Bubbles and Demographics

Like many during this current economic crisis, I have been trying to figure out what happened and when (if) we will get out of it. Will I have a job until I can retire? Will my 401k recover? Will Social Security be around when I'm retired? Will my company be able to cover it's pension costs?
I'm normally an optimist but this article has me wondering if any of the above will happen. The crux of this article boils down to one paragraph:

"There is nothing complicated about finance. It is based on old people lending to young people. Young people invest in homes and businesses; aging people save to acquire assets on which to retire. The new generation supports the old one, and retirement systems simply apportion rights to income between the generations. Never before in human history, though, has a new generation simply failed to appear. "

A look at the key graphic shows the problem:

The law of Supply and Demand is going to be hard pressed to overcome the demographic problem that the West has. The reduced population will have a low demand for the older generations money and homes. There will be a limited supply of money (i.e. taxes) to fund SS and pension funds.

My wife often argues that it is much better to have only one child so that you can have more for yourself. It is a view held by many, but in the end, this is a shortsighted and selfish view of the world. By failing to reproduce, we doom ourselves to a very bleak future.

Update: More from the same author with the Pope's views on free markets.

How much will housing prices fall?

I found this graph here. It sure seems to indicate that some housing markets will be in decline for some time to come. Real estate prices tend to correct at a much slower rate than say stock or commodities. This doesn't mean that all real estate prices are falling (Buffalo's are rising).

The question is, will the politicians allow the market to correct and face a short, sharp recession or will they try to prop up prices and keep the country in a long period of stagnation? My guess is the later. We are a society that tries to avoid pain at all costs.

What's the forecast with Obama and experimentation?

The economy looks as bleak as I have ever seen since the 1970's. Consumer spending seems to have fallen off precipitously. I looks like the government hasn't got a clue as to what to do. Treasury Secretary Paulson sold Congress on a $700 billion bill to purchase toxic assets (TARP). However, Paulson changed his mind and forced large banks to give some of their equity to the US government in the largest nationalization in our history. The markets have predictably reacted by dropping some more.

Last Sunday night on "Sixty Minutes" President-elect Obama indicated that we was going to follow FDR's model of experimenting with the economy. However, what Obama does not seem to understand is that the markets do not like experimentation. Uncertainty creates volatility. Here's a useful chart of stock market volatility during the last century.

Many Democrats idolize FDR as a saviour but the facts show that if anything, he made the economy worse. Now the electorate has put all their faith in a new Saviour who promises to repeat the mistakes of history.

Irrational Pessimism

Many remember Alan Greenspans claim of irrational exuberance during the 1990's stock market run up. Now the market value has dropped about 40% from its peak and each day brings news of triple digit market losses. Foreclosures are up as well as joblessness and it's hard not to be afraid, especially for those in their mid-fifties who were hoping to retire in 5 to 10 years.

So is the world ending as we know it? Many people are thinking that way, claiming that this is the next Great Depression. The media claimed for over a year that we were in a recession despite the fact that the economy was still growing. Self fulfilling prophecies are part of the reality we deal with and as people are told that things are bad they change their behavior until things do become bad.

One contrarian is Warren Buffet who recently published an article recommending people buy now. I think that is exactly what smart investors need to do. Stocks have always come back. And some areas may have good real estate values where sellers have irrational pessimism (though I think that values will have to drop by 50% or more in some markets).

Stocks Vs Real Estate III

I've written in the past about why I thought real estate was a better investment than stocks. The current 40% (and counting) drop in the stock market serves to underscore many of the points I made.

Now, many people who were trying to use the greater fool theory to flip houses in rapidly escalating real estate markets during the past few years may disagree. I used to watch "Flip this (or that) House" and wonder if I could ever make money in real estate in the Buffalo area. However, at the moment I seem to be at the right place to own real estate. My real estate basket has a positive cash flow and is appreciating.

Meanwhile my 401k has lost over 6 figures in value and if I look at that alone, I have no hope of retirement until I am in my 70's. I think that the country is in the verge of electing the most far left socialist in our history. His ideas of increasing capital gains taxes and taxes on small businesses as well as anti-NAFTA rhetoric is reminiscent of the 1930's. I wonder if it will make FDR look like a conservative a few years from now.

Fortunately, hockey season starts tonight and the Bills are winning. Otherwise, I might just jump off a skyscraper.

Third Quarter Net worth update

Well, like most people my net worth fell in the third quarter of this year. You can see the chart along the sidebar or at NetworthIQ. The primary reason for the drop is the loss of $30k in my 401k. Retirement is getting further away with each passing drop. Wish I were 30 and could take advantage of this market. After a long decade (in the 70's) the stock market came roaring back for nearly 30 years and made many people rich.

Fortunately, I live in a area of the country where real estate is actually appreciating, so at least I have one investment that is not being hurt (My REIT fund has been going down, so my 5 houses here are what is helping).

In terms of debt, I'm treading water at the moment - neither going down much nor increasing too much (most of the increase is due to increased appraisal of a home I own with my ex and my "debt" to repay her share)

Congress Acts - Extends Crisis 10 years

Every one is running around in a panic predicting that we are facing imminent doom if Congress doesn't pass out a bail out bill for Wall Street. Politicians are all about blaming greedy capitalists but greedy home sellers are as much to blame. But people, whether on Wall St or Main St were simply acting in direct response to the incentives that our benevolent politicians have provided for us. Easy money and the Community Reinvestment Act have combined to drive up housing prices to unsustainable levels. Having the government buy these "bad" loans at inflated prices will not solve the problem. Houses in most areas will still be over priced.

How do I know this? Just look at prices of homes in the greater Buffalo area. Housing prices in many areas of the country are still 400-500% greater. Now, I know people will pay a premium for a better location. But once the lending industry is reigned in, most people will not be able to afford a 500% premium. So, they will default or move.

So, I predict that we will (like Japan did) suffer from slow economic growth over the next decade or until we let the free market set housing prices unrestricted by government intervention.

Liberal Fascism and Free Markets

I've been reading Jonathon Goldberg's book Liberal Fascism during the current economic crisis. The book is an eye-opening look at the "religion of the state" as Goldberg defines fascism. Fascists, progressives, and liberals are all one and the same and dedicated to the idea that the government alone can solve all problems, prevent all harm, absolve all sin.

