selling, general and administrative expenses" otherwise known as SG&A. Included in SG&A are salaries and costs of doing business, such as travel or advertising.

SG&A plunged 6.4% in the second quarter from the year-earlier period, Goldman says. In contrast, in the last recession, SG&A fell just 0.2% and in 1991, it dropped 4.1%.

"There's been an unprecedented decline in overhead costs," Mr. Kostin says.

A big part of the challenge for generating an upturn in sales is that consumers, whose spending has driven roughly 70% of economic activity in recent years, are hamstrung by a bleak job market. That was evidenced Friday by a weak reading on consumer confidence from the University of Michigan and government data showing incomes were flat in July.

This environment typically leads to disparate performances between sectors and stocks, according to strategists at Ned Davis Research.

In the initial stage of a recovery from a bear market, the stocks that have fallen the most tend to be the ones that rebound the strongest. "After a bottom, the market shifts to more industry-specific and company-specific factors," says Amy Lubas, senior equity strategist at Ned Davis.

Such differentiation will most benefit those companies that have both cut their costs and have the best prospects for revenue growth, says Goldman's Mr. Kostin.

Among S&P sectors, materials stocks posted the biggest decline in SG&A costs -- down nearly 10% -- followed by information technology. Energy companies, too, have cut costs significantly. In contrast, SG&A costs rose at telecommunications companies and fell only 1% at consumer staples names.

Mr. Kostin says the most likely sources for revenue growth are outside the U.S., where technology, energy and materials companies get the greatest percentage of revenue.

More narrowly, Brazil, Russia, India and China are likely to be the strongest performing economies, and, Mr. Kostin says, the best revenue prospects. Already, a basket of stocks that Goldman identifies as having the greatest business from those so-called BRIC nations has done 29 percentage points better than the S&P 500 this year.

Barry Knapp, equity strategist at Barclays Capital, favors industrials as a play on the cost-cutting binge. "They've been cutting costs for nine years," he says. "That sector looks really well-poised for coming out of the recession."

In addition, technology companies, which have lifted the Nasdaq Composite Index 29% this year, also look good on the cost cutting and revenue metrics, Mr. Knapp says. "But once you get into the consumer discretionary, staples and services areas, it's not quite as good a story," Mr. Knapp says.

Zack's Mr. Van Dijk says that short term there could be good earnings news for retailers. "You have a bunch of retailers who have really cut their inventories way down, and if they do see any pickup at all, their turnover will zoom and that lowers their costs significantly," he says, noting that already it is a group for which analysts have upgraded earnings forecasts.

Still, for retailers aimed at the middle-class, such as Macy's, J.C. Penney and Gap, the good news won't last long.

"They may be good for a trade, but they're a lousy long-term investment," Mr. Van Dijk says. "They just have too many headwinds against them."

Saturday, August 29, 2009

Reigniting the Bubble With Inflation

As the article reprinted below from The New York Times makes very clear, the current U.S. budget deficit estimated to be an eye popping $9 TRILLION over the next ten years is unsustainable.

It is going to require massive tax increases on everyone, not just the rich as Mr. Obama claims, but also extensive monetarization of the deficit through inflation. In other words, Bernanke at the Fed is going to keep the money presses rolling around the clock.

It is now obvious to me what Federal economic policy will be over the next ten years.

When Ronald Reagan was elected President, his strategy for national policy was very simple. Cut Federal taxes which would require a massive cut in Federal spending. In other words, he would achieve his political objective (smaller government) indirectly by starving the government of its capital and capacity to spend. As Mr. Reagan predicted, smaller government meant a larger private sector.

Mr. Obama's approach is exactly the opposite.

He wants larger government, more programs, more spending. So by raising Federal taxes and monetizing the Federal deficit, he forces the government into an inflationary spiral. Inflation makes people feel prosperous. Hard asset values rise, like the homes they own that have been falling in value for years. Real job earnings have been flat for years. Inflation means larger cost-of-living adjustments for everyone on Social Security and under union contracts. Inflation means larger gross profits for everyone since above-the-line prices for everything rise.

Since there is no way to reignite the economic bubble through fundamental methods under the Obama approach, it appears he plans to reignite it through inflation, or the appearance of prosperity. He gets larger government by starving the private sector of its capital.

This policy is not only reckless but suicidal---but as they say, it is ten years down the line and Mr. Obama at best will only serve eight. By then his government programs and new agencies will be entrenched and dug in like a tick on a dog's back.

I am predicting the largest wave of inflation in American history over the decade as one program after another from the FDIC to Social Security to Medicare to the PBGC begins to run out of money and forces taxpayers to pick up the tab---let alone the trillions in new spending proposed by Mr. Obama and his Congress.

Just think about it? The PBGC alone posted a $33 BILLION defict for the first six months of 2009. Who ever talks about the PBGC anymore? Who covers this shortfall? How?

And as the article below makes very clear, what costs and expenses the Federal government estimates over ten years usually is obsolete over three.

Robert J. Abalos, Esq.

It's Hard to Worry About a Deficit 10 Years Out

by Floyd Norris
Friday, August 28, 2009

provided by
The New York Times

Ten years ago, Washington was worried about the budget outlook, and there were forecasts of dire outcomes. And so it is today.

The difference is the nature of the worries. Alan Greenspan, then the Federal Reserve chairman, talked about the dangers of a shortage of Treasury securities as the $5 trillion surplus forecast for the next decade enabled the national debt to be paid down. This week we were warned of a $9 trillion deficit over the next 10 years.

“The last time people got really excited about a 10-year budget outlook, they were hysterically wrong about what transpired,” said Robert Barbera, the chief economist of ITG, who mocked the surplus forecasts then and now thinks the consensus outlook is too negative.

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“The $5 trillion surplus was a ‘nothing can go wrong’ forecast,” he said. “No recessions, no wars, no bear markets and a perpetuation of inexplicably high tax receipts. You can make the case that the current conversations about our fiscal outlook are effectively, ‘Nothing can go right.’ The estimates assume we continue to allocate over $100 billion a year for fighting wars. They assume a very mild recovery for the economy, and an even milder recovery for tax receipts.”

It was easier a decade ago to know the forecast was foolish, although few did. The assumption that politicians would refrain from cutting taxes or raising spending in the face of large surpluses had no historical support.

On the other hand, the notion that politicians will point fingers and do nothing as deficits mount has plenty of historical support.

One unusual factor now is that everyone agrees Congress must pass a new tax law. If it does not, taxes on nearly everyone will soar under an absurd plan enacted in 2001 called the snap-back tax, which provides that in 2011 the tax law that had been in effect in 2000 will reappear.

That would drive tax rates up sharply for most people, which might reduce budget deficits. But it is hardly what anyone wants if the economy is not booming by then.

Most of the tax changes being mulled can await Congressional action until next year. Under the snap-back tax plan, however, the estate tax is set to vanish for a year if nothing happens before the end of 2009, just over four months from now.

Heirs of a very rich person who died on Dec. 31, 2010, would get everything, without any estate tax. If that person died a day later, his or her estate would owe 55 percent of everything over $1 million. (I call that the Dr. Kevorkian provision, after the physician who specialized in assisted suicides until he was sent to prison.) How will hospitals respond if heirs demand that life support be ended before the clock strikes 12?


It would have been nice to fix that up in a nonelection year, but the health care debate has consumed Congress. The chairman of one tax-writing committee, Senator Max Baucus, is still trying to shape a bipartisan health care bill, a Sisyphean task that may not leave much time for taxes. The other chairman, Representative Charles Rangel, has just discovered that he forgot to mention a checking account with more than $250,000 in it when he listed his assets. Tax policy may not be on the top of his to-do list either, at least while the dual investigations of his ethics are continuing.

The country got into the current tax mess because George W. Bush wanted it all in 2001. He could overcome procedural hurdles in the Senate and make the 10-year cost of his tax cut appear lower, if the entire bill was labeled temporary. So it was.

To make things worse, that bill did nothing about the alternative minimum tax, which was supposed to catch wealthy citizens with big deductions and force them to pay something. By not lowering the A.M.T. rates when ordinary tax rates were cut, the law negated the cuts for millions of middle-class people. Now Congress passes a temporary fix every year to keep that from happening. President Obama wants to make that fix permanent, something Mr. Bush was hesitant to do because it would have made deficit forecasts look worse.

