Monday, July 26, 2010

Treasury Secretary Geithner Says Let Bush Era Tax Cuts Expire: Exactly Who Buys Real Estate Anyway?

U.S. Treasury Secretary Timothy Geithner made the Obama Administration's case yesterday for letting the Bush-era tax cuts on the "rich" (actually those making over $200,000 per year) expire in the name of fiscal discipline.

Coming from a guy who has a history of not paying income taxes this argument was laughable, almost surreal.

Geithner, probably the most inept Treasury secretary in American history, is about as convincing on the subject of taxes as Tiger Woods preaching on the virtues of marital fidelity.

Forget about the macroeconomic implications of hitting people, LOTS OF THEM, with serious tax increases in the middle of a recession.  Not exactly stimulative, is it?

Let's deal just with the implications for real estate.  Who exactly buys rental properties and commercial real estate?  With the industry battered, bleeding, and still suffering, does real estate truly need another serious financial hit?

So who exactly who can buy all those surplus rental properties flooding the real estate markets?  Single mothers working at Wal-Mart?  UPS truck drivers?  What about baristas at Starbucks?  The guy who makes sandwiches at Subways?

It's the upper middle class and the rich, silly.  $200,000 a year isn't exactly rich but these people normally have surplus capital to invest, in of all things, real estate.

Instead of making a mortgage payment on a new rental property held for retirement, these people can now just send the same amount of money to Mr. Geithner so he can make interest payments to the Chinese government on all those bonds he sold them to finance the bloated and growing Federal deficit.

Geithner needs to be fired.  NOW.  This fool has never had a job in the private sector by his own admission and his bizarre ideas and incomprehensible answers to the most serious economic problems of the day prove this daily, unfortunately for us.

Robert J. Abalos, Esq.

Saturday, July 24, 2010

The American Middle Class is Shrinking and so is the Market for Your Rental Properties

The statistics overwhelmingly prove that the American middle class is shrinking.

Wages have fallen.  Debt has risen.  Equity has collapsed.  What happened to all that real estate equity, all those 401(k)s, and even the income off bonds?

The rich have gotten richer.  The poor have gotten richer too.  But the middle class, that huge bulge of people in the middle that propels the entire U.S. economy, has gotten smaller and is slowly disintegrating.

This simple fact has profound implications for the future of the United States.  And for any real estate development venture or project based on selling to the middle class.

Suburban middle class development is dying.  The old school idea of building subdivisions in within an hour's drive a major city is becoming an anachronism.  It just does not work any longer.  The "Drive Until You Qualify" homebuyer is overburdened in so many ways they are becoming an endangered species.

I meet many real estate investors all the time who are basing their retirement plans on the ownership of "bread and butter" middle class housing, especially single family homes.  I'll rent them out and let the tenants pay off the mortgages, or so the thinking goes.  Then I'll refinance or sell them at age 65.

All I ask is who will buy them in 2020, 2025, 2030?  How will they buy them?  And why?

Ignoring the macroeconomic trend that your target market is disappearing is inviting disaster.

Robert J. Abalos, Esq.

Wednesday, July 21, 2010

Obama Financial Reform Law Will Drive Down Home Prices and Raise Interest Rates

If you thought getting a mortgage was tough these days, try again in few months once Mr. Obama's financial reform bill signed today into law becomes effective.

Think what would happen in the Post Office ran your local mortgage broker.  That's your future when you go to buy your next home.

Here is one excellent analysis of what will happen under the new financial reform law, including higher interest rates on mortgages and much more paperwork to get them (including having to prove to the U.S. government and not just your bank you can afford the monthly payments).

I'll go further.  A lower number of buyers mean home prices must fall.

Fewer borrowers will qualify under the new rules.  Banks will write fewer of these loans because, let's face it, why bother?  They are now required under this new law to hold many more of them in their portfolios which sounds like a good idea but ask yourself this question.