There is no doubt that the real estate bubble was created by the religion of affirmative action. Government intervention (with a push by Obama) in the markets black-mailed banks into loaning money to people that couldn't pay for it. The solution proposed to solve the "crisis" is more government intervention into the markets.

President Sarkozy of France has declared that laissez-faire capitalism is dead. But, truth be told, the fascists have been in control of the markets for most of the past 100 years and the free markets of Joseph Schumpeter have not been allowed to work.

There is wide spread panic that if the Congress doesn't pass this bail-out package we are headed for the second Great Depression. I believe that we need the creative destruction of the free market to wring out all of the stupidity that has been fostered during the past 15 years by bad government policies.

I was happy that the bail-out package failed but I fear that ultimately, politicians cannot do the right thing. Here's a good description and solution to the problem.

P.S. You don't think we have a religion of the State???? Here's a creepy worship song to the Dear Leader.

Root Causes of the Market Turmoil

Based on what I've been able to discern there are two causes to the current market crisis. The first began a decade ago when our meddling politicians decided that the lenders were being racists by not lending to poorly qualified minorities in slummy urban areas (CRA). So the government relaxed lending standards and created tremendous liquidity. This allowed people to refinance property and created two bubbles - first the stock market and second in real estate.

I was able to purchase property because of this liquidity with virtually nothing but my credit score. Some of the property I got was foreclosed when the homeowners couldn't pay after borrowing many times the value of their property. (One property I got for $5k had a $71k loan against it. In truth it was probably only worth $1k, but it was owned by a minority and no one wanted to discriminate by valuing the house at its real value)

The second part of the crisis is due to a FASB accounting practice called "mark-to-market". About 8 months ago I started getting letters from all my HELOC's stating that the value of my property had fallen and my credit line was no longer available. Although property values in our area have increased, suddenly the loans I owed money on were valued at over $100k more than I owed on them. So the big companies like AIG and Lehman had to revalue all of the loans to market value suddenly showing tremendous losses and cutting all market liquidity. It didn't matter if I (and most other homeowners) were still credit worthy and paying off the debt. These firms found themselves stuck.

So the politicians that created this mess are all decrying the "greed" of the Wall Street managers (and no doubt there is greed there). But the truth is that Washington created this mess by trying to interfere in the market.

Credit Crisis Hits Home

I've been using a lease-purchase method to keep my 4 houses filled during the past 2 years. The first people to purchase an option on the first house I had bought 2 years ago decided to buy another property. So I was able to re-lease the property and collect another option payment.

The second couple has been quite religious about paying their rent on time and counting their rent credits in the hopes of buying the house. Their option expires this month and they have been unable to obtain a loan. It looks like stricter borrowing rules from the banks are the culprit. They asked if they could have another year to figure out how to buy the house since they really like it. They seemed really despondent about the possibility that I was going to evict them.

So, I am debating how to structure another option. Do I give them credit for any money they paid or any of the rent credits they earned (my position) or start from scratch (my wife's position)?

At the very least, I won't have to worry about having a vacant property. Despite the current climate of fear being generated by the media and politicians, my properties remain rented out and my cash flow situation seems stable.

Rent to Own Troubles

After my tenants deserted my property in Cheektowaga, I spent about a week cleaning it up and put our a "Rent to Own" sign on the front lawn- no other advertising. I received about 50 calls in the past 2 weeks and 3 serious contenders for the house.

The first was an older couple without children who I thought would be ideal tenants. They called my excitedly last Friday indicated that they had received a large legal settlement and wanted to sign the paper work. I drove 40 minutes up to the house and met them. They proceeded to tell me that they could not get out of their lease (wife in tears). I suggested they negotiate a pay off with their landlord.

A second couple contacted me through a Realtor several times and kept making verbal offers but all lowball offers. Sunday another couple came to the house and gave me a check for $1750. I told them I would decide Monday night and called the other two couples.

Monday I contacted the other two parties. The buyers came up slightly and the first couple could not be reached, so I deposited the check from the third party and told them they could have the house.

Today the second couple called and offered my asking price - too bad that their Realtor didn't give them good advice (She had sold a lesser property for $196k last fall)

The first couple called and said that they had paid their way out of their lease. When I told them I had leased the house, the wife broke in tears again because now their land lord would not let them continue in their apartment.
So now I've added to the ranks of the homeless - must be Bush's fault!
Now I've created a

Whiny Blacks

While I was away on vacation I did not answer my voice mail to check for calls. About 30 people left messages, many several times. One woman called about 6 times. After I did not return two calls she started leaving more and more hostile calls accusing me of being a racist. Some were quite vulgar.

This type of behavior is so sad. It seems that many blacks believe that when something is lest than perfect, it must be about race. I'm not sure if these people have super low self esteem or just developed a sense of entitlement that they deserve special treatment. I find many of Obama's whines about race repulsive. I think he is using guilt as a political tool. Maybe this woman was as well.

The experiences that I've had dating a black woman in college and adopting a black child 15 years ago have led me to believe that most of the racism in this country today is in the minds of blacks - not in reality.

I don't think electing Obama is going to solve any racial problems in this country. In fact, I think it may just create more whiny blacks.

Bad Tenants vanish while I'm away

While I was away on vacation my MIA tenants reappeared at my Cheektowaga house after being away for two months. They took about half of their stuff and left me a mess. They didn't leave any of the $3500 that they owed me behind. They wouldn't leave the mail man a forwarding address and the utility company didn't want to switch the power back on unless I put up a security deposit, so I guess they screwed everyone and don't want to be found.

Fortunately, with the security deposit and option money I had collected, I am not out anything. I put up a "rent to own" signs and have had 50 calls already. Hopefully I can do another lease-option before the end of the month, otherwise I'll be borrowing against credit cards to pay the mortgage.

The Best Energy Plan

Well we've heard from the great guru Al Gore about his plan - a fool's idea if there ever is one. The great Al ignores the millions in invested infrastructure that would have to be mothballed, the trillions in investment for a new infrastructure. And, oh by the way, even if we did this it wouldn't be economically feasible.

Then there's is T. Boone Pickens who will harness all the wind power blowing up the center of the country and reap millions in profits. Talk about a self-serving interest.