When Congress does get around to tax law, the political calculations could be fun to watch. Read the numbers one way, and President Obama’s proposals call for big increases in taxes on every group. Read them another way, they call for tax cuts for every group except the most prosperous one-tenth of 1 percent of Americans. Guess which interpretation the Republicans, and the Democrats, will choose.

The numbers to back each interpretation come from a new study by the Urban-Brookings Tax Policy Center, estimating effective federal tax rates using both current law and President Obama’s legislative proposals. The figures include all federal taxes, allocating corporate taxes to the owners of those companies and payroll taxes to the employees. Middle-income people tend to pay higher payroll taxes than the rich, because there is no Social Security tax on high incomes. The poorest are exempt from income tax, but do pay payroll taxes if they earn money.

In 2009, the average effective rate for all Americans is estimated to be 18.2 percent. The center estimates that if there are no changes in the law, that will rise to 23.4 percent in 2012. If the president’s proposals are all adopted, the figure that year will be 20.7 percent, with increases from 2009 for every group — those with the lowest incomes as well as those with the highest. How can that be, given that the president has promised to raise taxes only on those who make at least $250,000 a year?

Roberton Williams, a senior fellow at the Tax Policy Center, points to two reasons. First, Mr. Obama does not want to continue some special tax breaks, like a tax credit for new homeowners, that were part of the stimulus package he pushed through Congress. More important, the 2012 estimates assume a better economy, in which incomes will be higher and more people will therefore be in higher tax brackets.

Mr. Williams argues that, eventually, President Obama’s vow not to raise taxes on the middle class is going to have to be violated. “There is just not enough money” earned by the very, very rich, Mr. Williams said.

When, or if, the government does confront the need for more revenue, Mr. Williams says he thinks it might adopt a value-added tax, which amounts to a national sales tax. Others urge energy taxes, to both bring in revenue and discourage energy consumption. Either would be political dynamite if there were not some sort of bipartisan agreement.

Some countries, particularly in eastern Europe, went on enforced austerity this year because no one would lend them money. In the United States, with its dollar printing presses, we assume that could never happen. But it is conceivable that someday investors will grow cautious about lending to a country with so little self-control and demand higher interest rates to protect them from the possibility of a depreciating dollar. Or they might insist on lending in euros or Chinese renminbi, currencies the American government cannot print.

Before the United States gets serious about raising taxes, I suspect that inflation will start to seem much more attractive, even if few are willing to say so publicly. In the past, inflation has enabled the United States to reduce the burden of repaying existing debt, and China, for one, has voiced fears we will do it again. Widespread inflation could also make depreciated assets — like homes — worth more dollars than the owner now owes.

Ben Bernanke got a second term as Fed chairman this week, something he earned for his evident success in dealing with the financial crisis. (He failed to see the crisis coming, but few others who might have gotten the job could claim a more prescient record.) In this term, he may find that inflation-fighting is not the road to popularity.

His reappointment should serve as a reminder that things could be much worse. Which would you rather worry about: the specter of Great Depression II, which seemed so real only six months ago, or the possibility of excessive budget deficits in the next decade?

Wednesday, August 26, 2009

The Truth About the New Home Sales Data

The media is all orgasmic about the new homes sales data released today by the Commerce Department. The reporters on CNBC and CNN and Fox should just pick up their pom poms and start practicing their best "New Bull Market" cheerleader routines.

The TRUTH about the new home sales data is not so good.

First, new homes sales represent only 7% of all home sales. In other words, NINETY-THREE PERCENT of all home sales are EXISTING or PREOWNED homes, not brand new ones.

Second, prices of these new homes were down 11% from a year ago. As I have said a million times, who cares if you sell more of something when the price goes down by double digits? That's easy. The goal is to sell MORE with prices UP and RISING. I can sell lots of BMWs at $500 each and I'm not a car salesman.

Third, the margin for error on all new homes sales data is plus or minus 10.3%. So let's do some math. If the government says new home sales rose 9.6% in July but the margin of error is 10.3%, what is the real number of new home sales? By the way, the Commerce Department revises new home sales on a retroactive three to six month basis so we will actually know the real number on new home sales in July sometime around Thanksgiving.

Fourth, new home sales in July 2009 were DOWN 13.4% over July 2008 which was itself a dismal month. This doesn't sound like much of a housing market recovery to me.

Fifth, all full SEVENTY-SEVEN PERCENT of the July 2009 new home sales were deposits put down on unconstructed homes, not purchases of spec or existing new homes. What does this mean? Buyers are hedging their bets, unwilling to buy new homes at current prices. What they are willing to do is potentially buy new homes at future prices. In other words, nearly eighty percent of new home buyers are speculating on the future value of their homes. None of this, of course, does anything to reduce the current inventory of existing new homes which is still at near historic highs. I suspect many of the new homes sales buyers in July will walk away from deposits (or hire lawyers to get them back) if home prices continue to fall---or if they are not eligible for the Obama $8,000 homebuyer tax credit.

I could go on but what's the point. Here is a link to the official Commerce Department report. Read the actual numbers like I do. The mainstream financial press is not about accuracy or truth anymore. It's about making investors feel good about their investment decisions, more like psychological counselors than journalists.

The new homes numbers today aren't very good and the numbers speak for themselves.

Robert J. Abalos, Esq.

Tuesday, August 25, 2009

National Debt to Double in the Next Ten Years: What About Interest Rates?

The White House and Congress surely do want to bury this report.

On the same day that Ben "Throw Cash Out of Helicopters to Stop Deflation" Bernanke was reappointed by Mr. Obama to another term at the Fed, the Congressional Budget Office announced its report on the U.S. national debt.

It is going to DOUBLE over the next ten years due to excessive spending.

As the article reprinted below makes very clear, no one on Pennsylvania Avenue wants the public to focus on this grim statistic, let alone Mr. Bernanke's prime role in causing it.

It is impossible to sustain such deficits without massive inflation and the resulting double digit interest rates. IMPOSSIBLE.

I remember 21% interest rates in the late 1970s as stagflation took its toll on the Carter Administration. The fundamentals for the U.S. economy are now actually worse.

We have a deeper recession.

With virtually no job growth leading us out of it.

And a tidal wave of new government spending with more on the way. Take a close look at Mr. Obama's health care initiative if you have any doubts.

Consumers can't lead the way out of this mess either by spending their savings or taking on additional debt. All their money is gone. U.S. residents are likely to experience DECADES of declining living standards due to this current recession and its consequences on real estate values, stock portfolios, job losses, and other financial calamities.

Investors need to keep one clear fact in mind. The substantial and grotesque mismanagement of the U.S. economy means that the capital gain business models that worked so well from the end of World War II through 1990 are obsolete, as dead as the proverbial doornail.

You can't count on continuously rising real estate prices to bail you out of overleveraged positions.

You can't rely on index funds to make you rich in the stock market.

You can't expect your children to have a higher lifestyle, larger home, or more prosperous future than you did. The days of parents passing on a better economic future to their offspring are long over.

The days of American economic hegemony are gone, sold off to the highest bidders like so much used scrap metal. American workers now compete for jobs against third world laborers working in abysmal conditons for poverty wages but are expected to keep up with the Joneses using VISA cards to fill in the monetary gaps.

All the rules have changed, all the rules written long ago when financial markets around the world from London to Tokyo and back again looked to Washington for leadership and new ideas, and we have buffoons like Ben Bernanke to thank for that.

At least he won't be applying for unemployment anytime soon. One less mouth to feed on the dole. Be grateful for small blessings.

Robert J. Abalos, Esq.

White House, CBO debt forecasts challenge Obama

By Alister Bull and Andy Sullivan Alister Bull And Andy Sullivan

WASHINGTON (Reuters) – The U.S. national debt will nearly double over the next 10 years, government forecasts showed Tuesday, challenging President Barack Obama's economic and healthcare overhaul agenda.

The White House midsession budget forecast and the non-partisan Congressional Budget Office both forecast that government revenues will be crimped by a slow recovery from the worst recession since the 1930s Great Depression, while spending on retirement and medical benefits soars.

The White House projected a cumulative $9 trillion deficit between 2010 and 2019, while the CBO took a more optimistic view, pegging the deficit at $7.1 trillion because it assumed higher revenues as tax cuts expire.

The spending blitz could push the national debt, now more than $11 trillion, to close to $20 trillion. The debt is the sum the government owes, while the deficit is the yearly gap between revenues and spending.

"The alarm bells on our nation's fiscal condition have now become a siren," said Senator Mitch McConnell, the Republican leader in the Senate.

