Thursday, December 29, 2011

Apartment Building Bubble

If your city is like mine, you see lots of cranes on the horizon building apartment buildings.

Five years ago, those same lots were destined for condo towers.  But today those very same buildings with very little interior modification are being put up as apartment towers.

Do you see the problem?

The same out-of-whack forces that drove condo prices into the ground are destined to do the same for apartment building owners.  Simply put, there are too many apartments being added to a supply of apartments that is already too large.

I know there's a bubble in apartment building valuations when I read that large NON-RESIDENTIAL developers are started to get the apartment itch.  In Seattle the bubble is obvious even to the lamestream media which usually can't find an pink neon elephant in a conference room.  When developers are chasing yields you know the bubble is in its last days.

I recently wrote about a sweet apartment building deal in Seattle where investors probably made 100%+ on their money in about a year flipping a building.  Returns like that are not possible outside of bubbles.

Apartment REIT valuations are high---and headed higher.  The industry currently reflects a P/E of 21, way too high for a real estate sector facing major headwinds.  That said, most of the individual REIT charts look less than stellar.  Here is EQR as an example.

What is the logic of apartment building ownership?  Simple.  People can no longer afford to buy homes or are unwilling to do so in previous numbers.  Since people have to live somewhere, the choice is either rent or buy.

Sounds good, right?  WRONG.

The first problem is that the number of households in the United States is shrinking.  The growth rate has been NEGATIVE for FORTY YEARS.

These figures are from the official U.S. Census Bureau Population Profile of the United States.

In the 1970s, on average 1.7 million new households were created each year.
In the 1980s, the number fell to 1.3 million per year.
In the 1990s, down to 940,000 per year.
In the 2000s, down again to a mere 716,000.

Remember the issue is not population growth but the number of people living together in households.

In downtown Seattle where I live, for example, it is common to see three or four people living in one apartment due to the high cost of rent in the city.  What does this mean?  Demand for SOLO apartment living is not as high as could be estimated.  Unless there are two, three, or four roommates/workers/employees available to fill each of those new and existing apartments you have a vacancy problem.

Guess what?  There aren't.  The city of Seattle itself says that just two of every five households in the city is made up of one person.  A full 15% of the city's households are made up of people who live together but are not related by marriage or family.  In other words, roommates.

So 60% of the new apartments you see being built better have more than one person supporting the lease or the rent is likely not to be paid.  NOT the way it is supposed to work for rental property investors.

I fully expect the apartment building bubble to grow and finally burst when either too much supply comes online (in late summer or fall 2012), when the economy dips again (in early 2013 after the U.S. Presidential election).

Of course, with historically low interest rates the moment condos are in demand those apartment buildings will begin languishing on the market.  Remember 2004 and 2005 and all those FREE RENT incentives?  The slightest loosening of underwriting standards will pop the apartment building bubble.

In the meantime, sell those buildings if you own them.

Saturday, December 17, 2011

59.4% Yield in One Year

The Marlborough Apartments is an 82-unit building in downtown Seattle. Built in 1927, this Gothic Revival architectural gem was purchased by a group on investors for $12.75 million in September 2010.

The new owners spent about $4 million on rehab costs and put the new Marlborough back on the rental roles in January 2011. By the middle of the summer, the building was fully leased.

The Marlborough just sold for $28.7 million or a sweet $321,000 per unit.

The cash-on-cash calculation is an approximately (less friction costs) profit of $11.95 million on an investment of $16.75 million over fourteen months.

Or about 59.4% for the year. Of course, using leverage the actual return for these investors is much, much higher, well into triple digits in less than a year and a half.

Still, I wanted to see how they pulled off this stellar accomplishment.  What lessons can be learned from their success?

I shot the video and photographs outside the Marlborough Apartments on very busy and noisy Boren Avenue in downtown Seattle. As you can see, the exterior of the building is gorgeous. Of particular note is the covered driveway which as far as I remember has been part of the building's original design. Here is an older picture of the Marlborough without all the shrubs and barriers setting off the street from the drive.

These investors made their money five ways and all real estate investors can apply the very same techniques whatever the size of the investments.

1.  Apartment buildings right now are hot commodities.  This investment group got out ahead of the trend by buying while others were still on the sidelines or selling.

2.  This was a foreclosure purchase.  The previous owner had tried to convert the building to condos but got burned when the bubble burst.  In other words, these investors bought cheap.

3.  The exterior improvements to this building are not expensive but impressive.  The dirty old Marlborough is clean and sharp again.  You expect to see Humphrey Bogart and Jimmy Cagney walking out the lobby.  The place has a museum feel.  The covered drive and the building's awning give this place a sense of class that others in the area lack.

4.  The bones of this building were solid and did not require much renovation.  You save money when you don't have to make major improvements.  Check out the interior detail of the building lobby and other tenant spaces in this photo gallery.

5.  They sold the building fully leased with a solid and growing cash flow statement.  All the above Steps #1-4 above are really designed to affect Step #5 which is to get tenants in every unit paying above market rents so the value of the property can be maximized to the extreme.

When you read about real estate investment successes in your area, visit the locations and see for yourself what you can learn.  Little details mean a great deal.  For example, on the Marlborough there are two banners hung on the corners of the front facade.  On many buildings these advertisements look cheesy and detract from the beauty of the building.  In this case, the banners highlight the architecture of the Marlborough.  Even the colors used on the banner is consistent with all the building's signage.  Notice in the old picture of the Marlborough above the banners on the building are an awful garish green!

This is an impressive achievement and I'm sure there were lots of celebrations when the contract was signed.  Super nice job.

Tuesday, December 6, 2011

Seattle Plastic Bag Ban Scam

For the second time in just two years, the Seattle City Council is getting ready to pass a ban on nearly all plastic grocery bags the kind used at supermarkets and convenience stores.

Despite this provision being overwhelmingly rejected by the voters of Seattle by referendum in 2009, the City Council last night held hearings on the idea---which, of course, makes little real sense since most of the members of the Council have already said they will vote for the ban.

The bill's sponsor, council member Mike O'Brien, has publicly stated that a report called "Keeping Plastic out of Puget Sound" by a group called Environment Washington has helped him understand the importance of this issue.  This report supposedly makes the case that banning plastic bags is the right thing to do for Puget Sound.