So what is the best energy plan? How about letting the free market work? It's failed you say - look at what has happened to the price of gas!! No, it hasn't failed. The laws of supply and demand are working perfectly. Demand is way up due to the growing economies of China and India (I've witnessed China's first hand and know this to be a fact). The problem is on the supply side. The monopolists have been restricting supply for decades that has resulting in the rapid rise of prices. Oh those evil oil companies (you think), raping us to get obscene profits!

No, the monopolists in this case are the environmentalists - restricting building of nuclear plants, restricting drilling for oil offshore and in ANWR, restricting development of oil shale and now stopping the building of clean coal plants. (a third of my electricity bill goes towards paying for a nuclear plant that was built but never used due to environmental law suits)

The best energy plan is to start protecting our energy supply from lawsuits from these environmental monopolists. Once this happens:

• oil companies can use new technology to recover an almost unlimited supply of oil from existing supplies as well as oil shale
• nuclear plants can be built
• gas will be cheap, electricity will be cheap and both will be abundant
• we will stop the myth of carbon dioxide causing global warming

Net Worth Update for 2nd Quarter '08

I've updated my net worth at NetworthIQ. My net worth dropped by $5k. Despite adding $3k to my 401k that account dropped by $6k. My debts dropped slightly, off-setting some of the loss in retirement savings.

One interesting thing has occurred which (I hope) underestimates the value of one of my properties. In 1998 I made an offer to purchase a home on 5 acres for $180k. Someone else outbid me and now has that property on the market for $369k. I purchased a slightly nicer property nearby for $195k which I have valued at only $235k. I still own that property (with my ex) and think that it is pretty comparable. If so, I may have more equity than I currently think in real estate.

Data from the local Realtors indicates that property values have continued to rise at their slow 3-6% rate as they have for the past 8 years. However, the banks have all sent me notices that the values of my properties has dropped dramatically (20%!!). I guess that they don't want to loan out any more money. At any rate, I've not changed the values of any of my properties.

Tenants are such liars

Some properties just seem to have a dark cloud over them. We purchased and renovated a nice home in Cheektowaga last year. We were unable to flip it and so after dropping $16k in holding costs we rented it out. Meanwhile the loan interest rate ran up from 7.9% to 11.1% and makes the property a money loser every month.

We thought we found some great tenants for the property, but 3 months ago they started paying late. Last month I payed a visit to them on the 10th and the husband said that his wife had the check and they would drop it off as soon as she got home from work. Well, I didn't get the check until the 20th.

Now in June it's the 24th and still no check. I went over to the property last night since both their phone numbers are all out of service. The lawn hasn't been mowed for a month and the inside looks like a disaster. There was a notice on the door from a Rent to Own company. I called the number and the store manager told me that they wanted to pick up some appliances since the tenants told them they were moving to Illinois!

I talked to the lady next door and she told me she had seen the tenants within the past 2 days. I tracked down another phone number for the husband through his employer. As soon as he answered and I told him who I was he hung up. Minutes later his wife called to tell me she was in a hospital in Illinois due to a heart attack (she's in her thirties) and couldn't talk because she had a tube in her mouth! This is too rich. Her husband makes his sick wife who has tubes down her throat call me rather than telling me she is sick??? (and she wanted to know how the #?!% I had gotten her brothers phone number?)

Of course, the wife told me they will pay the rent - the check is in the mail

Bernanke signals end of peak oil pricies

Yesterday Ben Bernanke signaled that the US was going to start supporting a strong dollar policy. This will no doubt start to stop the run up in commodity prices, especially that of oil. A look at gas prices in the chart above shows how irrational the market is at the moment. A smart, high risk trader would certainly short oil futures. If I had the cash I would also buy US dollar futures.

The gloom and doom crowd is predicting $6 a gallon gas prices. It's more likely that by year end we will be at half that price.

Update: from Senate hearings:

“Speculators now account for about 70% of all benchmark crude trading on the New York Mercantile Exchange, up from 37% in 2000, said Rep. Bart Stupak, D-Mich., chairman of the investigations subcommittee.”

Since then, oil has risen by more than 300 percent. Any questions?

Banks Panic - One size property drop for the country

During the past 3 weeks I've received 3 letters from 3 different banks about HELOC's on 3 different properties in 3 different towns. Each letter essentially cut off all of the credit in the HELOC. Each bank claimed that the property values had dropped drastically in the past year in "my area" and so, by the terms of the HELOC agreement, they were, without providing any comps or data, going to revalue my houses 20-30% lower.

Now certainly in some areas of the country when housing prices were increasing 20-30% a year and with prices are crashing back to reality this makes sense. But in Western New York housing prices never increased more than 2-3% a year during the great real estate boom. And data from the local Realtors showed that last year was the first time prices increased a lot - a whopping 5%!! I've been watching real estate sales this year and they are pretty brisk and there is no sign of price drops - quite the contrary.

But in order to prove this, I have to hire an appraiser and shell out $400. This I'm not going to do. So the banks are doing their best to hurt the local economy by over-reacting to their poor choices in other areas of the country earlier in this decade.

The average time to foreclosure is 445 days in NY. I sometimes think about punishing these banks by just collecting the rent for a couple years without paying the mortgage. Unfortunately, the fools that run these institutions never pay the price for their stupidity.

the latest bubble bursting and what's next?

Oil ran up to $135 a barrel increasing in price nearly daily. This despite drastic drops in US driving over the past year. Oil may be ready to crash as prices have dropped by $10 a barrel in the past week. Whether this week or next year, prices will crash eventually.

This is the third time in the last 15 years that we have seen this scenario. It seems to me that there is a tremendous supply of dollars chasing the next big thing. In the 90's the stock market marched to new highs due to "irrational exuberance", companies like Enron and WorldComm created new accounting to rack up "profits". When the curtain was pulled back and everyone realized the people pulling the strings didn't have the fundamentals, the bottom fell out.

In the early part of this decade the same scenario played out in real estate. The Wall Street gurus found new hedge founds to sell sub-prime loans and run up housing prices to irrational levels. The greater fool theory kept people buying until some started defaulting. Suddenly the curtain was pulled back again and look at the mess the real estate market is in.