"If anyone had any doubts that this burden on future generations is unsustainable, they're gone," McConnell said, adding that economic stimulus funds should be diverted to pay down U.S. debt.

However, both the White House and CBO estimates anticipate that the deficit, now at its highest level as a percent of economic output since World War Two, will decline relatively swiftly in the next three years as growth resumes and federal bailout programs shrink.

White House budget director Peter Orszag said the deficit was too high and cited this as a reason to pass Obama's healthcare overhaul plan, which is in trouble with lawmakers while opinion polls show it losing popular support.

"I know that there will be some who say this report proves that we cannot afford health reform. I think that has it backward," Orszag told reporters on a conference call.

"The size of the fiscal gap is precisely why we must enact well-designed and fiscally responsible health reform now."

Obama's healthcare plan, his policy priority, has run into opposition from critics who complain its $1 trillion price tag is too high and who worry it will limit consumer choice.

The debate is gaining steam as Republicans seek momentum for next year's mid-term elections, where they hope to chip away the dominant position Obama's Democrats enjoy in both the House of Representatives and the Senate.


The White House forecasts a record $1.58 trillion deficit in fiscal 2009, matching the numbers of the CBO, while it shows the deficit at $1.5 trillion in 2010, a touch higher than the $1.48 trillion projected by CBO.

But both estimates show annual deficits staying above $500 billion every year until 2019, compared with a then-record $459 billion last year. The White House shows the gap averaging 5.1 percent through 2019, compared with 3.2 percent last year.

By 2019, it estimates that the ratio of national debt to gross domestic products will rise to 69 percent from 48 percent in 2009.

"The administration has always said that you have to get deficits under 3 percent of GDP to be safe. They now admit that they will not in the next 10 years," said Douglas Holtz-Eakin, a CBO director under Bush and chief economic adviser to Republican Senator John McCain for his 2008 presidential bid.

The budget news was overshadowed by Obama's surprise announcement Tuesday to renominate Ben Bernanke to a second four-year term as Federal Reserve chairman, a move seen as aiming for continuity at the central bank during a tentative stage of recovery.

"I'm stunned at how hard they have worked to bury this," Holtz-Eakin said of the White House's budget estimate timing.


One reason CBO and OMB can end up with different numbers is technical. The CBO employs a baseline method which only takes into account policies that have already become law.

On the other hand, the administration's forecasts can reflect the economic impact of policies it hopes to implement, even if they have not yet been approved by lawmakers.

For example, the CBO assumes the there would be no "patch" for the Alternative Minimum Tax, meaning millions more Americans would have to pay higher taxes, even though Congress has agreed to a temporary reprieve every year to prevent this happening. In addition, CBO assumes the tax cuts delivered by former President George W. Bush will expire at the end of 2010.

Orszag said that the White House numbers also assumed that some of the Bush tax cuts would be extended. Obama has pledged not to raise taxes on U.S. households earning less than $250,000 a year.

Monday, August 24, 2009

Whatever Happened to Tony Hoffman and Hal Morris?

As part of a new book project on the history of creative real estate fraud and the gurus that sell worthless real estate home study courses and seminars I am trying to track down two creative real estate gurus from my past.

Tony Hoffman and Hal Morris.

The reason I say these gurus are part of my personal history is that they were the speakers at the very first real estate get-rich-quick event I ever attended back in 1983. I saw their infomercial on late night TV and attended an all-day "information workshop" (read that as eight hour sales pitch) at the Holiday Inn in Dedham, Massachusetts for the grand price of $10.

I remember both these speakers vividly. (The other speaker on the bill that day was Wayne Phillips on making money through government loans. He was shut down by the Federal Trade Commission in 1991 and then once again sued by the FTC in 1995 for $2.1 million.)

Tony Hoffman was pitching a course on lease options. Hal Morris was selling a foreclosure course. I couldn't afford either one of the twenty cassette tape home study courses they were selling at $495 so I went home.

The next day I went to the Boston Public Library and got the only real estate investment book they had on the shelf. William Nickerson's "How I Turned $1,000 into $1 Million in Real Estate in My Spare Time."

And, as they say, the rest is history.

Anyway, nearly thirty years later I'm trying to find out what happened to these guys. The Internet is not providing much of a resource. The article reprinted below describes some of the events of Tony Hoffman, leaving out his notorious stint as producer of the disgusting video by O.J. Simpson proclaiming his innocence of murder.

There is even less on guru Hal Morris.

What I do know is that he authored a number of books in the 1980s, including a decent one called Crisis Real Estate Investing in 1985. Around the same time he sponsored an informercial interview program called MONEY MONEY MONEY where he would pretend to interview various get-rich-quick real estate gurus and promoters so they could pitch their various products. The show was so campy I would tune into it just to watch the bad production values.

As part of my research for my new book I have been speaking to a number of former real estate gurus and especially the sales teams that worked for them. The stories I am hearing are beyond unbelievable. I had always known that the creative real estate world where gurus pitch home study courses and seminars preaching instant wealth was essentially organized crime.

But today, I'm learning this lunatic fringe of the real estate world is more corrupt and venal than anything I ever thought possible.

If you know whatever happened to Tony Hoffman and/or Hal Morris please email me at I really want to find out what happened to these guys.

Robert J. Abalos, Esq.

Tony Hoffman, the infamous real estate guru of the 80’s was a former (Albert) Lowry employee. Tony Hoffman founded a company “National Superstar Inc.,” Apparently, his own advice did not seem to work for him and the company was declared bankrupt in 1986.

Tony Hoffman organized seminars on the art and negotiations involved in buying and selling of property and promoted concept of “nothing down” on purchases.

Tony Hoffman harbored an ambition to become governor of California, which obviously did not work out. Thereafter he was spotted doing TV ads for household appliances.

Tony Hoffman is also the author of the much talked about book “How to Negotiate Successfully in Real Estate”

Tony Hoffman was considered unethical. He irked many people by his callous implications to real estate investors. He recommends that, as a buyer should keep his own interests uppermost and try to squeeze out the maximum. He even suggests that one retract at the lat minute when the deal is near finalization to pressurize the seller who eventually would sell in a hurry and at a low price.

Tony Hoffman also indicates the use of the “Standard Real Estate Purchase Contract”, a purchase contract draft in his book. The purchase contract of his is full or "get out clauses" for the buyer. It equips him with a safety net to enable him to back out of the purchase whenever he wishes while binding down the seller. The reality is that no fixed standard contract is prescribed and most states insist on a state-approved form.

Tony Hoffman suggests that one should never make their best offer at the first go and implies that everything is negotiable; one must know where to apply the brakes. His philosophy is an offshoot of the manipulative and calculating nature of man.

Once, in the 80s, while appearing on call in show on Financial News Network TV hordes of callers dialed in and abused Tony Hoffman vociferously.

Clearly, Tony Hoffman is not a much-adored name in the real estate industry.

Saturday, August 22, 2009

There is No Such Thing as a Jobless Recovery

There is so much talk of an "jobless economic recovery" these days let's dispel this myth immediately.

There is no such thing as a "jobless recovery." In other words, until the U.S. economy begins producing new and high paying jobs there cannot be an economic recovery.

Most economists live in a fantasy land of delusion and silliness. Assumptions on this or that rule their domain. They do not live in the real world where people actually have to have jobs in order to buy things. Most (like Fed chief Ben Bernanke) have never run a real business, met a payroll, or even created a job. Economics is a theoretical realm, not a practical one. I should know. I am an economist, reformed that is.

Economists measure GDP growth when determining when a recession begins or ends.

So what?

GDP growth doesn't matter to an unemployed construction worker in Las Vegas or a single mother in Miami who is about to lose her condo in foreclosure.

As the article reprinted below makes very clear, the term "jobless recovery" is an Orwellian creation of politicians who want to boast how great the financial world is while their constituents are selling their family heirlooms on eBay to buy food.

Economies that do not produce NEW and HIGH PAYING jobs are doomed economies, sick and spindly failures. While GDP numbers are certainly important in some circumstances, they do not mean anything to the real estate markets where people actually need jobs to pay rent, buy homes, lease offices, or start new businesses.

It's nice that GDP is positive again but so what? The Federal government cooks its numbers in ways that put Wall Street to shame.