Given the reckless government spending, the massive $1 trillion Federal deficits, the certainty of higher interest rates, the likelihood of a double dip recession coming early in 2011, and all the monetary mismanagement lately by the Fed, would you loan someone $250,000 on a 30-year note at just 4.5%?

This is an absurd risk and bankers are not stupid.  Many will exit this line of work if they cannot readily sell the notes to investors to spread the risk.

What the feeble U.S. economy did not need was yet more government regulation and paperwork.

It got TONS and MILES of it in spades today.

Robert J. Abalos, Esq.

Monday, July 19, 2010

The Strange Adventure of Michael R. Mastro

Real estate investor Michael R. Mastro has been a living legend in Seattle for generations.  Hugely successful as a developer and rehabber for more than forty years, he had been part of downtown Seattle for as long as anyone can remember.

Then, in 2009, due to excessive leverage and the collapse of the real estate market, he was forced to file for bankruptcy.

But this is where the interesting story really just begins....

Here is an excellent piece from the Seattle Times on how to live like a King when you supposedly ain't got a dime.  Much can be learned by real estate investors by studying how Mastro built his empire and why it collapsed.

I once met Mr. Mastro years ago briefly at a charity event.  He was as charming as you would expect from anyone who could wheel and deal in large commercial properties for decades.

But now, Seattle is abuzz over the story of the man who fell from grace but somehow still lives a lifestyle fueled by nothing but grace.

Robert J. Abalos, Esq.

Sunday, July 18, 2010

Bite of Seattle and a Great Lost Marketing Opportunity

The Bite of Seattle is an annual three day celebration held at the location of the old 1962 World's Fair in downtown Seattle, literally at the base of the Space Needle.

It's all about FOOD, lots of food, and free music and hundreds of thousands of people having fun.  What makes this event all the more impressive is that it is free.  No admission fees are charged of any kind.

I was there yesterday on what is probably the most perfect day in the history of always rainy and gloomy Seattle.  Sunny, cool, weather just about as ideal as any major public event could expect.

From the photo, you can learn two key points.  How close the stages are to the iconic Space Needle and what a poor photographer I am.

Anyway, what was relevant for me while I wandered the endless aisles of Junk Food Heaven (Funnel Cakes, yummy!) and saw the few arts and craft vendors selling their homemade wares what a lost opportunity this event is for real estate investors and investment based companies.  There were some larger companies advertising through display booths, like GEICO and Verizon and especially the event sponsor Comcast, but not a single real estate firm of any kind

No sales companies like Century 21, John L. Scott, or Windermere, all huge residential brokers in the Seattle area.

No rental companies like Equity Residential or AIV pushing apartment rentals.

No contractors or home repair companies like Roto-Rooter or Terminix Pest Control.

Home Depot Installation, a vinyl siding company, and a small hardware store chain are sponsors of the Bite so the question is raised.  Why not more real estate?  Why doesn't one single real estate investor market their "I BUY HOMES" message there?  Who wouldn't want a captive audience of 100,000 people every day walking by their booth?

Every single one of the hundreds of thousands of people who visit "The Bite" have one thing in common besides the love of music and junk food.  They all live somewhere.  Either they rent or own their own home.

What a wasted marketing opportunity.  The Bite could have used the revenue.  The crowd could have used some practical real estate advice and information.  And we all, in the end, could have enjoyed a diversion from all those French Fries, ice cream, gyros, and kebobs that don't exactly sit well in the stomach the next day.

Robert J. Abalos, Esq.

Thursday, July 15, 2010

Bridget Fonda Wouldn't Want to Live There Anymore

One of the reasons the world fell in love with the city of Seattle in the early 1990s was the grunge rock movement.  Nirvana, Soundgarden, Alice in Chains.  Kurt Cobain and Pearl Jam.