The only problem with this report is that it is a sham.  

NO ONE could read this report, including Mr. O'Brien, and conclude that any rational case has been made for a plastic bag ban in Seattle or anywhere else.  This entire document is a series of non-sequitors written by someone without a clue how to do research, statistical correlation, or anything else except make political statements in favor of unproven science.


Given the fact I could raise about 250 objections to this piece of sloppy investigation, let's take three at random.

There is plastic in Puget Sound.

Yes, there is.  BIG DEAL.  Given the fact that plastics are and have been one of the most common substances on earth for nearly the past hundred years, you will find TRACE AMOUNTS of plastic everywhere.  You find trace amounts in every human body.  The Environment Washington report mentions plastic in Puget Sound but in no statistically significant amounts.  The report wants to make the presence of plastic in the water as ominous and threatening but it's not.  NOWHERE does this report mention any significant level of plastic in Puget Sound that would endanger human or animal life.

The proportions of plastic in Puget Sound water is microscopic, in parts per billion.  No person or animal is harmed at such concentrations, nor does the report suggest a threshold of toxicity for plastic.

The plastic in Puget Sound comes from supermarket garbage bags.

This is the biggest lie in the report of all.  There is no link proven or even attempted in the report between supermarket garbage bag plastic and plastic residue found in Puget Sound.

The author's of this report want you to believe Gil Grissom and his CSI team have conclusively linked through intensive chemical analysis like "Plastic DNA" supermarket bags to the plastic found in Puget Sound.

There is NO ANALYSIS in this report making such a claim.  The idea that millions of plastic bags are migrating from landfills miles away into Puget Sound is ludicrous.  Has any member of the Seattle City Council ever visited a landfill?

The almost certain causes of the plastic residue in the Sound are:

1.  Decades of industrial production and manufacturing on the shores of the Sound now rotting.
2.  Thousands of tons of plastic debris sunk and decaying at the bottom of the Sound.
3.  Hundreds of tons of plastic debris added by boaters and consumers every year, things like soda bottles, food wrappers, etc.

Can the authors of the Environment Washington report please explain how tens of millions of plastic bags get into the Sound each year?  HOW?

Plastic bag bans are accepted by the public.

There is no a single fact in the report that proves efficacy of a plastic bag ban beyond one year.  NONE. The report even goes so far as to say this:

Fee programs and taxes can have multiple purposes. First, by establishing a price on disposable bags, governments can send a price signal to citizens to mo- tivate different behaviors. For example, in 2002 the Republic of Ireland established a15 Euro cent tax on plastic bags (roughly equivalent to about 28 U.S. cents per bag today), applied to consumers at the point of sale. In the first year of this policy, consumers used 90 percent fewer plastic bags. The tax grew relatively less effective over time, so the nation increased the tax in 2007. Overall, plastic bags have gone from 5 percent to less than 0.25 percent of the waste stream.60

It is clear that even the proponents of these bans admit that their effect fades over time.  Consumers will just begin buying paper bags and paying the "tax" unless it is constantly boosted.  Nowhere does this report make the case that these bag bans are wanted anywhere,  Seattle residents sure do not want it.  So why is the assumption made that people will meekly go along with the social direction suggested by the ban?

Also, notice how the Irish call the bag fee a "tax" but the Seattle City Council refuses to label the same mandatory fee as such.  The bag fee is "voluntarily"unless you need a bag.  Right now the bags are free to customers but what should that fee paid by consumers to retailers and then forwarded to the government really be called?

This Environment Washington report on Puget Sound is one of the most pathetic documents I have ever read in my life, filled with at least a dozen intentional attempts to mislead on nearly every page.

For example, the report coins the term "single use plastic bags" when describing supermarket bags but each of us knows that term is false.  Many plastic bags are recycled, including reused by consumers for all sorts of purposes such as lining kitty litter boxes and kitchen wastebaskets, and even "Pooper Scooper" duty on the street.

Ask yourself this simple question.  If you currently use the plastic bags you get at the store for your cat or for the trash pail in your home, what happens when these bags are banned and you can only buy PAPER bags at your local store?

Yes, you will use fewer SUPERMARKET plastic bags.
BUT you will use MORE non-supermarket plastic bags.

In other words, you won't be bringing home free plastic bags any more.  You will have to buy the same number of bags.  Same number of bags, just a different label given to them.

The efficacy and effectiveness of the bag ban is wildly overstated by the report, on purpose of course.  The subject of forcing consumers to buy new plastic bags for non-grocery purposes is never addressed once in the report.

Aside from being a policy boondoggle, the plastic bag ban is anti-environmental according the City of Seattle's own analysis.  Paper bags are far more costly to produce and recycle.  Paper requires the cutting of trees, while plastic can be made out of virtually any natural product including waste corn husks.  Paper production involves the use of dangerous chemicals like caustic lye and hydrogen peroxide.

Has any member of the Seattle City Council ever been to a paper mill?  I will gladly take anyone who wants to go.

This bag ban is politically offensive.  No member of the City Council ran on this agenda despite being elected back into office just a month ago.  Seattle voters have rejected this idea once already.  Does the city really need another contentious referendum and lawsuits on this issue?

PAPER BAGS in SEATTLE make no sense.  Mr. O'Brien, it rains in Seattle.  The other day when I bought a magazine at Walgreen's, the clerk asked me if I wanted a plastic bag because of the pouring rain.  I guess under the new regime I could buy a paper bag---but why?

This foolish idea needs to immediately tabled and an investigation launched by the Seattle media over how such a worthless report could be given such high regard by politicians when anyone with an open mind who reads it can instantly conclude the report is bogus and a sham.

The Seattle City Council needs to stop catering to the elitist whims of a tiny sliver of the city's residents and start addressing REAL concerns that people who live in Seattle have, like the deteriorating infrastructure, rampant homelessness, rising street crime, and the declining business base.

Saturday, December 3, 2011

Bogus Unemployment Numbers

The mainstream media is once again in full pom-pom mode relentlessly cheerleading the latest unemployment rate released this week by the Bureau of Labor Statistics.