I have no doubt that something similar is afoot in the commodities market. Oil prices are in the irrational range based on my years of working in oil research. Will we find new "funny" structures that traders have created? Possibly. Then Congress will hold some hearings and the money men will move on to some other way to find a way to invest all these excess dollars.

What that will be, I have no idea, but I'd bet money that it will happen. The world is awash with dollars.

Update: An interesting article I found several days later predicting $50-$70 per barrel oil in our near future. Also comparisons with housing bubble.

Rent Vs Buy

Many have debated the rent Vs buy dilema with regards to a home. Now the NY Times has offered a calculator that you can tailor to your local conditions.

Here's the numbers for my current house. Since I plan to stay here for at least 10 years, its looks like a no-brainer.

A Global Warming Report with Perspective

Fred Singer is a well regarded professor and expert on climate. This paper when read without the religious bias of the earth worshippers can provide perspective on how phony the climate change claims of Pope Gore are.

A key point:

Fortunately, there is a method that can be used to check on whether the observed warming is anthropogenic. It relies on comparing the observed pattern of warming with the one calculated from GH models. Essentially we try to see if the “fingerprints” match. The fingerprint is the pattern of warming, that is, the rate of warming at different latitudes and altitudes. Greenhouse warming should give increasing rates as one goes from the surface up into the atmosphere -- peaking at about 10 kilometers, where the rate of increase is about a factor of two greater than the surface rate, and quite pronounced in all the models.

The observed pattern, however, does not show any increase at all; in fact, the data from balloon-borne radiosondes show a slight decrease over the equator. Evidently, the observed and calculated fingerprints don’t match, indicating that the human contribution to current warming is insignificant, too small to be discerned. The cause of warming must therefore be natural, either an internal oscillation of the atmosphere-ocean system, or an external effect, perhaps stemming from the Sun.

The recent revelation that sea buoys have not detected any warming but cooling also boast the magnitude of the hoax the environmentalists are forcing on us to drive up gas prices and destroy our standard of living.

Of course, why let data get in the way of your religious beliefs.

The Environmental Conspiracy to raise gas prices

I'm a big skeptic when it comes to believing in conspiracy theories. I think that 99.9% of these theories are believed by mentally imbalanced people. However, there is one "conspiracy" that I'm a firm believer in that no one is talking about. That is the conspiracy of environmentalists and politicians to foil the free market for energy in order to reduce our standard of living.

It was instructive to listen to oil company executives try to elucidate causes of high energy prices at Congressional hearings yesterday. Now, I believe, that politicians smart enough to graduate from Law School should have a fundamental understanding of the Economic Law of Supply and Demand. So why are these politicians spewing their ignorance?

Lets review some facts:

• we have lots of oil in this country - more than 75% off-limits due to Environmentalists
• we have even more shale-oil deposits off limits due to ???
• We have enough coal to last for centuries. In the 1970's I worked for a coal company developing technology to convert coal to oil. Why aren't we working on that?

But wait you say - what about global warming?? We can't burn all those carbon based fuels, can we? Besides the lack of evidence to support AGW (man made global warming), let's assume that it's true. Well obviously we should be going full speed ahead to the only green-house friendly energy source that is economically viable. Windmills?? No. Solar energy?? No.

Nuclear power!! But wait- we can't build new nuclear plants. Why? Well the environmentalists feel that the truckload of waste fuel that that has been accumulated over that last few decades will threaten their god planet.

So politicians paid off by environmental interests have reduced supply of energy in all manner (except for really expensive sources like solar and wind). So it's no surprise that prices are high.

It's time to stop blaming oil companies when you go to the gas pump and put the blame squarely where it belongs - the wacko greens.

The Non-Recession Recession

I wrote a few weeks ago that despite the news media proclamation and the consensus of economists that we were in a recession (or a depression) was wrong because we did not have any data to support that notion. Now that first quarter GDP shows a positive growth of 0.6% (note:revised up to 0.9%!!!). Unemployment is a historically low 5% and manufacturing data shows an upturn in orders. It turns out consensus science was once again wrong.

And we won't go into a recession!!

How do I know that? I work for a big international company and like all international companies we have been expanding into growing markets like gang-busters for the past 10 years. And there is no slow down over seas. With the weak dollar, exports are booming as American goods are cheaper in non-US markets.

This is brings jobs and dollars back into the US, counteracting a lot of the outsourcing that has been going on.

The economy has been growing since 2001 and we have not reached a peak. Maybe when the Democrats fail to extend the current tax cuts we will see that come to pass.

No on Refinancing

I've given up trying to refinance my rehab. No one is willing to take on a loan to me since my debt to income ratio is too high per current underwriting standards and "No Doc" loans are definitely out of favor - even with a FICO score of 750.

So now I'm stuck losing $600 a month on this property. If I didn't have $50K of equity in it, I'd just walk away from it (the loan is not in my name). I was hoping the ARM would adjust since interest rates have dropped so much, but so far the loan is still at 11%.

Will Environmentalists be biggest killers of all time?

Rachel Carson was responsible for the deaths of millions of African children due to her hysterical, non-factual rant about DDT. Al Gore's global warming hysteria has created a large spike in food prices (as we switch to ethanol which does nothing for global warming) and nations riot over food prices causing many to fore go food. Fear of genetically modified food has prevented Africans from using drought and pest resistance seeds. The world has the technology to provide energy, food and good health for the people of Africa, but are being forbidden by zealot environmentalists. That will continue to kill large numbers of people.

A large group of environmentalists subscribe to the theory that the cause of all the worlds problems is people and the only way to solve the problems is to eliminate people. Looks like they are well on their way to killing off most of Africa. People in the West are unwitting accomplices to this through our environmental policies, support of abortion and Europe's move to euthanasia.

Update: Looks like someone just wrote the book on what I'm talking about

Update 2: From the Corner:

So how does that add up? Check out this piece in Foreign Affairs, from last year's May-June issue:In a study of global food security we conducted in 2003, we projected that given the rates of economic and population growth, the number of hungry people throughout the world would decline by 23 percent, to about 625 million, by 2025, so long as
agricultural productivity improved enough to keep the relative price of food constant.

But if, all other things being equal, the prices of staple foods increased because of demand for biofuels, as the [International Food Policy Research Institute] projections suggest they will, the number of food insecure people in the world would rise by over 16 million for every percentage increase in the real prices of staple foods. That means that 1.2 billion people could be chronically hungry by 2025 — 600 million more than previously predicted.