How about this as a definition of an "economic recovery"? When the economy actually has just as many jobs as when the recession began? In other words, when the economy in 2010 is back to where it started in 2007? Common sense, eh? But you guessed it. Washington would never agree to such a definition. It's far too logical. But ask yourself this. Isn't a patient in a hospital "recovered" when they are in the same health again as before they got sick?

There will not be a prolonged and substantial recovery in the U.S. real estate market until the U.S. economy starts producing NEW and HIGH PAYING jobs, those capable of supporting apartment leases and home mortgages.

Until then, we tread water while politicians in Washington throw champagne parties celebrating each other with speeches, awards, and trophies about how they pulled us out of the New Great Depression with $2 trillion in deficit spending and hardly a bead of sweat on their brow.

Robert J. Abalos, Esq.

If jobs don't return, is it really a recovery?

Sunday, August 16, 2009

Is the term "jobless recovery" an oxymoron?

That was the question some readers had in response to my Aug. 6 column on the subject.

"I have to say that anyone who uses the term 'jobless recovery' needs to be sent to a re-education camp," Storey Chapman of San Francisco writes. "It is a rude, heartless oxymoron. When there are more than 20 million people either unemployed or underemployed, millions more trying to survive on niggardly unemployment compensation, there is no 'recovery,' no matter what the artificial, irrelevant economic statistics claim."

Whether jobless recovery is a contradiction in terms depends on who's talking.

When economists talk about business cycles, they focus mainly on gross domestic product.

Before the 1990s, employment typically recovered soon after GDP. But after the recessions ending in 1991 and 2001, the unemployment rate continued rising for 15 and 19 months, respectively, after GDP turned up - giving rise to the term jobless recovery.

My previous column discussed possible reasons for this phenomenon - including the decline of labor unions, global competition, offshoring and a surge in productivity.

Now it looks like GDP is jumping the gun on employment again.

On Friday, the Philadelphia Federal Reserve released a quarterly survey showing that forecasters now expect GDP to grow 2.4 percent this quarter, up from their previous estimate of 0.4 percent. (GDP shrank just 1 percent in the second quarter after plunging 6 percent on average the two previous quarters.)

But they also raised their forecast for unemployment. They now expect the unemployment rate will average 9.2 percent this year - up from their previous projection of 9.1 percent - and 9.6 percent next year.

The question for today is, should economists and the media say the recession is over when so many are still jobless?

I put this question to members of the National Bureau of Economic Research Business Cycle Dating Committee. This small team of economists is the semiofficial arbiter of recessions and expansions. Only one, Harvard's Jeffrey Frankel, called me back, but others have been quoted on the subject.

The committee defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income and other indicators." It calls GDP "the single best measure of aggregate economic activity," but it also considers other indicators, notably employment.

No one can accuse the NBER of acting hastily when it declared - in July 2003 - that the previous recession ended in November 2001. The committee typically declares turning points long after the fact, but it waited even longer last time because unemployment just kept going up.

"When we declared the end of the recession, it was clear that employment was not recovering," says Frankel.

Nevertheless, the committee declared an end to the recession because it didn't want to break with tradition. In its statement, the committee said it "has consistently placed more emphasis on output than on employment."

Frankel says that he personally was willing to call November 2001 the end of the recession because around that time, even though jobs were still being lost, they were disappearing at a slower rate.

He sees the same thing happening now. The average monthly job loss was 331,000 in May through July compared with 645,000 in November through April. One sign the tide could be turning: In July, hours worked did not decline for the first month in almost a year.

Although he does not see strong employment gains for several years, Frankel says that if he were "forced to guess," he thinks the committee could declare that the recession ended in the second half of 2009, perhaps as early as July.

Stanford economist Robert Hall, the committee's head, is in no hurry to make such a call. "The committee will have to reconcile positive GDP growth with shrinking employment," Hall told Bloomberg. "I personally put substantial weight on employment, so I may be leaning toward a later date."

Frankel points out that the committee is not a slave to GDP. Last December, it declared that the recession we're in now started in December 2007 - the month employment peaked. Yet GDP continued growing in the first and second quarters of 2008.

"Employment started declining before GDP. That's pretty rare," he says. "We took a bit of a gamble. We thought the GDP statistics would be revised." And they ultimately were. Two weeks ago, the government changed its GDP number for the first quarter of 2008 from positive to slightly negative.

Frankel says terms like jobless recoveries are inevitable because indicators don't move in lockstep. "It would be convenient if they did. Awkwardly, they don't."

Lawrence Mishel, president of the Economic Policy Institute, a liberal think tank, says it's wrong to focus on GDP.

"Wall Street economists focus on GDP because their interest is the stock market and corporate profits," he says. "To me you haven't really recovered until you have at least as many jobs as you had before the recession started."

Since the recession started, the U.S. economy has shed about 6.7 million payroll jobs, Mishel says. Getting them back "is going to take several years."

Maybe it's time to come up with a new term for a recovery that's missing jobs.

Friday, August 21, 2009

Loan Modification and Foreclosure Rates: The Plan's Not Working

Obviously the Obama Administration's plan to reduce foreclosure rates by encouraging loan modifications isn't working.

The foreclosure rate is still rising and is, in fact, at an all-time high short of the Great Depression.

And most participants and observers of the program (including me) consider it a failure.

Reprinted below from ABC News is an excellent piece on why the Obama loan modification program isn't going to work.

Of course it isn't. Common sense says this. How do you get people to stay owners of homes they obviously cannot afford? Or don't want anymore because they are underwater on the mortgage?

Modifying most mortgage loans is like doing emergency dental work on a death row inmate.

Nice gesture, some short term pain relief, but the futility of the effort is obvious.

Robert J. Abalos, Esq.

Foreclosure Frustration: The Trouble With Loan Modifications

Homeowners at Risk of Foreclosure Face Hurdles Even After Their Loan Modifications Begin


Aug. 21, 2009—

Six months after the government announced that the Making Home Affordable program would help stem the tide of foreclosures, the opposite appears to be happening.

The Making Home Affordable program was launched in February to help address the foreclosure crisis brought on by rising unemployment and tighter credit. At the time, the Treasury Department said that the program would help between 3 and 4 million homeowners. So far, fewer 10 percent have had their mortgages modified, and those who have tried have said that the process is slow and frustrating.

When 80-year-old Gloria Lowe applied this spring, she was out of work and on the brink of losing her home.

"My pay(check) took care of the extra bills, my mortgage and my equity loan. And when that stopped, there was no way for me to pay it," Lowe said.

Lowe said she tried calling her bank for help, but got nowhere, so she turned to the Consumer Credit Counseling Service of Delaware Valley. Credit counselors there helped Lowe submit the reams of paperwork needed to modify her first and second loan.

But four months later, she found out she was still at risk of foreclosure and would have to start all over again. Even though her bank modified the first mortgage, it never looked at reducing the rate on her second loan.

"People are going to loan servicers and they're not getting through. When they get through, the responses are incredibly slow. They provide paperwork time and again, and the paperwork gets lost. It's like banging your head against a wall," said Ira Rheingold, executive director of the National Association of Consumer Advocates.

"This program, as it's working today, is simply not making a dent in what needs to happen so that our economic recovery can continue," he said.

More Loan Modifications Soon?

The Treasury Department admits that the program got off to a slow start, but it also says that banks are adding more staff to handle calls and that more than 400,000 applications are currently pending.

There's good news for Gloria Lowe too. Her bank told ABC News that they've fast-tracked the loan modification application on her second mortgage.

That's not the norm, however, for the nation. The Treasury Department's advice for others like Gloria is to go to a non-profit credit counseling agency to get help dealing with their bank. Officials say that's a much faster way than navigating the system alone.

Wednesday, August 19, 2009

Warren Buffett on Inflation Fears

Warren Buffett, the chairman of Berkshire Hathaway, wrote a lengthy op-ed piece for The New York Times which was published this morning and reprinted below.

I am not only a huge fan of Warren Buffett but a long time Berkshire shareholder.

Of course, Warren is right about the explosion of the money supply and the effect on inflation and the devaluation of the dollar. I've been making the very same points in my writings for years.

But I will go two steps beyond whatever Warren would ever say. The Federal Reserve is incapable of managing the U.S. money supply and needs to be abolished.

I can say this because, unlike Warren, I am not beholden to the Fed. I don't run a huge regulated insurance company like he does. He needs to be respectful to the Fed. I don't.