Here's one typical headline from Bloomberg Business Week:

Unemployment Rate Falls to Lowest Since March 2009

But few of the journalists writing these headlines are actually looking at the raw numbers they themselves report and ask "How can the unemployment rate REALLY be falling when the numbers do not add up that way?"

You do the math yourself.

Here are the official numbers from the November 2011 BLS unemployment report:
  • Unemployment rate falls to 8.6%, down 0.4% from 9% last month
  • The private sector added 140,000 new jobs in October 2011.
  • The public sector cut 20,000 jobs in October 2011.  (A net of 120,000 new jobs created.)
  • But 190,000 people LEFT THE LABOR FORCE IN OCTOBER because (a) their unemployment benefits had run out and they no longer can file claims for compensation; and (b) they gave up looking for work since no jobs in their area are available, so-called "discouraged workers."
So ask yourself this simple question using the U.S. Government's own numbers.

If 120,000 new workers joined the U.S. labor force in October but 190,000 workers also left the very same labor force in the same month because they could not find jobs, how can the unemployment rate go down?

How?  The BLS assumes you can be unemployed, not have a job of any kind, but still not be "officially unemployed" for their calculations.  This is not how I learned to do math.  This video explains how you REALLY calculate an unemployment rate.

The fact the government does not count unemployed workers who are so discouraged they can't find work as "not unemployed" is indicative of what is really going on here.  According to you, me, and common sense, someone who is "not unemployed" is employed.  According to the U.S. Department of Labor Statistics, your brother-in-law or your daughter who has exhausted their 99-weeks of unemployment and has given up trying to find a job is unemployed---but they aren't "officially" unemployed for government accounting purposes.  To be blunt, they and the millions like them just don't count.  Here is the BLS' official definition of discouraged workers.  You read it.  If you are not in the labor force, aren't you unemployed?  No, you are merely discouraged....

This is statistical madness.  Kafka and Orwell would be proud of such reasoning.  Some unemployed are more equal than others???

I do applaud some news outlets like the Christian Science Monitor that have run critical pieces on the BLS and how these phony numbers are calculated.

The real reason the BLS and all government agencies play games with official numbers like inflation, unemployment, GDP, and the rest is obvious.

For example, when President Nixon in 1971 was battling a wave of inflation that ultimately led him to initiate a disastrous policy of wage and price controls, his administration changed the way CPI adjustments were made to Social Security and the Medicare program.  The lower the CPI increase, the better the inflation picture looked from a political perspective.  Plus the government saved hundreds of billions by shortchanging beneficiaries on the real rate of inflation increases in the economy.

By the way, President Clinton changed the CPI numbers once again to make his administration look better too.  Both parties play these games.

The lamestream media is in full cheerleader mode on the economy since the actual economic numbers are grim and not radically improving.  With their candidate Mr. Obama languishing in the polls, someone in New York and Los Angeles needed to turn the economic lemons received from the BLS into lemonade.

Monday, November 28, 2011

Camping Restrictions in Leases

Here is some video I recently shot of the Occupy Seattle protest that has taken up residence on the campus of Seattle Central Community College.  Located in the Capitol Hill area of Seattle, this neighborhood on Broadway and Pine Street is heavily commercial.  Local businesses are not happy with the Seattle encampment, echoing the same opinions from other cities.

The protesters chose this location after being evicted from Westlake Center Park because the college administration had no legal rights to evict campers from the campus.  Apparently, no school official or member of the Board of Trustees that regulates such educational institutions had ever thought of adding a "No Camping" restriction to the usual public protests that are drawn to universities.  An emergency vote of the SCCC Board needed to be taken just to get the legal right to file an eviction proceeding in district court.

The administration has legally moved to evict the Occupy Seattle protesters but the tents and debris are still on the campus tonight.

This example, along with the highly negative occupation experience of Brookfield Office Properties and their privately owned Zuccotti Park in Manhattan where the Occupy movement began, should encourage every property owner to check their commercial and residential leases for express NO CAMPING clauses.

If I was writing such a lease, I'd draft not just the words ("No Camping or Outdoor Sleeping Overnight") but also ban all the indicia of camping, like tents, sleeping bags, portable stoves, generators, and the like.

Despite the chantings of the 99%, this review of commercial leases should prove a financial windfall to the 1% who are the partners in the law firms that do this work.  If I ran a commercial real estate practice, I'd be sending out friendly "Dear Client, I just checked your lease agreement and guess what I found?" letters to every lessor I knew---here, near, and far.

But what if you are a small real estate property owner with apartment buildings or even single family homes?  YOU NEED TO CHECK YOUR LEASES MOST OF ALL.  Brookfield Properties can afford high legal bills to evict tenants but many small owners obviously cannot.

My reading of some residential leases over the last few days have very weak provisions with respect to camping in yards, in courtyards, even parking lots.  No one really has given this need or provision a great deal of thought.  The bottom line, however, is simple.

If you give a tenant use of a public space, you need to carefully regulate the use of that space.

For example, if you let your tenants use the backyard of your apartment building for reading and even cooking (assume a BBQ pit), what stops one of them from inviting some friends to live in his backyard? You might say the lease has been breached, but how?  You gave the tenant use but did not regulate what use is permissible.  One lease I saw said spaces could be used 24/7 so long as the use was "quiet and not bothersome to others."  So if someone is sleeping in the backyard and not making noise is there a breach of the lease?

Check those leases now before you need to check them later.  Ask Seattle Central Community College and its Board of Trustees.

Sunday, November 6, 2011

Bernanke and Geithner

Watch these uncomfortable interviews by Fed Chairman Ben Bernanke and Treasury Secretary Geithner.  Both are explaining, or more like making excuses, why the U.S. economy is so weak and, more importantly, why they are cutting GDP growth estimates going forward.  Geithner explaining why the U.S. will not lose its AAA credit rating knowing full well it did makes him look completely out of touch with reality.

The Fed has already cut its own rosy GDP projections it laid out in June, just five months ago.  Here are some excerpts from this Reuters article that should put those videos into context.

