Friday, April 9, 2010

Obama Health Care Bill Will Cause Price Decline in Rental Property Values

Mr. Obama's new health care bill places a new tax of 3.8% on all so-called "unearned income" including dividends, interest, and rental income for taxpayers making above $200,000 per year.

The new tax, now cynically called an "unearned income Medicare contribution", is really just another surtax imposed by Mr. Obama to get "wealthy" Americans to pay for his health insurance scheme.

Anyone who has ever managed rental properties and all the headaches tenants can give you know that rents are EARNED income.  I find this Orwellian definition of rental income offensive and ignorant.

But more importantly, imposing a 4% Federal tax on rental income has to depress the prices of rental properties by at least that much.  Use any capital asset pricing model ("CAPM") to get the actual value with respect to any property.  When the costs of owning an asset, or more accurately, owning its income stream rise, the value of the asset must fall to adjust the yield for investors relative to another investments or uses for capital.  This is basic Corporate Finance 101. 

So at a time commercial real estate is struggling, and the banks who hold this paper are afraid for dear life, the Federal government decides to milk this sick cow for another 4% per year.

What a way to run an economy.

Robert J. Abalos, Esq.

Thursday, April 8, 2010

Don Corleone and Alan Greenspan?

Alan Greenspan was testifying before Congress yesterday and it was obvious he still doesn't understand his primary role in creating not one, but TWO, investment bubbles during his watch as Fed Chairman.

NASDAQ, 1999
Real Estate, 2007

As regular readers of this blog and my other writings know, I'm not a fan of Mr. Greenspan or his successor, Mr. Bernanke.  I wouldn't hire either one of these guys to run a cash register at a 7-11, let alone run the Central Bank of the United States.  There isn't a thimble's worth of common sense between them.

But Greenspan has gone from an idol in the financial world to a pariah in just three short years.  And he still believes his "Greenspeak" song-and-dance pony shows can charm the masses, holding sway over public opinion as he once did like a hypnotist on a stage.  I once wrote that the saddest thing to witness is an unfunny comedian doing his act.  No, that's now #2.  Leading the pack is a former Fed Chairman who still doesn't get it.

I watched his testimony yesterday and I really felt sorry for the guy.  I'm sure he's a nice man who likes dogs and buys his wife, NBC correspondent Andrea Mitchell, pretty flowers on her birthday.  But as an economist or a Fed chairman he's just clueless.  A taxi cab driver from the streets of Dayton, Ohio pulled out of his hack at random would have done a better job at the Fed.  And that's no slight against taxi cab drivers either.

Want to see how bad the ridicule has finally gotten?  Check out this video clip of Greenspan being compared to "Godfather" Don Corleone by talk show host Dylan Ratigan.  Yes, it's hyperbole but he's not far off the mark.

On a more serious note, check out GREENSPAN'S BUBBLES: THE AGE OF IGNORANCE AT THE FEDERAL RESERVE the wonderful book by author William Fleckstein that makes it very clear Alan needs to rethink his legacy, and do it REALLY REALLY fast.

Robert J. Abalos, Esq.

Tuesday, April 6, 2010

MUST READ BOOK: The New Empire of Debt by William Bonner and Addison Wiggin

"In the last half of 2008, the Empire of Debt received the margin call from Hell."

And so begins the captivating book,  The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble by authors William Bonner and Addison Wiggin.

If you are concerned (like me) that America is quickly spending itself into oblivion and third world nation status, this is a must read for you.

Yes, the authors lay out a compelling case that politicians are borrowing and spending money so fast that the once great American empire has become a hollow shell.  But they do it in a witty and often humorous way that H.L. Mencken would have found amusing.  (He's actually quoted in the book.)  I feel that much of what I read in this book is gallows humor, disguising the sad fact that Washington and Wall Street are devouring our national wealth for the sake of their own aggrandizement while Main Street suffers and sacrifices to pay the bills.

Politicians point to the latest financial crisis and scowl with derision about all the accounting gimmicks and social mistrust that has been generated.  But the investment bankers and bond analysts who sold bogus derivatives are mere amateurs compared to the waste, fraud, and numerical slight-of-hands occurring daily on Capitol Hill.  The hypocrisy is stunning, and quite disturbing to witness---and funny to read, in a black humor sort of way.