Asking Congress and their lapdog Ben Bernanke to voluntarily restrain the money supply for the financial security of future generations of Americans is like politely asking an alcoholic to quit drinking. It's not going to happen. The lifeblood of the modern political class in Washington is to spend money they don't have to buy votes so they can make it through the next election cycle. Much like most of Wall Street can't focus beyond the next earnings season, most politicians these days can't think beyond the next campaign.

All that borrowed money makes a great deal of constituants very happy. Free services, free products, subsidies, cash for clunkers, cash for not growing crops, cash for not working, cash for making babies out of wedlock, cash for drug addicts and their needles, cash for condoms, cash for unwanted weapons systems that don't work, cash for Congressional junkets and their brand new airplanes, CASH CASH CASH, all borrowed cash, of course.

All tidal wave of cash is being spent. ALL BORROWED from China, Japan, Singapore, and dozens of other foreign investors who can stop loaning at any second. $1,800,000,000,000 a year and growing.

The U.S. government is now borrowing HALF of all the money it spends.

This is a 400% increase from the last Bush Administration budget, which was too fat and bloated to mention.

The Fed cannot be trusted. This failed institution has a 100-year political history of being coopted by Congress, incompetence, mismanagement, and short-term financial thinking. The notion that Congress and the Fed are not going to monetize the current fiscal deficits, now running at $1 TRILLION DOLLARS A YEAR for as far as the eye can see is childlike.

Of course they are.

And you might as well put out the Welcome mat for hyperinflation.

Warren Buffett is right when he says the U.S. economy cannot grow its way out of the deficit. That isn't going to happen. But where does that leave us?

We can't grow out.

Congress and Fed won't restrain spending or the growth of the money supply.

The only answer is monetarization. And that means inflation and lots of it.

As investors you had better be planning for it. LOTS OF IT.

Robert J. Abalos, Esq.
August 19, 2009
Op-Ed Contributor

The Greenback Effect


IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.

The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.

To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.

They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.

The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.

To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.

Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.

An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.

The current account deficit — dollars that we force-feed to the rest of the world and that must then be invested — will be $400 billion or so this year. Assume, in a relatively benign scenario, that all of this is directed by the recipients — China leads the list — to purchases of United States debt. Never mind that this all-Treasuries allocation is no sure thing: some countries may decide that purchasing American stocks, real estate or entire companies makes more sense than soaking up dollar-denominated bonds. Rumblings to that effect have recently increased.

Then take the second element of the scenario — borrowing from our own citizens. Assume that Americans save $500 billion, far above what they’ve saved recently but perhaps consistent with the changing national mood. Finally, assume that these citizens opt to put all their savings into United States Treasuries (partly through intermediaries like banks).

Even with these heroic assumptions, the Treasury will be obliged to find another $900 billion to finance the remainder of the $1.8 trillion of debt it is issuing. Washington’s printing presses will need to work overtime.

Slowing them down will require extraordinary political will. With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap.

Legislators will correctly perceive that either raising taxes or cutting expenditures will threaten their re-election. To avoid this fate, they can opt for high rates of inflation, which never require a recorded vote and cannot be attributed to a specific action that any elected official takes. In fact, John Maynard Keynes long ago laid out a road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.... The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

I want to emphasize that there is nothing evil or destructive in an increase in debt that is proportional to an increase in income or assets. As the resources of individuals, corporations and countries grow, each can handle more debt. The United States remains by far the most prosperous country on earth, and its debt-carrying capacity will grow in the future just as it has in the past.

But it was a wise man who said, “All I want to know is where I’m going to die so I’ll never go there.” We don’t want our country to evolve into the banana-republic economy described by Keynes.

Our immediate problem is to get our country back on its feet and flourishing — “whatever it takes” still makes sense. Once recovery is gained, however, Congress must end the rise in the debt-to-G.D.P. ratio and keep our growth in obligations in line with our growth in resources.

Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Monday, August 17, 2009

The Single Pour Concrete House

I recently met a contractor who believed he had a wonderful idea.

He wanted to create single pour concrete houses. After all, the concept is beyond simple. Just put up the forms, pour the mix, and---POOF!

An instant house. And not just any house. A solid, low cost, easy to maintain, and ultra-cheap to build house.

It's a great idea. But I told him it had been tried before.

In 1907.

By none other than the American inventor genius, Thomas Edison.

The article reprinted below explains the Edison experiment with the single pour concrete house, some of which still stand more than a century later in New Jersey.

Nevertheless, the concept is so intriguing. Technology has obviously advanced quite a bit since Edison's day. I'm actually talking to experts in this field to see if this can be done economically, practically, and with modern design standards and amenities in mind.

And most importantly, be done by me.

I'm off to New Jersey over the next few weeks to investigate this "new" construction technique a bit more closely.

Robert J. Abalos, Esq.


THE WIZARD OF MENLO PARK thought instant homes of concrete poured in molds could clear out America’s slums


“I AM GOING TO LIVE TO SEE THE DAY WHEN A WORKING MAN’S HOUSE can be built of concrete in a week. … If I succeed, it will take from the city slums everybody who is worth taking.” When Thomas Edison announced in 1906 that he planned to recast the world and mold it according to his own vision, people took him at his word. He was already well on his way to becoming history’s most successful and productive visionary, and with the progress that he had recently made in the Portland cement industry, the prospect of concrete nouses was not at all extraordinary. The genius of Menlo Park seemed perfectly capable of molding concrete into whatever shape he wanted. Thus with a few words, and the best of intentions, Edison launched himself into an endeavor that would prove more elusive in the end than the development of his incandescent lamp.

The story had begun in 1902, when Edison entered the Portland cement business. He did it mainly to find a use for the heavy equipment and giant crushing rolls that he had developed for an ill-fated iron-ore enterprise; the rolls would otherwise have been sold for scrap. (See “Thomas Edison, Failure,” Invention & Technology, Winter 1991.) Characteristically, once Edison became interested in the business, he threw himself into it wholeheartedly and came up with a string of innovations and improvements on traditional industry practices. By the summer of 1906 his huge new cement plant, near Stewartsville, New Jersey, was finished and ready to come on-line.

During construction of the plant, Edison was fascinated by the ability of concrete to mold into highly durable products in a wide variety of shapes. He began to wonder about the possibility of molding and pouring an entire house in one operation—a single monolithic concrete structure. If the process could be mechanized and the houses mass-produced, he reasoned, the final product could be made available at a very low price. In addition, Edison found that by using mostly concrete structures at Stewartsville, he had solved one of his biggest headaches: the availability and cost of fire insurance.

The Stewartsville buildings were built with reinforced concrete— that is, concrete with an internal mesh of steel rods—which could be cast into very strong, inexpensive structural members. The technology had been invented in France in the 186Os and revived at the end of the nineteenth century. Reinforced concrete had many benefits, but thus far it had only been cast into individual components, which were then assembled into a building. Edison proposed to eliminate this step by simply pouring concrete into an enormous mold, with reinforcing rods in place.

EVERYTHING FROM BATHTUBS, windowsills, staircases, and picture frames to electrical conduits and reinforcing rods would be molded right in.

The idea was not original with Edison; numerous local builders poured monolithic concrete houses in the first two decades of the century. They were generally built one at a time for wealthy clients because, as Scientific American noted in 1911, “a concrete house will cost considerably more money than the frame house as we know it today.” Edison had something different in mind: building inexpensive houses on an industrial scale, to provide affordable shelter for the working class. If successful, his scheme would benefit capitalists as well, because worker housing was a major concern of large employers in the early 1900s.

In August 1906 he shared his idea during an after-dinner speech in New York City. Why not concrete homes? After all, he argued, concrete is fireproof and insectproof, will never rot, stands up in a storm, is easy to clean, and can be adapted quickly to mass production. As usual when Edison spoke, the press listened. Though he hadn’t yet done the slightest bit of work on the project, its prospects were sensationalized in newspapers from Maine to Florida. Thousands of letters from would-be homeowners and contractors poured into the company’s office. Edison, a man of immense pride, had no choice but to deliver on his words.

AS EARLY AS 1902, WHILE THE Edison Portland Cement Company was still in the design stage, he had predicted to reporters that concrete was the construction material of the future. The forests that had supplied lumber to build the great cities of the East Coast were rapidly disappearing. The price of wood could go no place but up. If cement could be produced in large enough quantities, then concrete (a mixture of cement, water, and an aggregate—sand, crushed stone, gravel, or the like) would be far more attractive to homeowners than wood.