In fresh quarterly projections, the Fed lowered forecasts for growth and raised forecasts for unemployment for this year, 2012 and 2013. Policymakers do not see the jobless rate, now at 9.1 percent, falling to a level they consider consistent with full employment even by the outer edge of their forecasting horizon, the final quarter of 2014.

Officials now expect the world's largest economy to grow by a tepid 2.5 percent to 2.9 percent next year, down from the rosier 3.3 percent to 3.7 percent they were expecting in June, with inflation muted over the forecast horizon.

They see the unemployment rate going no lower than 8.5 percent to 8.7 percent by the end of 2012, up from the more sanguine 7.8 percent to 8.2 percent range envisioned in June.

Fed officials believe the economy will have reached full employment when the jobless rate drops to between 5.2 percent and 6 percent, with a growing number seeing it at the top of that range. In their forecast, the unemployment rate would still be at 6.8 percent to 7.7 percent at the end of 2014
Bernanke and Geithner complaining that the economy is not growing fast enough reminds me of the endless problems and nonsense solutions of Lloyd Christmas and Harry Dunne, who seem to make more sense in some ways than our high paid public servants in DC.  Watch all three clips and you tell me who comes off best, who actually figures out they have a problem and actually comes up with a solution.

Tuesday, November 1, 2011

Mike and Irene Millin Update

Since writing this post on real estate gurus Mike and Irene Milin, the self-described "Dynamic Duo" of late night TV infomercial fame, I have a received a steady trickle of updates and news on the pair since they have completed disappeared from the get-rich-quick in real estate world.

This update that arrived in an email yesterday from a reader really intrigued me.

Irene and Mike Milin raising money to elect a former Hawaiian governor to the U.S. Senate?

The actual email contained a great deal of contact information which I have redacted here.

I verified the information provided by my source.

Linda Lingle is a former governor of Hawaii.

She is indeed running for the U.S. Senate.

The organization that was listed as the sponsor for this fundraiser confirmed that they indeed were hosting such a brunch.  (I redacted this information because it was not relevant to the Milins.)

I am very happy to see that the Milins are continuing their enthusiastic political activism on behalf of the candidates they support.  I also note that Lingle is a conservative Republican and I guess so are the Milins these days.  It is a bit of trivia to note that Linda Lingle is a Sarah Palin associate and also introduced Palin at the Republican National Convention in 2008 when Palin was nominated for VP.

Here is the video of Lingle's performance:

What I find utterly fascinating about Mike and Irene Milin is not their mediocre real estate investing products or their cheesy infomercials but their dramatic yin-to-yang political conversion from 1970s hippie Communist radicals to 1980s preachers of the capitalist ideal.

As I said before, to go from Karl Marx to Robin Leach of "Lifestyles of the Rich and Famous" in just ten years is a remarkable political and economic transformation.  The Milins even boast about this achievement on the rear cover of their most famous book, How to Buy and Manage Rental Properties.

I would love to read the story of their political transformation, awakening, whatever they want to call it.  I would gladly buy the book and promote it here.

A very similar book on this same theme of finding a new political identity that I highly recommend is RIGHT TURNS by author and radio show host Michael Medved.  How he went from a college leftist and a staff aide for ultra-liberal Ron Dellums to a protege of Rush Limbaugh draws an eerie parallel to the experience of the Milins.

And why are the political conversions from left to right, after all?

Wednesday, October 19, 2011

Frasier Crane in Seattle

About twice a year I get an email asking me about Seattle locations linked to Dr. Frasier Crane, or Kelsey Grammer's character on the NBC-TV show, FRASIER.  Since I am a huge fan of the show and enjoy discussing Seattle movie locations from a real estate perspective I am finally taking this chance to put my Frasier Crane information on the record, once and for all.

On the show, Frasier, his uptight brother Niles, their grumpy father Martin, ditzy housekeeper Daphne Moon, and sexpot Roz Doyle all hang out at the Cafe Nervosa at the corner of Pike Street and Third Avenue in downtown Seattle.  This favored coffee shop is across the street from the radio studio, KCAL (780 AM) where Frasier and Roz work.

None of this is true in the real world, except for the intersection of Third and Pike.  The Google Map of 3rd and Pike is where Cafe Nervosa is supposed to be.

View Larger Map

I have featured this location many times in this blog since, despite being one of the most important crossroads of the city for business and shopping, 3rd and Pike is a dangerous place with rampant drug dealing, prostitution, stabbings, and even public murders in the middle of the day.  I honestly can't see the fictional Niles wanting to hang out very much at the real 3rd and Pike.

And yes, there is a coffee shop there.  A tiny and always crowded Starbucks on the southwest corner.  There actually is a chain Italian restaurant called Cafe Nervosa but there is no location in Seattle.  The now defunct Elliott Bay Bookstore in Pioneer Square is thought to be the inspiration for Cafe Nervosa on the show, but it was located nowhere near 3rd and Pike.  I agree that both Frasier and Niles would have been regulars at Elliott Bay Books, as was I for many years, and I miss the place.  Niles would have thrived on the intellectualism (pseudo and otherwise) that oozed from the walls.  The store did move to Seattle's Capitol Hill neighborhood but the new location is not just the same.

In Seattle, the radio and TV stations are located about a mile from 3rd and Pike near the Space Needle.  There is no KCAL, 780AM in Seattle either.  The nearest call letters are KTTH, 770 AM, which is a conservative talk radio station featuring Glenn Beck and Rush Limbaugh.

Ever see the opening credits of the ABC show GREY'S ANATOMY?  The "hospital" where the helicopter lands is actually the KOMO-TV studio at Fisher Plaza in Seattle, about one block from the Space Needle and a mile from the mythical Cafe Nervosa.  Frasier and Roz would work within 250 yards of the Space Needle where just about every Seattle radio and TV station in the city is located.

This area, unfortunately, is a high crime area at night, especially for prostitution.  There is extensive new residential and commercial development around Seattle's Space Needle, especially the Bill and Melinda Gates Foundation headquarters literally across the street.  But the real Frasier and Roz for the most part would work in a gritty neighborhood known for the homeless and drug dealing at night.

On the other hand, Frasier, Martin, and Daphne live in an apartment with an amazing balcony view of the Space Needle and the downtown Seattle skyline.  Many people looking for apartments wish this view actually existed.  It doesn't in real life, at least visible from a building.