The world's poorest people already spend 50 to 80 percent of their total household income on food. For the many among them who are landless laborers or rural subsistence farmers, large increases in the prices of staple foods will mean malnutrition and hunger. Some of them will tumble over the edge of subsistence into outright starvation, and many more will die from a multitude of hunger-related diseases.

More genocide here Guess the one Green focus is population reduction.

1970's Again?

In some ways the economic environment today is eerily similar to the 1970's. We have rising gas, food and precious metal prices. There were incessant fears about the coming climate crisis (a new Ice Age). The government was screwing things up with price controls then, now they are mandating CFL's, and ethanol and preventing oil drilling (there's talk about price controls for mortgage rates). We have claims (again) of peak oil and predictions of depression (much less a recession that hasn't even started).

So should you be afraid? That's what the media wants. That way you'll buy more of what they are selling. But the facts don't support the non-sense.

The stock market has barely dropped 10% from its peak which is usually called a market correction. Take a look at some statistics from 1996 when Clinton ran on the greatest economy ever:

Key Labor Market Statistics in 1996 and 2008
	March 1996	March 2008
1. U.S. Unemployment Rate	5.5%	5.1%
2. Number of Long-Term Unemployed	1.33 million	1.28 million
3. Average Weeks Unemployed	17.3 weeks	16.2 weeks
4. Median Weeks Unemployed	8.3 weeks	8.1 weeks
5. Not in Labor Force because discouraged over job prospects	451,000	401,000

Of course, if the Democratic candidates that are preaching anti free trade get elected and create another Smoot-Hartley Act, all bets are off. My employer (a large international chemical company) is booming with earnings rising faster then they have since the 60's. Most of that is due to the drop in the dollar and expanding oversees markets.

I expect that we will have slow positive growth this year. However, since this is an election year and the press is trying to discredit the incumbent party, we are going to hear recession, depression and everything else that's negative about the economy.

By years end the press will be moving on to something else to create fear. In the words of Emily Litella "Never mind...."

Update: More perspective Economic Hysteria

Underwriting Hell

I've been trying to refinance my Cheektowaga rehab since November. My latest loan application has been in underwriting for a month. The loan to value ratio of this house is really low and during past years would have been approved in days. Though the Fed is pumping money into the economy and interest rates are low the underwriters are being much more cautious about lending to investors. I expect this is due to all the investors that bought houses on speculation and then defaulted. I don't have any data, but I suspect that a lot of current foreclosure "crisis" is related to people that though they could make easy money by purchasing houses and flipping them quickly - assuming that the prices were going to go up forever.

So this year I have not even been looking at properties. This is unfortunate since I think that the current market is good for buyers. But flipping is too risky in this market and the only money available to me is hard money which is too expensive for a buy and lease strategy.

1st Quarter Net Worth Update

I've updated my net worth at NetworthIQ through the first quarter of this year. Overall my cash on hand is up and debts are down compared to the end of December. This is largely due to two large tax refunds (from the IRS and NY State) I used to pay down debt. I paid no taxes due to huge losses in real estate last year but had my withholding higher than normal since I was expecting to make $40K in profits from sale of two flips. My 401K is up $2K as well which I think is OK considering the market was down 9% in the first quarter. Must be due to the interest I am paying myself from the loans I took from my 401K :)

Oil Bubble - ready to burst?

During the past 10 years we've experienced bubbles in the stock and housing markets. Whenever a bubble bursts money tends to flow into other markets. With prices over $107 per barrel recently it looks to me like oil is a bubble market. There is not technical reason for oil prices to be this high. People point to increased usages by China and India but I believe oil prices are primarily fear driven. Technology exists to get oil for much cheaper prices and I think that the oil price will drop soon. Maybe this discovery will be the catalyst to a sharp price drop.

If I had the money I would short oil futures right now

Installing a tankless water heater

When I purchased my current home in December I noted that the hot water heater was 13 years old and probably at the end of its useful life, though it was still working. I knew that the Federal tax credit of $300 for installing a tankless water heater was going to expire at the end of the year and the local gas company was offering a $350 credit as well.

When I looked into it further I found out that the local gas company would only pay if a "professional" company installed the water heater and the cost estimates for installation were ~$2000.00. With a little research I found out that the "professional" installer only had to have a Federal Tax ID to qualify as "professional". Well, I own an LLC with a Fed tax ID.....so I thought that I'd have my company (wink) install the heater. After all, I considered myself a jack of all trades!

I bought the 0.7 gpm model at Lowes for $999 with a 12 month no interest coupon. The instructions seemed easy enough. Removed the old tank and put up the new tank next to the same wall. Then I took my measurements for exhaust piping. My old tank had a powered vent with a side exhaust through a 4" PVC pipe. The tankless water heater requires inlet air from the outside (like a high efficiency furnace), so I figured I'd use the old exhaust PVC as the new inlet. When I went to buy the exhaust duct work I got a big surprise. Tankless water heaters put out a lot of moist air and require stainless steel exhaust ducting.

So I came home and relocated the heater to the exterior wall where I could still use the PVC piping from my old hot water tank. I then went out and bought lots of 3/4" copper piping and 1/2" black iron gas piping since I was about 20 feet from the old tank location. The instructions mentioned using 3/4" gas line but I figured that I must have enough gas pressure since the old heater used 1/2" and my huge furnace used only 1/2".

It took me about 6 hours to do all the soldering, installing the gas line, cutting a 5" hole through the wall for the new exhaust duct and then connecting it. I didn't have any leaks when I turned the water and gas on. I plugged the unit into the wall socket and turned the water on and it worked! Or so it seemed at first.

With our old 40 gallon hot water tank we hadn't been able to really use our jacuzzi tub yet, so we decided to try out the new tankless water heater that night. We turned the water on, got in the tub and about 10 minutes later the water turned cold!! So much for a hot bath that night. Over the next several days I tried to figure out what was wrong. Most of the time the heater worked OK but sometimes it would not light or go out. Also, when I turned the water on at high volume the whole tank would vibrate violently. The troubleshooting guide gave 4 possible solutions, none of which could be checked without specialized tools.