Edison’s cement plant was different from most others of its day. Not only was it highly mechanized, but it had rotary-driven kilns more than five times as large as any others then in use. Changes in the grinding and composition of the cement made Edison’s product stronger and smoother than that of his competitors. By 1907 each of the kilns at Stewartsville was capable of producing more than 1,100 barrels a day, compared with an average of 200 elsewhere, and the Edison complex had become the fifthlargest cement company in the world. In the next three decades Edison Portland Cement built a large portion of New York City, including Yankee Stadium, and provided the impetus (and free materials) to test the world’s first concrete highway, Route 57 in Warren County, New Jersey. The master met these challenges with ease. But that little two-story home, the one Edison envisioned as the cornerstone of vast new suburbs full of yards, trees, and flowers, turned out to be a more difficult problem.

The quest to cast mass-produced housing was not a commercial venture, Edison said, for if he succeeded, he would take no profit. Instead it was something he felt impelled to do so that the poor could have a better life than in existing tenement slums. Such altruism presumably dated back to his working-class childhood. Later on, frequent visits to Manhattan’s ghettos would reinforce this compassion.

Though his idea had progressed no further than the talking stage for two years, by 1906 Edison wanted to pursue it more than ever, because industry insiders and engineers were beginning to scoff. Concrete can’t be poured reliably, they said; it doesn’t run properly, and a mold the size of a house would be ridiculously complex. Such skepticism only made Edison more determined.

By the time Edison had resolved the problems associated with starting up the Stewartsville plant, in early 1907, he had also obtained a first-rate education in the technology and properties of cement and concrete. During that period the numerous inquiries he received about his concrete housing were answered with a mimeographed letter, which he initialed personally, stating that he was hard at work on the idea and would tell the world all the details as soon as it was ready. But as expectations continued to grow, the inventor remained otherwise occupied.

FINALLY, IN THE SPRING OF 1908, two experiments got under way. The first was an attempt to cast a miniature house as a demonstrator, complete with individual rooms, door and window openings, and intricate ornamentation. Employees jokingly called the tiny mold a “chicken coop.” Ultimately the chicken coop was cast on the lawn behind the family estate in Llewellyn Park.

The second experiment was a detailed study of the molding, pouring, and liquidity properties of Portland materials, conducted on the floor of the big lab. Starting in the summer of 1908, visitors couldn’t help noticing a large wooden mold, eight feet high, with risers at either end, four right angles, and a switchback in the middle. Throughout the fall and winter, different formulas of concrete would be poured in the high end and forced to the top of the opposite side. Each time a new batch of concrete cured, core samples were taken from various locations and studied to see if the finished product was of uniform strength and composition.

The initial quest was for a way to make concrete run horizontally for a long distance and then, through hydraulic force, in an upward direction. One simple solution was to add more water, but this would interfere with the finicky chemistry of the concrete and create a mix that would never fully cure or, if it did, would remain weak and brittle. The running and pouring problem was eventually resolved by adjusting the mix of fine and coarse particles. Another challenge was determining how much gypsum to add to the mix. Gypsum is used to control the length of time before the material begins to set. Edison and his associates decided that six hours was the optimum drying period: less and it wouldn’t have time to fill the mold, more and the components would start to separate. Whenever they fiddled with the other ingredients, they had to readjust the gypsum content accordingly to maintain the proper drying time.

Of all the difficulties Edison encountered, maintaining a homogeneous mixture proved to be the most vexing. After flowing fifty feet or more and sitting for six hours, the heavier aggregates, such as gravel and coarse sand, tended to separate from the cement and lighter materials. The mixture somehow had to be glued together in an even composition that would stay that way. After much casting about, Edison started experimenting with bentonite clay, which was commonly used in well drilling to bind and draw up small stones. When added to the mix, the bentonite acted as a colloidal glue, turning the cement into a jelly that stabilized within moments of coming to rest.

EDISON WANTED TO WORK out the technical aspects and then license the patents to anyone with the means and desire to help humanity.

With these problems solved, Edison filed a patent application outlining the entire process of casting a pouredconcrete house. The company’s mimeographed reply letter was replaced with an illustrated brochure that described the plan, if not the actual process. Rumors of impending construction of the new Edison houses surfaced in the press once again.

For the concept to be economical, a company would have to take advantage of the houses’ reproducibility by building many on a single site. The footings and slab foundations would be produced by traditional means, using a steam shovel, and then a crew consisting of thirty-five laborers, a foreman, and a mechanic would erect the first set of cast-iron house molds. The next day a large mechanical mixer would churn out the concrete, which would be fed into the tops of the molds by a conveyor with a string of bucket hoppers. Six men at the top would tamp the mixture to keep it liquid and make sure it flowed properly. As the cement went in, air would be vented out special cloth traps on the roof and at the highest points above each wall.

Reinforcing rods, pipes, and electrical conduit would be molded right in, as would everything from staircases and windowsills to picture frames, closets, bathtubs, hinges and fireplaces— even the roof and exterior decorations. Both exterior and interior would already be “painted” with pastel tints added to the cement. After six days’ curing, the mold could be removed. A day was allocated to do minor finishing work, add windows and doors, attach light fixtures, and install a furnace; Edison even planned to leave a groove around the edge of each room for a strip of wood to which carpets would be tacked. The next day the house could be occupied. An efficient crew with four sets of molds at its disposal could build a house every two days, or 144 per year, working a six-day week.

Edison decided that the houses should sell for $1,200 each, about one-third the usual price for a house at the time. The one drawback was that only large companies would be able to handle the logistics and cash outlay. With at least four sets of molds (at $25,000 each) needed per crew, as well as cranes and other equipment, the initial investment would be more than $175,000.

Despite much publicity and planning, by the end of 1909 there was still no concrete house, no iron molds, and no other hint of new cementrelated activity around the lab. Logistical problems persisted, technical snafus remained to be worked out, and since Edison was again otherwise distracted (by work on batteries and a redesign of his phonograph), he started looking to others to deal with the “minor details.”

Even though the architect William Ransome had already designed a concrete house on his own, Edison hired the high-profile New York City firm of Mann & MacNeille, which had experience working with pre-cast and modular concrete construction in the city. The Mann design was a two-story, two-family house “in the style of Francis I,” according to Scientific American, with a large front porch and extensive moldings and exterior decoration (at Edison’s request; he did not want to be remembered as “the father of ugly houses”).

A small model of the Mann house appeared in many photos and much news coverage over the next two years. But all was not as rosy as it seemed, because the molds for the Mann house were impossibly unwieldy. A finished mold set would contain between 2,300 and 2,500 structural parts, subject to options, and thousands more bolts, flanges, and connectors. In addition, it would weigh more than 450,000 pounds —hardly conducive to quick, easy assembly by unskilled labor.

NONETHELESS, THE PROJECT rumbled on. Edison’s good friend and neighbor Frank D. Lambie fabricated a set of molds; his business, the New York Steel Form Company, had the relevant expertise and was interested in acquiring a license. When the Lambie/Mann molds were done, Edison became directly involved again. Experimenting on the grounds of his Llewellyn Park estate, he cast two buildings, which are still standing: a two-story gardener’s cottage and a larger garage and workshop.

Lambie tried casting two Mann houses (minus the porches) on Mountain Avenue in nearby Montclair. He succeeded in creating a pair of durable buildings—they remain standing today—but the casting did not go smoothly. Evidence shows that he wound up pouring the two stories separately.

After learning of Lambie’s difficulties, Edison decided that the Mann design was too large and complex to be practical. That winter he directed two of his top draftsmen, Henry Harms and George Small, to draw up a new building that would be much less complicated and somewhat smaller: twenty-five by thirty feet, two stories high, with a living room and a kitchen downstairs and two bedrooms and a bathroom upstairs, as well as a front porch, an attic, and a cellar. Only the closets, the staircase, and some minor ornamentation would remain of the earlier, more ambitious plans. The new mold had only five hundred structural pieces and weighed less than 250,000 pounds.

The design had to have interchangeable sections and options that would allow an enterprising builder to vary the size, look, and decor of a house by simply using different sections of mold from the inventory. By doing this, and by tinting the concrete with different colors, Edison envisioned up to twelve house designs, each with a significantly different look from its neighbors, on the same street.

Sometime in the winter of 1910-11 the first true monolithic Edison house was cast by a Lambie crew on Hixon Street in South Orange, New Jersey. This time, despite the usual hitches, the process worked, and the house went up almost exactly as envisioned. (In the late 1960s it was demolished to make way for a supermarket and parking lot.)