A question I've gotten from friends and website visitors for years is "Where is Frasier's building?"  I'm sorry to say that Frasier's magnificent view is a figment of Hollywood's imagination.  No apartment building in Seattle has such a view.

The actual studio backdrop shot used on the Frasier apartment set was taken with a long lens from Seattle's famous Kerry Park, a stop for any tourist visiting the city.  The views are amazing.  Tourists line up with their cameras to take this shot. Can you see how similar it is to the view from Frasier's balcony?

Ever see the film 10 THINGS I HATE ABOUT YOU starring Heath Ledger and Julia Stiles?  The introduction of the movie was filmed at Kerry Park.  So if you watch the opening sequence to the film, this is where Frasier was supposed to live, a very nice part of Seattle called Queen Anne, known for its wine bars, cheese shops, and luxury housing all atop a VERY VERY VERY steep hill that was one of Seattle's first planned residential communities---for the wealthy.

In real life, however, Frasier Crane's apartment building with that angled view of Seattle (looking directly to the Southeast) would have been in a part of Seattle called the Denny Regrade, an area of extensive condo development since NBC put Frasier on the air for the first time in 1993.  The Denny Regrade is famous in Seattle history because this entire neighborhood was created by washing mountains of soil into the bay using high pressure hoses to create flat level building lots.

This first photograph is approximately where Frasier Crane lived in the year 1906.  Notice the hose squirting water and the house in the distance for scale. It is amazing to believe that a full 27 cubic city blocks of soil was sluiced into Puget Sound to create two neighborhoods for residential and commercial development.  The entire meat of the project took just 22 months from start to finish, even though sluicing continued in the area for more than thirty years.

The second picture is the 1907 intersection of 3rd Avenue and Virginia Street, about three blocks from Frasier's mythical Cafe Nervosa, which would have been exactly where the wooden buildings in the distance are located.  The building being constructed in the background still exists and is a residential hotel.  Once again, notice the size of the hills being chopped away using the railroad locomotive as scale.

The third picture shows the last stages of the Denny Regrade in 1929.  Notice the city skyline in the distance.  Frasier Crane's apartment building, called the Elliott Bay Towers on the show, would have been built on the land in the foreground of this photo.

Incidentally, Seattle has no Elliott Bay Tower Apartments---YET.

What I can tell fans of the show is that the screenwriters definitely were looking at Seattle maps when they were writing the scripts.  The city of Bellevue, WA, for example, is EAST of Seattle, just like Frasier says.

Tuesday, October 18, 2011

125% Increase in Seattle Car Tabs

Voters in Seattle are being asked to approve Proposition 1, a $60 per year increase in automobile registration rates.  The proceeds, according to a unanimous vote by the Seattle City Council and Mayor Mike "McSchwinn" will be used for transportation improvements.

In a unique and rare repudiation of both the City Council and the Mayor, the Seattle Times editorial board is urging a voter rejection of Prop 1.

I agree with the Seattle Times in what must surely be a sign of the Apocalypse.

If you understand what Prop 1 is really all about, you will appreciate life in the People's Republic of Seattle and how everything public in the Emerald City has a certain Alice in Wonderland quality.

And King County, where Seattle is located, just added another $20 this past August.

If approved, this would mean the average Seattle car owner would see their vehicle registration jump from $80 per year to a whopping $180, a massive 125% increase.

Of course, you pay this $100 increase no matter what type of car you drive.  The 2011 BMW 760Li and the 1975 Ford Pinto pay the same regressive rate.

Seattle claims it needs this new money, an estimated $27 million per year, to make important local transportation improvements.  REALLY?

$18 million would go to study (not build, but study) the development of two streetcar lines in the city.  Even supporters agree that these lines will likely never be built.  The current Seattle streetcar, the South Lake Union Trolley (nicknamed "The SLUT" for the obvious acronym) is a money loser and white elephant

So, at a time that all five of Seattle's main bridges are in need of urgent repair and earthquake retrofitting, the city wants to spend $18,000,000 to study streetcar lines that should not be built and likely never will.

Oh, the story gets better....

Remember the original $20 increase from August 2011 imposed by King County?  Did that amount go to help build new roads or repair the existing ones?  No, the money went to mass transit and to preserve bus lines.  Once again, car owners subsidize non-car owners.

But in a city where sidewalks are needed desperately in some northern Seattle neighborhoods, only NINE BLOCKS PER YEAR are allocated to be built.

At the present time, it appears that Prop 1 will fall to defeat.  Virtually everyone is against it except the bicycle clubs and labor unions that would benefit from the financial windfall.

So what does any of this story, however interesting it is, have to do with real estate investment?

Simple.  When Prop 1 fails, Seattle will do once again what it did before.

Tax real property owners to get the road and bike money it needs.

The great sham in the Prop 1 debate is the relatively untold story of a 2006 tax increase called "Bridging the Gap" which was supposed to completely eliminate the backlog of transportation projects in Seattle.

It didn't, obviously.  Homeowners (and investors) in Seattle are still paying the $365 million tax bill.  Where did much of the Bridging the Gap money go?  You guessed it.  Mass transit and not road repairs. Aside from being ashamed of this fact, Seattle boasts about it.

"BE BOLD" he admonished the City Council.

Instead, they were reckless and came up with the madness that is Seattle Proposition 1.

When I finally find myself agreeing with Ken Schram, maybe the Apocalypse really is on the way after all.

Tuesday, October 4, 2011

S&P 500 Bear Market

As Mr. Bernanke spoke today, the S&P 500 index officially hit bear market territory.  You can watch the video above and listen to the words that spooked traders this morning.

What is more interesting to me is how the financial press covered Bernanke's testimony today.  Here is an excellent example from IBT.  Did you hear what they say he said?

Monday, September 26, 2011

New Home Sales Fall Again

The Commerce Department announced today that new home sales fell again for the fourth straight month to a new six-month low in August 2011.

What is crucial to note in the Commerce release is this startling statistic.

With a seasonably adjusted annual rate of merely 295,000 new home sales, the United States is LESS THAN HALF from the number of homes that must be sold merely to sustain (and not grow) a healthy housing market.