I sent an email to the manufacturer and they thought my problem was inadequate gas pressure. I had noticed that the problem seemed to occur when the furnace was running, so I decided to replace the 1/2" gas line with 3/4" line. Another $100 later I have a tankless water heater that works flawlessly.

Overall, I spent ~$1400 on the installation. Unfortunately, I lost so much money on my real estate last year that I paid no Federal taxes, so I didn't qualify for the Federal tax credit. Today I did receive the $350 rebate from the local gas company, so my net was ~$1050.

Hopefully, this unit will pay for itself. With 3 baths and 4 teenagers who think nothing of 1 hour showers I hope for some savings, although they may be tempted to take even longer showers now since cold water was the only reason they used to stop.

The only complaint I have is that the heater will not turn on until it senses water flow for 4 seconds. If someone takes a shower and shuts the water off, then you get in you will have hot water at first (lots of water in the pipes) but then the water will turn ice cold (our inlet water is only 35 degrees). The hot water comes back eventually, but it seems like a long time when you are caught in a cold shower.

We're in a Recession!!! Not!

Headlines across the country are screaming doom and gloom about the economy, claiming we are in a recession. This is impossible. A recession, by definition, is two consecutive quarters of negative growth. Since we have not even had one quarter of negative growth and probably won't, it's impossible for anyone to declare that we are in a recession.

Don't buy into the doom, and wait until the facts make the claims evident. Whether you are talking about economics or global warming the same logic applies

Update: It must be true - we have a consensus! Never mind gathering data.

Borrowing against your 401k part 2 - the question of double taxation

One of the most popular posts I have written was Why not Borrow Against Your 401k? . The number 1 comment left as to why to not do this was that you would be double taxed. That is, you pay back the loan with after tax dollars and then pay taxes on the money when you withdraw it.

Let's do a little thought experiment here to see if this is a valid reason. Let's assume for convenience that I will be in the same tax bracket when I retire as I am now (this may not be the case - people are often in a lower bracket). For this example I will assume a 15% tax bracket. Assume my monthly payment is $170 so I need to make $200 to pay this back. But no matter who I make this payment to, it is with after tax dollars - so I don't see any difference here.

Now let's look at the money when I am old and start to withdraw it. I will indeed pay taxes on it. But as far as the IRS is concerned, it doesn't matter if the interest my account earned was from my loan repayments or from bond funds - I pay the same amount of taxes. So, I see this argument about double taxation as a false argument.

Now if you make the mistake of reducing your withholding (as I did when I was young) then borrowing against your 401k is a bad move.

I have never used my 401k for frivolous uses like vacations or new cars. Most all of the loans have been to purchase a primary residence. In this case the interest is tax deductible so I am not paying in after tax dollars. Using my 401k has allowed me to keep my LTV below 80% and avoided mortgage insurance. In addition, it doesn't affect my FICO score. For this purpose I believe that it has served me well.

Oh, Oh...Global Temps Dropping

Al Gore will have to return his Nobel Prize. The last 12 months have seen the largest one year drop in temperatures ever recorded, wiping out a century of supposed global warming.

Oil Myths Debunked

Here's an interesting report on why the price of oil is so high (OPEC) and when we will run out of oil (never). One interesting tidbit I didn't know was that the Saudis are using only 9 of their 80 know oil fields. So don't buy into Hillary's rants about ExxonMobile's obscene profits. She's just another Chavez statist puking up communist garbage.

Where to get rich?

The laws of Supply and Demand really determine where you will get rich. The more people there are available to be your customers the more likely you can get rich. That is why a large proportion of rich people are located or do most of their business in the largest cities. The Internet has started to level the field in that it provides world wide access to large populations no matter where you live. However, for a person starting a business in a small town or buying real estate where the population is low this is no consolation. There are fewer customers in small towns or cities for your products or houses. Demand is low and potential for profit is low.

I watch a great deal of HGTV now and see lots of stories about how people make profits of $100k+ flipping houses (and selling them in days or weeks). Others just buy a house and in a few years reap over $100k in appreciation (and are often disgustingly disappointed because it wasn't $150k). This doesn't happen in Buffalo. There are few houses that sell for over $500k here and the demand for them is low. Most houses in this price range sit on the market for months or years. There is a house across the street that was for sale for $370k. It's a beautiful home of over 4000 sq ft in great shape. It was for sale for 2 years and now is off the market. I'm guessing the owner is going to let it go to the bank. So flipping a house here is a precarious venture. Long sales times and low profit margins can sink you. Plenty of supply and low demand.

One concept that is in demand here is a rent-to-own. Whenever I put up a RTO sign I get hundreds of calls. I can get higher than normal deposits and higher than normal rents and don't have to do maintenance on the properties.

One commenter on another post asked how I got into the same situation with real estate twice. The first time I had a dozen properties that were unrented and unrentable. I was literally paying people to occupy them so they would keep the heat on in the winter. Now I have all of my properties rented out (though I wanted to flip them) with a positive cash flow. Only one property has a negative cash flow and hopefully I will be able to rectify that soon. This is no where near my previous situation, just not what I had planned.

I don't think that I will get rich investing in real estate in Buffalo but it is possible since I have found a concept that has a high demand and few suppliers. This will be a slow process though since I have little cash to invest in more properties at the moment. I cannot use hard money lenders to buy properties since I cannot flip them quickly here and must wait on having conventional financing. Maybe an Internet business is the way to go from here but I haven't a clue what that would be.

A review of What's So Great About Christianity

Dinesh D'Souza has written a book "What's So Great About Christianity" which I had the pleasure of reading during the past week. For me it was an appealing book because it comes at Christianity from a logic and reason standpoint (I'm an engineer that used logic and reason for many years to discredit Christianity). There were many points he made that I was aware of but D'Souza puts it all together in one piece that I find quite compelling. I was raised as a Catholic, became an avid atheist for many years but continued to study spirituality and was hooked into New Age beliefs for some time. I started reading M. Scott Peck's works (author of The Road Less Traveled) and by the 4th book I came to agree with Peck that Christianity was the only true religion.

Here are some highlights from D'Souza's book:

1. The conventional wisdom is that religion is declining. But the fact is that religious conversion is growing and Christianity is the fasting growing religion. Growth is mostly in the Southern hemisphere, but we see growth in mega-churches.