With the success of the Hixon Street house, Edison considered his work complete. He reiterated to reporters that he had only wanted to show the way and work out the technical aspects, then give a license to build the houses to anyone with the means and desire to help humanity. The one restriction was that builders had to sell them to “working men” at no more than a 10 percent markup if they wanted to use the process royalty-free.

MEANWHILE FRANK LAMbie still had his molds. Convinced that Edison was done with the project, he began to explore his options. The investor for whom he had performed the Hixon Street test was Charles Ingersoll, of the dollar-pocketwatch fortune. Together they formed the Lambie Concrete House Corporation (renamed the American Building Corporation after Ingersoll withdrew). They made a good team: Lambie had expertise and equipment, while Ingersoll had money and connections. Though Edison did lend them his blessing and occasionally his ear thereafter, he declined to lend his name to the company or even serve as a director.

The ultimate test of the Edison process would be in mass production, which had yet to be demonstrated. After careful planning, with the equipment all assembled, the first large-scale development began, with forty houses planned to be built off Route 22 in Union, New Jersey, during July and August of 1917.

The street was named Ingersoll Terrace. Basements for the first eleven houses were dug with a steam shovel, and all the equipment and materials were put in place. The first few houses went up very slowly, as laborers struggled to learn the system and become familiar with the molds. Eventually the crew began to move with increasing speed and expertise. By the time the mold was broken on the eleventh house, the process was almost as systematized as Edison had predicted.

In the end the technical side of the monolithic concrete house was another Edison success story. But neither Edison nor Lambie nor Ingersoll had predicted the marketing nightmare they would encounter. Ingersoll decided, as a test, to put the first houses up for sale at the agreed price of $1,200 before building the next block. To everyone’s surprise, despite the extremely low price, not a single house was sold in the first month. Ingersoll abandoned the project, and no more Edison concrete houses were ever built.

Some historians and Edison biographers blame the publicity and Edison’s grandiose predictions for the demise of his most altruistic endeavor. No one wanted to live in a house that had been described as “the salvation of the slum dweller.” People were too proud to be stigmatized as having been “rescued from squalor and poverty.”

But there may have been a more important reason for the Edison monoliths’ failure to catch on. The architect Ernest Flagg, writing in Collier’s Weekly seven years later, noted that “Mr. Edison was not an architect— it was not cheapness that wanted so much as relief from ugliness, and Mr. Edison’s early models entirely did not achieve that relief.” From looking at them, it is hard to disagree.

After the initial fiasco the scheme did not vanish instantly. Following World War I, Henry Ford and others talked about plans to build Edison housing. Eambie went on to experiment with other types of molds, and several companies tried marketing concrete houses over the next seven years. None of them got anywhere. Edison’s vision of molding America had died in Union, New Jersey, in 1917, when the first For Sale signs produced nothing more than a handful of reporters.

The Edison Portland Cement Company remained one of the top producers of concrete and cement materials until it closed in 1942 in response to wartime energy-conservation measures. By then the technology had become outdated and inefficient, so the machinery was dismantled and sold to a South American company. Skeletal remains of the buildings, including some minor structures still occupied by other businesses, are evident at the site in northwestern New Jersey.

Ten of the original eleven houses remain standing on Ingersoll Terrace (one was demolished to make way for a highway exit), so the technology of the process has certainly shown itself to be durable. The original owners are long gone, but newer residents have generally positive opinions of the little houses. According to Mrs. Joseph Fila, who occupied an Edison house for half a century, “The twenty-four inch walls keep out the summer heat and provide good winter insulation.” Joe Kearny says that the maintenance cost of his concrete house is “zero.” Dolores Chumsky is less enthusiastic; her house is plagued by an elusive leak that defies detection. She adds that any prospects for renovation or improvements are doomed. “Just try and get someone to come and make repairs,” she says. “They may come in once, but they never come back.”

IN CONSIDERABLY DIFFERENT FORM from what Edison envisioned, concrete construction has become a mainstay of modern building technology. The technique of pre-stressing, developed in the 1920s and 1930s and widely used beginning in the 1950s, has made concrete skyscrapers built from pre-cast elements commonplace. The plight of the slum dweller, however, remains unsolved.

Michael Peterson is a freelance photographer and writer in Blairstown, New Jersey.

Sunday, August 16, 2009

Not Everyone Can Afford a Home and Many Never Will

The article reprinted below from the Saturday, August 15 2009 Wall Street Journal is a brilliant analysis of why homeownership is not an appropriate solution for many families.To be blunt, many cannot afford it. And many never will.

As a society for years we have attempted to encourage the epitome of success as the norm regardless of cost. All levels of government has spent trillions on tax credits, subsidies, loan programs and more to achieve a phantom upper middle class in America modeled on the priviledged elite but to what effect? Does the middle class in today's America really feel richer and better off than their parents? And what happened to the genuine lessons of success that they lived and allowed them to achieve financial success without public handouts?

A great parallel example to the current housing crisis is the notion that everyone should go to college after high school. Of course, for thousands of years trade schools and apprenticeships were the accepted option for most individuals. Learning a skilled trade meant financial security for a lifetime. There was honor in being a stone mason, a baker, a distiller, or providing some other necessary service or skill and doing it well.

Instead, modern Ameican society after 1945 viewed manual labor with disrespect and encouraged all students, regardless of intellectual capability or personal temperament, to get two or four year college degrees. University enrollment exploded after World War II.

The result? We have an entire class of young people saddled with tens (and sometimes hundreds) of thousands of dollars of student loans to earn essentially worthless university degrees unable to earn a living wage because they lack necessary business skills. Visit any Starbucks and speak to the baristas with degrees in poetry, sociology, and English literature. You'll quickly understand what I mean.

The truly important article below by author Thomas J. Sugrue tells an important truth. Sometimes people can't afford what they want. They either need to wait to buy a home, taking all those necessary steps our grandparents did, like saving money and living a life of thrift, or simply resign themselves to never buying one at all.

Policy makers need to have the courage to face their constituants with this simple fact.

If you can't afford a home, no one is going to buy one for you.

Robert J. Abalos, Esq.

The New American Dream: Renting

It's time to accept that home ownership is not a realistic goal for many people and to curtail the enormous government programs fueling this ambition. By Thomas J. Sugrue

[HOME_cover2] Superstock

Suburban sprawl in Placer County, Calif.

'A man is not a whole and complete man," wrote Walt Whitman, "unless he owns a house and the ground it stands on." America's lesser bards sang of "my old Kentucky Home" and "Home Sweet Home," leading no less than that great critic Herbert Hoover to declaim that their ballads "were not written about tenements or apartments…they never sing about a pile of rent receipts." To own a home is to be American. To rent is to be something less.

Every generation has offered its own version of the claim that owner-occupied homes are the nation's saving grace. During the Cold War, home ownership was moral armor, protecting America from dangerous outside influences. "No man who owns his own house and lot can be a Communist," proclaimed builder William Levitt. With no more reds hiding under the beds, Bill Clinton launched National Homeownership Day in 1995, offering a new rationale about personal responsibility. "You want to reinforce family values in America, encourage two-parent households, get people to stay home?" he said. George W. Bush similarly pledged his commitment to "an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, 'welcome to my house, welcome to my piece of property.'"

Bill Owens/James Cohan Gallery

A 1970 photograph from Bill Owens’s “Suburbia” series.

Surveys show that Americans buy into our gauzy platitudes about the character-building qualities of home ownership—at least those who still own them. A February Pew survey reported that nine out of 10 homeowners viewed their homes as a "comfort" in their lives. But for millions of Americans at risk of foreclosure, the home has become something else altogether: the source of panic and despair. Those emotions were on full display last week, when an estimated 53,000 people packed the Save the Dream fair at Atlanta's World Congress Center. Its planners, with the support of the Department of Housing and Urban Development, brought together struggling homeowners, housing counselors, and lenders, including industry giants Bank of America and Citigroup, to renegotiate at-risk mortgages. Georgia's housing market has been devastated by the current economic crisis—338,411 homes in the Peachtree state went into foreclosure in May and June alone.