The U.S. needs to sell at least 700,000 new homes a year.

At best, this year new home sales may top 300,000.

I have been reporting in this blog for YEARS now that an improvement in the new home sector will not happen before 2015 and this figure is optimistic.

The news gets worse.  Prices of new homes are still falling, down another 9% over the last year.

So with near historically low mortgage interest rates and sharply falling prices, new home sales rates are steadily declining and even failing to keep pace with normal market demand forces needed to sustain a healthy market.

New home sales figures have fallen for FIVE straight years.

2011 is appearing to be #6.

What is the Federal government's response to this crisis?  So far, almost nothing.  But watch this video from Australia on what some "activists" are proposing for the new homes sales catastrophe in their country.  It is just a matter of time before similar calls go up in the United States, especially in an election year like 2012.

Wednesday, September 21, 2011

Seattle Homeless Encampments

On June 17, 2011 I posted this photo online of a homeless encampment in downtown Seattle.  The particular one I chose was just four blocks from City Hall and literally on an entrance ramp to Interstate 5.

Tens of thousands of people saw this encampment daily.  At the time I saw it in June, it "housed" about four people and was about a quarter of a city block long.

KING-5 TV in Seattle did a piece on this very same homeless encampment on September 14, 2011.

What took them so long?

When you watch the TV piece, look for the talking head shot of reporter Linda Brill.  You will see camping tents in the background, yet another homeless encampment that has arisen since my original report in June.

This report is amazing.  You will be stunned to learn that this particular encampment now houses twelve people and there is a "waiting list" for space.  I also learned through a source that works near the encampment that most of the people in this space have lived under I-5 for years and just migrate from one space to another when the complaints mount and some eviction action is finally taken.

The lesson here is simple.  That which is allowed to grow unchecked, does.

Saturday, September 10, 2011

Mortgage REIT Alert

The mortgage REIT sector has been hammered this week by the SEC decision to review whether such REITs should be regulated as investment companies under the Investment Act of 1940.

For FIFTY years, since 1960, when Ike was in the White House and Gunsmoke was the #1 show on your black-and-white TV, mortgage REITs have been exempt from this regulation.

And a whole new real estate investment sector developed around this exemption.

Now, of course, when the economy is mired in recession and the President is desperate to stimulate business growth, another part of his own administration decides to investigate if new rules on mortgage REITs are necessary.  In other words, should we regulate the use of leverage in this sector and drive some weak and troubled existing REITs out of business.

Investors in mortgage REITs need to be fearful.  Most issues took a hit this week and I'm not sure when the good times are coming back.  Here's another author that agrees with that assessment.

Mortgage REITs are great instruments for investors.  Yes, of course they use leverage, lots of it, to boost their yields.  So what?  Knowing how to use leverage is part of what mortgage REIT managers are paid to do on the job.

The sixty-day public comment period has begun.  Please contact the SEC and tell them HANDS OFF this sector.  Here is the SEC concept release and how to reply during the review period.

Saturday, September 3, 2011

Feds Sue the Banks

Seventeen of the country's biggest banks, including the struggling and financially threatened Bank of America, were sued yesterday by the Federal Housing Finance Agency.

The claim?  Misleading Freddie Mac and Fannie Mae on mortgage backed securities.

Read this excellent article on why the Feds will not win this case.

The idea that the government is bringing huge legal actions against the very banks they need to lend money to lift the nation out of recession is like shooting yourself in the foot to spite your face.  These lawsuits stand little chance of success and most likely will be settled with petty agreements on both sides.  This case is brought solely for political reasons and does nothing but further destabilize an already weak and deteriorating financial system.

The White House certainly knew that Friday's job report for August with ZERO employment growth was coming.  The announcement of lawsuits against the nation's largest banks on the same day the risk of a major double dip recession increased dramatically is the definition of poor timing.

The statute of limitations on these actions should have been allowed to quietly pass and this whole sordid mess left to history.  The banks have not gotten off scott-free for any actions they committed.  This observation is obvious.  If the goal is saving the U.S. economy, it is time to move forward and not hold show trials for the benefit of the 2012 campaign.  The banks have plenty to do to move the economy and showing up for depositions and producing evidence are not on the list.

Monday, August 29, 2011

Guru Hal Morris Update

Since writing this blog post more than two years ago asking for updates on real estate gurus Hal Morris and Tony Hoffman, I've received a steady trickle of information about both.

Paul in Idaho sent me this clip of Morris on YouTube at a celebration for real estate guru Joe Land.  Although it is unclear from the video or others posted by the same author on the site, I believe Morris and the others are at a funeral celebration for Land.

Ironically, the Joe Land "60 Minutes" segment Morris mentions during the video is the notorious March 16, 1986 episode titled "Nothing Down" where guru John T. Reed debated Land on the subject of get-rich-quick real estate.  This segment was a disaster for Land who publicly refused to give correspondent Morley Safer any of the addresses of his money-making deals.

I am very happy to see Hal Morris still in good form.  I have fond memories of his early 1980s infomercial series called MONEY MONEY MONEY where he would interview fellow gurus and let them pitch their real estate home study courses.  The production values of this late night show were so poor that Morris as a late night host made Joe Franklin look like Johnny Carson.  I would enthusiastically tune in whenever the Morris show was on just to see what train wreck might occur, like the day a piece of the set fell down and no one noticed.

My favorite regular guru on the show was Tim Taylor, who sold a 10-cassette tape home study course called The Credit Card Millionaire System.  His advice was for people to get lots of VISA and MasterCards, literally hundreds of them, and use them for cash advances to buy real estate.

The image of a guy walking into a bank with a shoebox filled with credit cards and then paying for a home with 200 $500 cash advances is as silly as it sounds.  But Taylor and Morris played the sales pitch just right.  I wonder how successful the home study course really was?  Taylor's system was sold in the middle 1980s but in 2006 would a bank give a person even one hundred VISA cards?

I am glad to see Hal Morris is as entertaining and funny as ever.

Wednesday, August 24, 2011

Seattle Tourist Stabbed Downtown

For nearly a year in this blog I have been writing about the deteriorating quality of life for residents in downtown Seattle.  Crime is way up, especially violent crime including assaults, stabbings, police shootings and beatings, and even murders.