2. Darwinists and atheists(usually one and the same) predict the demise of religious beliefs, but as Darwin wrote “The vigorous, the healthy and the happy survive”. Atheism offers only a depressing world view (your life is meaningless, you are no different than any other animal species and death is the end – you came from nothing and are going nowhere), while Christianity offers hope and meaning to life (You are a special creation of a good and all powerful God. You are created in His image with capacity to think, feel and worship that sets you above all other life forms. You differ from animals in degree and in kind. Your Creator loves you so much and so intensely desires your companionship and affection that He has a perfect plan for your life. In addition, God gave the life of his only son that you might spend eternity with Him.) Secular people are not reproducing in adequate numbers to survive, while those with religious beliefs are.

3. The basis of Western Civilization is Christian ideals. The separation of Church and State is a religious idea that was first spoken by Christ (“Render unto Caesar that which is Caesars and to God that which is God's”) and further developed by Augustine in the “The City of God”. The basis of limited government, equal rights, religious tolerance found in the US Constitution were all Christian ideas.

4. The Christian concept of human fallibility led to the elevation of the nuclear family, limited government, the rule of law and our cultural emphasis on the relief of suffering. The priority of romantic love in marriage developed out of Christianity. Capitalism and the basic rules of economics rose out of Christianity. No where is compassion for those suffering so emphasized as in the Christian religion.

5. “All men are created equal” was a Christian idea. Though “democratic”, Greek and Roman cultures did not value the sanctity of life as Christianity does. Christianity elevated the place of women, was the first group to eliminate slavery, developed “just war” principles (you should not kill innocent civilians) and our concepts of individual freedom (derived from “free will”)

6. Science was able to arise in civilization only because of Christianity's focus on reason as a basis of understanding God's creation. The highest discipline in Judaism and Islam is jurisprudence, while in Christianity it is theology. Theology is employed to understand the ways of God. Augustine first posited that God created time along with the universe (something only recently confirmed by scientists). Augustine argued that every series (e.g. the universe) must have a cause and that cause must stand outside of the series. Thus the universe had a creator, God, that stands outside of time and space. Psalm 13:1”The fool has said in his heart that there is no God”. Anselm's argument that God is “that than which no greater can be thought” offers an inductive proof of the existence of God. Neither Augustine nor Anselm appeal to supernatural revelation to prove God's existence.

7. The greatest idea of modern science is faith that the universe is rational. All scientific discoveries have been developed from this faith. This is an idea Christians developed by envisioning the universe as following laws that embody the rationality of God the creator. The laws that govern the universe are written in the language of mathematics – a miraculous mystery. Institutions of higher learning developed out of Christianity (Oxford, Yale, Harvard & Dartmouth were all Christian universities). The first professional scientists can be traced to the Middle Ages and were Christians.

8. Modern science points to a Creator rather than a purely naturalistic explanation. The “Big Bang” theory is a stunning confirmation of the Genesis story of creation. “In the beginning was the word...”. Neither time nor space existed before the singularity of the universes' beginning. The universe was created in a burst of light. God separated night from day later, i.e. the sun and planets were created at a later point. The creation of the universe was truly a miracle. The universe had a beginning and that beginning had a cause which we call God. The Creator used no laws to create the universe since the laws of physics were created with the universe, so the creator must be supernatural. There was no matter before the universe, so the creator must be non-physical(i.e. Spiritual). Since space and time are inside the universe the creator must be outside of space and time (i.e. Eternal). Since the universe was created out of nothing the creator must be omnipotent.

9. Scientists claim that we are insignificant creatures in a vast universe and are nothing special. The Anthropic Principal proves that universe and all its laws are a conspiracy to produce human beings. Had any given law of physics differed by minutia amounts we would not exist (e.g. The gravitational constant or mass of the proton). It is not luck that we are here (the probability of all the laws of nature all lining up is astronomically small). The “multiple universe” theory explanation for the anthropic principal has no evidence. Using Occam's Razor you can deduce that we live in a Designer universe, that is a universe designed specifically for us.

10. Paley's argued that by looking at a watch you would conclude that there was a watchmaker and thus we can look at the Universe and conclude that there is a Creator. Darwin's theory of natural selection does not disprove the need for a watchmaker. Evolution by natural selection explains a significant portion of how creatures are they way they are, but does not explain the beginning of life. How did the simple living cell come into being? There is no explanation for the complex formation of DNA and RNA in such cells. In addition, evolution cannot explain consciousness, rationality nor morality. Evolution offers no explanation for the creation of the universe nor its laws.

11. Scientists believe that reason and evidence are the only way to understand the universe but Kant points out that our knowledge is limited by our 5 senses. Kant asks “how do we know that the reality that we see is reality itself?” Science provides only an illusion of reality – this is congruent with all the worlds religions. We don't know what we don't know.

12. Scientific laws are not verifiable. No finite number of observations can be used to determine that the laws are true everywhere in the universe. Science properly understood cannot verify theories, it can merely falsify them. This leaves open the possibility of miracles.

13. Life is full of gambles (who you marry, what field to study and job to take, where to invest...). So how should you gamble in regards to whether God exists or not? Pascal's Wager says that it is better to bet that there is a God than to wager that there is none. Reasonable people have faith because it is the smart bet. Doubt is the proper habit of mind for the religious believer. If we have faith in a God that does not exist what have we lost? If we reject God and are faced with an eternity without him (hell) than we have lost everything. If God were to reveal himself, He would force us to accept Him, defeating the free will He has given us to believe or not.

14. Atheists condemn religion claiming that religion is responsible for most of the deaths the world has seen. But the facts are otherwise. Atheism has been responsible for over 100 million deaths in one century (Hitler, Mao, Stalin, Pol Pot), Christianity was responsible for 200,000 deaths over 20 centuries. Why? Atheists have no moral constraints, an ideology that sees man not god as the creator of values. “If God is not, everything is permitted”.

15. Moral laws are both universal and objective. There are no known cultures that do not have some system of morality. Jews, Christian, Muslims, Hindus and Buddhists agree on a wide range of moral values. Morality is not relative since even relativists have a code of values that they espouse. Moral laws presume a moral lawgiver. Conscience is the voice of God within our souls.