Atlanta represents the current housing crisis in microcosm. Since the second quarter of 2006, housing values across the United States have fallen by one third. Over a million homes were lost to foreclosure nationwide in 2008, as homeowners struggled to meet payments. The number of foreclosures reached an all-time record last month—when owners of one in every 355 houses in the country received default or auction notices or were seized by creditors. The collapse in confidence in securitized, high-risk mortgages has also devastated some of the nation's largest banks and lenders. The home financing giant Fannie Mae alone held an estimated $230 billion in toxic assets. Even if there are signs of hope on the horizon (home prices ticked upward by 0.5% in May and new housing starts rose in June), analysts like Yale's Robert Shiller expect that housing prices will remain level for the next five years. Many economists, like the Wharton School's Joseph Gyourko, are beginning to make the case that public policies should encourage renting, or at least put it on a level playing field with home ownership. A June 2009 survey commissioned by the National Foundation for Credit Counseling, found a deep-seated pessimism about home ownership, suggesting that even if renting doesn't yet have cachet, it's the only choice left for those who have been burned by the housing market. One third of respondents don't believe that they will ever be able to own a home. And 42% of those who once purchased a home, but don't own one now, believe that they'll never own one again.

[HOME_jp2] Classic Stock

A family house-hunting

Some countries—such as Spain and Italy—have higher rates of home ownership than the U.S., but there, homes are often purchased with the support of extended families and are places to settle for the long term, not to flip to eager buyers or trade up for a McMansion. In France, Germany, and Switzerland, renting is more common than purchasing. There, most people invest their earnings in the stock market or squirrel it away in savings accounts. In those countries, whether you are a renter or an owner, houses have use value, not exchange value.

For most Americans, until the recent past, home ownership was a dream and the pile of rent receipts was the reality. From 1900, when the census first started gathering data on home ownership, through 1940, fewer than half of all Americans owned their own homes. Home ownership rates actually fell in three of the first four decades of the 20th century. But from that point on forward (with the exception of the 1980s, when interest rates were staggeringly high), the percentage of Americans living in owner-occupied homes marched steadily upward. Today more than two-thirds of Americans own their own homes. Among whites, more than 75% are homeowners today.

Yet the story of how the dream became a reality is not one of independence, self-sufficiency, and entrepreneurial pluck. It's not the story of the inexorable march of the free market. It's a different kind of American story, of government, financial regulation, and taxation.

We are a nation of homeowners and home-speculators because of Uncle Sam.

It wasn't until government stepped into the housing market, during that extraordinary moment of the Great Depression, that tenancy began its long downward spiral. Before the Crash, government played a minuscule role in housing Americans, other than building barracks and constructing temporary housing during wartime and, in a little noticed provision in the 1913 federal tax code, allowing for the deduction of home mortgage interest payments.

Until the early 20th century, holding a mortgage came with a stigma. You were a debtor, and chronic indebtedness was a problem to be avoided like too much drinking or gambling. The four words "keep out of debt" or "pay as you go" appeared in countless advice books. As the YMCA told its young charges, "If you can't pay, don't buy. Go without. Keep on going without." Because of that, many middle-class Americans—even those with a taste for single-family houses—rented. Home Sweet Home didn't lose its sweetness because someone else held the title.

Getty Images

A foreclosed home in Antioch, Calif., in May.In any case, mortgages were hard to come by. Lenders typically required 50% or more of the purchase price as a down payment. Interest rates were high and terms were short, usually just three to five years. In 1920, John Taylor Boyd Jr., an expert on real-estate finance, lamented that "increasing numbers of our people are finding home ownership too burdensome to attempt." As a result, there were two kinds of homeowners in the United States: working-class folks who built their own houses because they couldn't afford mortgages and the wealthy, who usually paid for their places outright. Even many of the richest rented—because they had better places to invest than in the volatile housing market.

The Depression turned everything on its head. Between 1928, the last year of the boom, and 1933, new housing starts fell by 95%. Half of all mortgages were in default. To shore up the market, Herbert Hoover signed the Federal Home Loan Bank Act in 1932, laying the groundwork for massive federal intervention in the housing market. In 1933, as one of the signature programs of his first 100 days, Frankin Roosevelt created the Home Owners' Loan Corporation to provide low interest loans to help out foreclosed home owners. In 1934, F.D.R. created the Federal Housing Administration, which set standards for home construction, instituted 25- and 30-year mortgages, and cut interest rates. And in 1938, his administration created the Federal National Mortgage Association (Fannie Mae) which created the secondary market in mortgages. In 1944, the federal government extended generous mortgage assistance to returning veterans, most of whom could not have otherwise afforded a house. Together, these innovations had epochal consequences.

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President Herbert Hoover

Easy credit, underwritten by federal housing programs, boosted the rates of home ownership quickly. By 1950, 55% of Americans had a place they could call their own. By 1970, the figure had risen to 63%. It was now cheaper to buy than to rent. Federal intervention also unleashed vast amounts of capital that turned home construction and real estate into critical economic sectors. By the late 1950s, for the first time, the census bureau began collecting data on new housing starts—which became a leading indicator of the nation's economic vitality.

It's a story riddled with irony—for at the same time that Uncle Sam brought the dream of home ownership to reality—he kept his role mostly hidden, except to the army banking, real-estate and construction lobbyists who rose to protect their industries' newfound gains Tens of millions of Americans owned their own homes because of government programs, but they had no reason to doubt that their home ownership was a result of their own virtue and hard work, their own grit and determination—not because they were the beneficiaries of one of the grandest government programs ever. The only housing programs prominently associated with Washington's policy makers were underfunded, unpopular public housing projects. Chicago's bleak, soulless Robert Taylor Homes and their ilk—not New York's vast Levittown or California's sprawling Lakewood—became the symbol of big government.

Federal housing policies changed the whole landscape of America, creating the sprawlscapes that we now call home, and in the process, gutting inner cities, whose residents, until the civil rights legislation of 1968, were largely excluded from federally backed mortgage programs. Of new housing today, 80% is built in suburbs—the direct legacy of federal policies that favored outlying areas rather than the rehabilitation of city centers. It seemed that segregation was just the natural working of the free market, the result of the sum of countless individual choices about where to live. But the houses were single—and their residents white—because of the invisible hand of government.

But by the 1960s and 1970s, those who had been excluded from the postwar housing boom demanded their own piece of the action—and slowly got it. The newly created Department of Housing and Urban Development expanded home ownership programs for excluded minorities; the 1976 Community Reinvestment Act forced banks to channel resources to underserved neighborhoods; and activists successfully pushed Fannie Mae to underwrite loans to home buyers once considered too risky for conventional loans. Minority home ownership rates crept upward—though they still remained far behind whites. Even at the peak of the most recent real-estate bubble, just under 50% of blacks and Latinos owned their own homes. It's unlikely that minority home ownership rates will rise again for a while. In the last boom year, 2006, almost 53% of blacks and more than 47% of Hispanics assumed subprime mortgages, compared to only 26% of whites. One in 10 black homeowners is likely to face foreclosure proceedings, compared to only one in 25 whites.

Associated Press

Long Island’s Levittown, celebrated its 60th anniversary in 2007.During the wild late 1990s and the first years of the new century, the dream of home ownership turned hallucinogenic. The home financing industry—at the impetus of the Clinton and Bush administrations—engaged in the biggest promotion of home ownership in decades. Both pushed for public-private partnerships, with HUD and the government-supported financiers like Fannie Mae serving as the mostly silent partners in a rapidly metastasizing mortgage market. New tools, including the securitization of mortgages and subprime lending, made it possible for more Americans than ever to live the dream or to gamble that someone else would pay them more to make their own dream come true. Anyone could be an investor, anyone could get rich. The notion of home-as-haven, already weak, grew even more and more removed from the notion of home-as-jackpot.

And that brings us back to those desperate homeowners who gathered at Atlanta's convention center, having lost their investments, abruptly woken up from the dream of trouble-free home ownership and endless returns on their few percent down. They spent hours lined up in the hot sun, some sobbing, others nervously reading the fine print on their adjustable rate mortgage forms for the first time, wondering if their house is the next to go on the auction block. If there's one lesson from the real-estate bust of the last few years, it might be time to downsize the dream, to make it a little more realistic. James Truslow Adams, the historian who coined the phrase "the American dream," one that he defined as "a better, richer, and happier life for all our citizens of every rank" also offered a prescient commentary in the midst of the Great Depression. "That dream," he wrote in 1933, "has always meant more than the accumulation of material goods." Home should be a place to build a household and a life, a respite from the heartless world, not a pot of gold.

—Thomas J. Sugrue is Kahn professor of history and sociology at the University of Pennsylvania. He is writing a history of real estate in modern America.