This summer there have been so many stabbings in downtown Seattle that residents have turned to black humor to lessen the impact of life under such conditions.  I live here and it is grim.

Seattle just had a double murder where a man and a three-year old child were stabbed to death.

Just a few weeks ago a 69-year old man going home after work was knocked to the ground and beaten by five youths near Seattle's Space Needle.  He still is in the hospital.

Just a few days before this beating and a mere two blocks away, a man was stabbed in the back while using an ATM.

Google the words "stab" and "Seattle" and you get more than 3,000,000 results.

This past Sunday, August 21, a tourist visiting Seattle with his family was stabbed by a homeless man after a confrontation on a city bus.  The stabbing took place at the notorious Seattle intersection of Third Avenue and Pine Street in the heart of the city's shopping and hotel district, just four blocks away from Pike Place Market.  And it took place in the middle of the day when the streets around this corner are filled with tourists, shoppers, and kids.

The 38-year old homeless man who stabbed the tourist is wanted by the police in TWELVE states.

Realize all this crime is not taking place in some poor urban wasteland, a war zone neighborhood filled with poverty and decay.  Downtown Seattle from Pioneer Square to the Space Needle IS the city's urban core, filled with dozens of hotels, nightclubs, restaurants, shops, and some of the largest department stores you can imagine.  $1 million condos are common.  Rents for a one bedroom range from $1,100 to $4,500 or more per month.

Here is the intersection where this stabbing took place, Third and Pine.

This neighborhood is also home to the Washington State Convention Center where hundreds of thousands of visitors come each year to conventions and meetings.

Downtown Seattle is home to huge theaters like the Paramount, 5th Avenue, and Benaroya Hall that host millions of visitors each year for everything from music concerts to stage productions.

So when a tourist gets stabbed, especially in the middle of the day and especially in front of his family, on a beautiful Sunday afternoon, at an intersection where people seem to get routinely stabbed but nothing every changes but the victim's names, people begin to notice.

Tourists may not come to Seattle based on the TRUE perception the downtown core is not safe, especially at night.  Far too many visitors to Seattle today takes home horror stories associated with their visit.  Read some of these comments left on travel boards.

When a tourist to Seattle gets murdered, which seems inevitable based on what happened this past Sunday, the downtown core will become a ghost town.  I remember the New York case of Brian Watkins, a young tourist who was murdered on a New York City Subway while going to the U.S. Open with his family in 1990.  Tourism dried up in New York for a time, and Seattle will never have the bounce back effect of Manhattan.  One senseless act of violence will cripple the city's tourist core, an area already back on its heels and suffering.

I am urging the Seattle political leadership to address an obviously dangerous and deteriorating situation.

Monday, August 22, 2011

Gold Breaks $1,900

Gold broke $1,900 today.

I am getting a trickle of emails that ask "Is the bubble in gold prices about to burst?"

First, I would categorize the now eleven year old bull run in gold as a bubble market for the simple reason that gold has no intrinsic value other than its use as an industrial metal or in jewelry.  Gold is not like wheat that can be eaten or oil that can burned for fuel.  Gold bars just sit in bank vaults like Fort Knox looking pretty.

Corn you can burn for fuel.  Soybeans you can eat.  Gold bars make great paperweights.

So nearly all the gold market, aside from the few manufacturers who really need to fix gold prices, is pure speculation.  The run in gold has been caused by the instability of the financial system (especially since 2008) and the increased demand for gold from investors worldwide but also the new middle class of China and India who love gold jewelry.

So, is the bubble going to burst?

Yes.  All bubbles burst and the gold market is historically extremely volatile.

When will it burst?  That is the magic question and there is no rabbit under my hat.

Right now all the fundamentals on gold look extremely strong and that is not a good situation here.  It suggests a strong lack of confidence in the banking system and especially the governments that manage their currencies.  The recent downgrade of the United States does not help matters at all.

If the fundamentals change, I'll tell you.

Thursday, August 18, 2011

437% Return on Gold

Gold hit a new record high today, hitting $1,836 per ounce.

Since I started recommending gold to my readers in 2005, the price has risen 437% and I see no end to the rise in sight.  QE3 anyone?

On the other hand, home prices and sales keep falling.  Home sales keep slipping despite record low mortgage rates.  Home prices are now at a 21-month low, flatlined with no end in sight.

So readers that followed my advice did not buy overpriced rental properties in 2005.  They avoided the hyped up crazy money free-for-all and bought boring old gold and made a fortune.

So how's that "free" advice from the get-rich-quick real estate gurus working out for you today?  Can't wait to rush back to another REIA meeting or hotel ballroom for another "free" lecture on making money buying rental homes from the guru masters?

I am proud of the advice I gave my readers on my websites, in my blogs, and through my newsletter and will continue to give all my fans worldwide the best information I can.

Wednesday, August 10, 2011

Gold Breaks $1,800

Gold broke $1,800 per ounce today, up more than $200 per ounce since my last recommendation to you just a few days ago.

I have been recommending my readers buy gold since 2005.  Back then it was about $400 an ounce.  Here is an old blog post written by me on November 29, 2005 advising my readers to buy gold even at $500 per ounce.

Others had other ideas on how to make money in real estate in 2005.  So how are all those pre-construction condo flips and those lease options working out for you?  Are you thanking the gurus that told you home prices never go down and that leverage can make you rich?

Last Friday in my personal finance blog, Thrift and Accumulation, I told investors to jump into the stock market rather than run.  Those that followed my advice were rewarded with the sharpest snapback rally in decades.  Today, the volatility is so sweet that most traders are in heaven.

If the trend is your friend, recent trends have made you Big Man on Campus.  It is virtually impossible not to identify a long or short candidate and follow the rainbow to a big pot of gold.  No pun intended, but here is the one-month chart on gold prices.  So how are those rental properties you purchased in 2008 and 2009 working out for you?

Sunday, August 7, 2011

Eliminate the Corporate Income Tax

Last Friday's dismal economic news that only 117,000 jobs were created in June has capped off a grim week for the stock market and the U.S. economy.