The other reasons were the films SLEEPLESS IN SEATTLE and director Cameron Crowe's brilliant Valentine's Day card to his native city, SINGLES.  This 1992 film shot on location in Seattle starred Bridget Fonda, Matt Dillon, Campbell Scott, and Kyra Sedgwick and centered around life in an apartment building where all the tenants knew each other and were desperately searching for love.

Well, the apartment building featured in the film is located at 1820 East Thomas Street in Seattle in the Capitol Hill area of the city.  I decided to visit the location after recently seeing the film again (for about the tenth time!) and report what I found.

Bridget Fonda would no longer want to live there.

The crisp and neatly manicured apartment building in the film is now poorly maintained, rundown, and seedy.  There are tall weeds and debris everywhere. 

The building is far smaller than the film's lens makes it appear.  You get an almost claustrophobic feeling spending time in the small courtyard which, by the way, never had a fountain like the film portrays.  It was added just for the movie.

What is ironic is that this building is in a far nicer neighborhood today than it was in 1992.  Back in Bridget's day this area, east of 15th Avenue on Capitol Hill, was extremely gritty and rundown to put it mildly.  There has been extensive gentrification over the last ten years with many of the old rooming houses replaced by modern condos and townhouses.  For those who remember the grunge era, for example, the home called "The Rat House" occupied by murdered singer Mia Zapata and her band, The Gits, was just four blocks away from Bridget's place.  The band gave this distinctive name to their own home because the owner of the building claimed that by eating the rats that lived in the house he scared the other live ones away.  He proved to them who was boss when he made a soup from their corpses.

Understand what kind of neighborhood this was back when SINGLES was filmed?

I spoke to a tenant at the property, a young girl who was four years old when the movie was released.  She did not know the film or the building's place in movie history but she was excited to learn the facts about her apartment.   The opportunity to market these apartments through the film have been completely lost by the owners.

I have posted a bunch of photographs I took of the building on my Picasa website here.  You can see for yourself what the building looked like then by watching the movie (available on Netflix and everywhere) and what it looks like now.

After analyzing thousands of rental properties over the last thirty years I can tell you this without any doubt.

This property needs a good resident manager.  None lives on site.  There is no sign even telling prospective tenants who manages the building or how to contact the owners in the event of trouble.  The tree growing on the street on the right side of the building blocks the iconic view most people remember from the film and needs to be pruned.  There is rust, peeling paint, and tall weeds everywhere all can be.

SINGLES is one of those great undiscovered gems of a film and that's probably what Cameron Crowe, who went on to direct the Oscar-winning film, ALMOST FAMOUS, intended when he made it.  Simple characters in a simple story.  You can't watch this film without wanting to live in Seattle because the city itself becomes a leading character in the film, as naive, proud, fun, and unique as Bridget, Matt, or Kyra are on screen.

Unfortunately the Seattle of the film is long gone, not better, but different, and my visit to 1820 East Thomas Street on Capitol Hill yesterday proves it.

Robert J. Abalos, Esq.

Wednesday, July 14, 2010

Fed Considers Even More Monetary Stimulus Due to Declining Economy

Forget about the fiscal stimulus problems I wrote about just two hours ago in this blog?  Well here is yet another daily reminder the lunatics in DC have taken over the asylum.

Fed Chairman "Helicopter" Ben Bernanke is seriously considering even more monetary stimulus due to the obviously deteriorating economic situation in the United States which is becoming more and more obvious by the day and, coincidently, I have been forecasting in this blog for nearly a year.

I am reminded here of those old school doctors who believed the way to heal a patient was to bleed the illness out of him.

Yes, these techniques killed George Washington and many others.  But did such nonsense ever really make sense except to the most simplistic minds?  If you can figure out how bleeding a person can make them healthy there is hope for you.  A job at the Fed is waiting.

Does any rational person believe the Federal government alone can stimulate a moribund and declining $14.3 trillion economy with yet another round of stimulus when the previous THREE rounds have not worked?