The United States is approaching ONE HUNDRED TRILLION DOLLARS in unfunded mandates, loan guarantees, pension liabilities, entitlement program promises, and fiscal deficits.

The entire Gross Domestic Product of the United States last year was only $14 trillion.

And the number keeps growing...and growing...and growing...with no end in sight.

As this wonderful and insightful book makes clear, the two greatest economic empires of the 20th Century were the United States and Japan.  The Japanese built a powerful industrial machine on the ruins of a devastating country and within thirty years were the envy of the world.

Not anymore, however.  Too much debt, investment speculation, fiscal mismanagement, and internal political strife has left the country mired in economic recession for nearly twenty years now.  And nothing is likely changing anytime soon for the people in Japan.

The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble makes clear we are next unless matters change, and change REALLY REALLY REALLY fast.

For the record, I do not know these authors and have no stake in the sale of their book.  I am recommending it to you because it is not only essential reading but utterly fascinating to devour.

Robert J. Abalos, Esq.

Monday, April 5, 2010

Treasury Bond Yield Hits 4% at 18-Month High: Bad News for Real Estate Investors

The 10-year Treasury bond broke a 4% yield today, a major resistance point for technical traders and a serious foreboding of higher mortgage interest rates to come.

This was the first time the yield crossed 4% in 18 months, or since October 2008.

Higher yields are on the way, given weak demand for the bonds at the current coupon rates and wildly high inflation fears. Would you loan someone money with a balloon payment due in ten years at just 4% per year in this economic climate?

Just three days ago in this blog I warned readers of higher interest rates to come.

Guess what? They're here.

Robert J. Abalos, Esq.

Friday, April 2, 2010

Double Digit Mortgage Interest Rates Coming by 2014

Mortgage interest rates on residential and commercial properties in the United States will be in double digits by 2015 and likely even sooner.

The analysis here is simple.

The Federal budget deficit is out of control. The CBO now estimates that by the year 2020 the Federal deficit will be NINETY PERCENT OF U.S. GDP. That is TEN TRILLION DOLLARS of new debt from just 2010-2020 and does not take into account all the new spending programs Mr. Obama and Ms. Pelosi are dreaming up over coffee in the Oval Office.

Inflation in March 2010 was at an 18-month high. The pressure growing on the Fed to monetize the massive Federal debt is obvious. Read this article from columnist Michael Kinsley on Mr. Obama's ideas for using inflation to pay down the national debt he caused during this first year in the White House. The worldwide risk of hyperinflation is growing and this fear factor on bond yields and long-term mortgage rates should not be ignored.

The demand for U.S. Treasuries is falling as Japan and China are no longer buying them at their usual rates. China is now a net seller of Treasuries. Buying is now at six-month low. Simply put, these nations have their own financial concerns and are not satisfied with the low rates on these bonds any longer. This factor alone has "dire consequences" for mortgage interest rates in the U.S. The artificial mortgage rate subsidy from China and Japan that gave Americans all those record low interest rates from 2000-2007 is now gone.

Mr. Bernanke at the Fed is going to have to start raising interest rates more sooner than later. Most estimates are between six to eighteen months, and once he starts they have nowhere to go but up. They have been stuck at near zero percent for far too long.

The near term outlook for U.S. real estate is grim. Too much supply, not enough demand, disappearing government incentives to buy, tight mortgage money, rising interest rates, high foreclosure rates still keeping down prices, and a hidden market of sellers desperate to unload properties but just waiting for any prices increases to do so.

Real estate investors have lost trillions of dollars in the last three years, and homeowners even more. There is no speculative incentive to buy most categories of properties anymore. Does anyone think they are going to get rich anytime soon buying and renting out condos? All the conventional buy-and-hold or buy-and-flip real estate profit models are obsolete and have failed investors miserably.

There are ways to play this gruesome market and I'll be discussing them in the weeks and months ahead.

Robert J. Abalos, Esq.

Thursday, April 1, 2010

Canadian Broadcasting Corporation Reporter Please Call Me Back

To the CBC reporter who called me yesterday.

Please call me back at 206-289-0320 and leave your number again. Your message was garbled on the recording and I have no way to reach you again but this post. You can also email me with your contact information at I have the information you requested but I can't get it to you.

Robert J. Abalos, Esq.