Stock market plunges 513 points, the worst drop since 2008, on Mr. Obama's birthday no less.

The first two quarters of 2011 GDP growth were not even enough to keep pace with new workers entering the labor force, let alone get jobs for the nearly 20,000,000 who are unemployed.

So what's the solution?  QE3 from Mr. Bernanke at the Fed?  More "shovel ready" public infrastructure projects?  More Keynesian style government spending?

My solution is simple.  It's cheap, effective, and even politically feasible.

Eliminate the Federal corporate income tax.

But few American companies pay that rate.  Given an encyclopedia of tax law provisions (critics rightfully call them loopholes), many corporations pay no income tax at all with General Electric being a famous example.  Some estimates say more than half of all corporations pay no income tax.

The Federal corporate income tax is an extremely inefficient tax that raises only about $330 billion per year.  Completely eliminating the tax, including all the tax incentives, depreciation allowances, and the entire IRC devoted to corporations would cost ONE-THIRD of Mr. Obama's original stimulus package and just ONE-HALF of Bernanke's QE2.  Only 12% of all Federal revenue comes from the corporate tax and as the chart above shows, the tax relative to GDP has been declining for decades.

What would be the net effect of the elimination of this hated tax?

Wall Street would rally 2,000 points in two weeks.

Trillions of dollars of capital would immediately be released by companies that are currently hoarding the cash.  Tax rates are very predictable when set at zero.

Billions of expatriated profits would rush back into the United States for additional investment.  Why hold profits in Bermuda or Panama when you can bring them home without paying a tax?

Companies would begin using equity again to make investments and capitalize their balance sheets instead of debt.  Why should a tax code give an incentive to using debt over equity?

On this same note, eliminating the corporate tax instantly brings sanity to the taxation of dividends which have been double taxed at both the company and individual level for nearly a century.

Billions of dollars spent by companies large and small on tax avoidance can instead be used to build better products, give employees better compensation, and otherwise grow.  One of the few groups that would be hit hard by my idea would be CPAs and accountants.

So would lobbying firms in DC that work to get all those tax loopholes for their clients.  But these professionals will find much else to do in a world in generally increasing government regulation.  Getting rid of all the sleazy K Street lobbying for depletion allowances, accelerated depreciation schedules, and other such arcane accounting nonsense removes lots of room for political corruption and would restore some confidence in the political process.

As you can imagine, the Rachel Maddow wing of the Democratic Party would howl with betrayal.  Nancy Pelosi would be outraged by the rich not paying their fair share.

But most of America would not mind their crocodile tears.  The unemployed would be working.

Corporate America would be enjoying record profits and Wall Street would be in a bull market lasting years.

The Office of Management and Budget and the U.S. Treasury would be reporting growing tax receipts and falling budget deficits.

And Mr. Obama would be re-elected to another four years in the White House.  Unemployment could drop below 7% in just one year.

Republicans in the House would love my idea.  The Tea Party would find it orgasmic.

With Mr. Obama behind it, an elimination of the Federal corporate income tax could be passed with just a few conservative Democrats crossing the aisle in the Senate.

Will this happen?  Probably not.  But why not is my question?

Cheap, fast, and deadly effective seem to be all good political reasons to do something right.

Tuesday, August 2, 2011

Landlord Joe Biden

I find the revelation that Vice President Joe Biden is actually leasing a cottage he owns in Wilmington, Delaware to the Secret Service so they can guard him while on vacation the height of arrogance.

As VP, he lives for free in a gorgeous taxpayer mansion in Washington that makes the White House look like a public housing project.  The Vice Presidential mansion near the U.S. Naval Observatory is stunning.

For the last month, Biden has been the point player on the debt ceiling talks, constantly making thunderous remarks about "tax breaks for the rich" much like Mr. Obama.  But despite the fact the United States is more than $14 trillion dollars in the red and spends tens of billions of dollars EACH DAY it does not have, Biden still wants his rent money from the very people that will give their lives to protect him.

Are you aware than in the month of February 2011 alone the Feds spent $223 billion it did not have, a new fiscal record?

With all the clamor for "shared sacrifice" and "a balanced approach" to the deficit, shouldn't rich politicians like Biden who have suckled at the public tit for DECADES be the first to sacrifice?  Yes, $66,000 is a drop in the fiscal ocean.  But how many regular people had to work to pay that sum?

Joe Biden isn't just tone deaf, he's blind to modern political realities and how awful this situation looks to average taxpayers who are struggling in the worst economy in nearly eighty years, one Biden helped mismanage by the way.

Here is a photo of the Vice Presidential mansion.  Can't free rent here make up for free rent on the cottage?

Thursday, July 28, 2011

Property Taxes Rising

Your home's value is underwater.

Your job is either gone or at risk.  Maybe your kids had to move back home because they can't find a job after spending $50,000 for a college degree.

Inflation has returned to energy, food, and nearly all commodities.

Two bubble markets in less than ten years have crushed your 401(k) and your retirement savings.

So get ready for another shock.  Increasing property taxes.

Virtually everywhere I look I see legislatures and city councils getting ready to hit homeowners and rental property investors with a host of new taxes and fees.

The government is broke, and perhaps lonely, so it feels you should be broke too.

Here are just two examples I found in about four seconds.   I read about sixteen others.

Wyandotte County, Kansas:  Property taxes rising 8.9%.  City official calls the rise "nasty."

Palm Beach, Florida:  Tax rate rising to maximum allowed by state law, $10 per $1,000 valuation

In my city of Seattle, a new rental property inspection and licensing program is being launched in 2012.  The goal is to protect tenants from all those evil landlords who rent unsafe apartments to tenants much too dumb to think of moving from a filthy or dangerous place.  The fees?  So far I haven't seen them announced anywhere but the "program will pay for itself."

In other words, rental property owners get poorer while the city gets more money from them.

The idea of taking yet more money from taxpayers and property owners is revolting.

To do it in the midst of the worst real estate market since 1931 is downright mean.

If government cannot live within it's means, then it must do what every other entity faced with this challenge must do.  CUT EXPENSES.

Until this happens, God pity the real estate investor for they have the only deep pockets that cannot be put on a truck and moved out of town.