What is the definition of insanity?  Doing the same thing over and over again and expecting a different result?  And what type of additional stimulus do Ben and Company have in mind?  Interest rates are already at zero percent and the Fed's balance sheet is a mess.

Just hours after I'm writing about my concerns for inflation and skyrocketing interest rates Bernanke makes my original post today seem tame.

Madness.  Sheer madness.

Robert J. Abalos, Esq.

Federal Budget Deficit $1 Trillion So Far This Year: Think About Interest Rates

Your public servants in Washington so far this fiscal year have spent more than $1 trillion than they took in though taxes and fees.

$2.6 trillion spent.  $1.6 trillion in taxes.  You do the math.

And there is still three months to go on the fiscal year.  There is much more spending to do.

For the record, Congress spent more than $1.1 trillion last year they didn't have.

We are now in the 21st straight month of deficit spending.

Um, is anyone thinking interest rates and inflation?  The banks are getting a great deal borrowing at zero percent interest and then buying Treasuries at 3%.  Nice money when you can get it.  But it is INEVITABLE that when interest rise---and they sure can't fall any lower---they are going to have to rise SHARPLY to squeeze out all this outlandish fiscal stimulation or inflation will literally explode.  Think Fed policy in the early 1980s, only this time on steroids.

Every real estate market I am studying is getting more unhealthy and the extreme tight money and skyrocketing interest rates that are coming over the next five or so years will only make matters worse.

Congress needs to grow up and stop acting like a college freshman who got their first VISA card. I would say stop spending like a drunken sailor but that is an insult to drunken sailors everywhere.

Robert J. Abalos, Esq.

Tuesday, July 13, 2010

MUST READ BOOK: Value Investing by James Montier

Value Investing: Tools and Techniques for Intelligent InvestmentEveryone knows I am a classic Graham and Dodd value investor who (has) worshipped at the altar of Warren Buffett for many years.

THE INTELLIGENT INVESTOR by Benjamin Graham has been the definitive text (along with his massive tome, SECURITY ANALYSIS) on value investing techniques for decades.

Now it appears we have another book to add to this collection.

VALUE INVESTING by author James Montier is a stunningly comprehensive analysis of why value investing trumps all other forms of investment.  This is no superficial analysis of the subject but a highly detailed and statistical review of how buying on the cheap is the only method of securing long-term profits for investors.

Lots of graphs, lots of charts, lots of numbers, and most of all, lots of analysis proving what Graham, Buffett, and I have been telling investors for years.

Buy low, sell higher.

NOT buy high, sell higher.  This is momentum investing and it does not work over time.

To get you started before you buy this excellent book, here is an interview with James Montier where he explains some of his ideas.

I cannot recommend this book more highly.  BRILLIANT on every level.  Every page is bristling with critical advice for investors.  This book is simply stunning to read for its depth and practical advice.

For the record, I do not know the author and have no financial stake in the sale of this book.

Robert J. Abalos, Esq.

Thursday, July 8, 2010

Great Investment Advice from the Moguls at Sun Valley

The annual Allen & Company Sun Valley Conference is underway in Idaho and the wealth of investment ideas that pour forth from this gathering of the world's greatest business moguls is staggering.

Why do you think all the invited corporate titans attend this event every year?  Why do you think private investment bank Allen & Company hosts it?

To network for sure.  But they network with each other plenty every day of the year.

They go to Sun Valley in July to escape the Manhattan heat and to learn about business conditions from each other.  A glass of Domain Romanee-Conti (or two, or four....) can open a lot of lips.  You learn things you can't read about in Business Week.  You get investment tips over a wink and a nod and by reading between the lines.

Plus where else can you see billionaires like Michael Bloomberg wearing white socks with shorts?

The media is extensively covering the event.  There is LOTS and LOTS for investors of all budgets large and small to learn about the direction of the economy and much more.

You might not have been invited to Sun Valley this year but that doesn't mean you can't learn a whole lot from what is being said outside your presence.

Robert J. Abalos, Esq.