16. Are we just made of matter or is part of us spiritual? If we do not have a soul then we live in a deterministic universe and free will is an illusion. A materialistic view of the world makes us slaves to our genes controlling all of our actions and decisions, yet we can demonstrate that this is not so. Our inclination to live within a moral code is one such evidence. The “I” that we experience is outside of our material bodies and transcends time. We are free to chose not to follow our genetic programming.

17. Marx said that “religion is the opium of the masses” but the opposite is true. Religion requires sacrifice, and promises damnation for failure to follow a moral code. How can this be an opiate? Atheism allows us to practice a hedonistic life without consequences and avoid accountability for our actions. Atheists use sensual pleasures to numb themselves to the nothingness of their purpose and existence and ultimate end. Atheism is the opiate of the morally corrupt.

18. If God is good why do people suffer? No one can explain the existence of suffering or evil. However, religion offers hope to the despairing. Atheism offers nothing.

19. All religions are not the same. Christianity holds that man, no matter how hard he tries cannot reach God, so God became man. Christians view that mans nature is the propensity to sin. We cannot redeem ourselves (Hinduism and Buddhism believe that we can through meditation, Islam and Judaism through following God's Law). Christians believe salvation is a gift from God that can be claimed by asking for it.

20. Christ is the most influential figure in history. His words are unmatched in eloquence and are easily identified. We know he existed. There is historical evidence of his resurrection. His claims were remarkable. He did not claim to be a prophet but God Himself (“I and the Father are One”). Using Gods words for himself, “I Am”, he claimed to exist before Abraham. He forgave sins and the divine authority to interpret Scriptures.

21. Christianity makes sense of who we are in the world. It integrates reason and faith. Christianity infuses us with a sense of purpose. Christianity offers a solution to the cosmic loneliness that we all suffer. It helps us cope with suffering and death. For Christians there is the life to come. Finally, Christianity helps us to become better persons that we want to be.

Hunkering Down

The past few months have not been too active for me in the real estate business. I spent November and December fighting pneumonia and this past week had surgery related to complications I am suffering from ulcerative colitis that I've had for the past year. Unable to sell any of my "flips", I now have everything rented. I was hoping to have a positive cash flow but due to the mortgage crisis have not been able to refinance the big rehab I did. I still am paying over $2200 per month on it and taking in only $1750 (which is a damn good rent in this area). Interest rates are low but banks are wary about doing investment property loans at the moment and looking for full documented loans. Unfortunately, I can't show a profit on my rentals. I have been working on my 2007 taxes the past few weeks and am in shock as to the extent of my loses last year. Despite my high salary I won't be paying any income taxes. In fact, I expect to get back all of the withheld taxes plus $3000 in child tax credits when I file. Certainly this was the worse year of my financial life.

So I am hunkered down trying to ride out this financial disaster. Not spending anything on real estate that is absolutely necessary. I've taken down my web site and stopped doing direct mail. Everything is at a standstill. Hopefully, the tenants will pay their rents on time and my cash flow will allow me to sustain my lifestyle until one of the lease-purchases excercises their option.

The Best Mix of Investments from two top performers

I wrote a post talking about having a balance of investments in both stocks and real estate. It turns out that the "big boys" use this exact strategy and get some of the best returns. Look at how Harvard and Yale invest their endowments. It turns out that they invest approximately 30% of this money in real assets like real estate. And what is their return? Over 10 years it is 15% and 17% annualized returns for the two schools.

Even though I was upset that I could not sell my real estate last year, property values here have not declined at all and in fact have risen over the past year. So while my 401k has taken a beating this year, my real estate equity has been stable.

A Landlord Once Again

At the start of last year I had set some goals to buy and flip some houses. I ended up buying 3 houses last year Vs a goal of 4. I had set a goal to sell 3 houses but was unable to even get any offers on the houses I own. I tried FSBO, professional Realtors, and auctions but got no where. So to save myself from bankruptcy, I have rented all of my properties. Right now I have 4 rental properties in my real estate portfolio.

I wrote about my previous experience as a landlord in WV here. It was a miserable experience. Tenants didn't pay their rent, the apartments were usually vacant and difficult to rent, I was awakened in the middle of the night to fight bats or crawl under houses to thaw out frozen water lines and I lost lots of money.

I bought a house 2 years ago and used a lease-purchase method to rent it out. It worked out pretty well. The tenants spent money to upgrade the property, never called me and I didn't have to spend a penny on repairs. They decided not to buy the property after the year and so I got to keep their option money and have re-lease-optioned the property quickly. I should have learned from that lesson, but I had the flipping thing in my head and so spent the greater part of last year losing money trying to sell 2 properties.

In the end I ended up renting out all of my properties using the rent-to-own signs I put on the front lawns. The signs got the tenants, not any other advertising. I got lots of calls and rented each property quickly and higher than market rates with a non-refundable option payment. So far it is working out well. One trash property that I bought is being rehabbed by the tenant. He's put $3K into it so far - re-plumbed the whole house, re-wired it and put in a new bath. I couldn't give this house away when I was trying to sell it and now it's in much better shape and worth a lot more, so if the tenant defaults I'll have house worth much more.

The cash flow on all but one of the properties is positive. I had tried to refinance that property but so far have not had much luck. However, it has an adjustable ARM and maybe with the interest rate cut the ARM will drop from it's current 9.7% interest rate. The only real negative to my current situation is that I have no cash on hand for emergencies or to buy more properties. If the economy tanks and one of my tenants loses a job, it could put a hurt on my finances. Hopefully, someone will exercise their option in the coming year. But for now I remain a landlord not by choice.

CountryWide mess hits home

I had decided in November to take my flip off the market and try a lease-purchase. Part of the strategy was to re-finance the loan on the property. (I had been paying the previous owners loan payments on an ARM loan and the interest rate had jumped up to 9.7%). When I applied for the mortgage in November the broker thought it was a slam dunk. But CountryWide dragged their feet on the loan for 2 months, constantly asking for this and that document. It was a death of a thousand cuts as they decided Friday that they didn't want to lend the money.

So now I am in a funk. This is a $500 a month penalty over what I thought I would be paying on the re-fi. I had the cash flow on all my properties worked out to squeak by and now it doesn't look promising. There's no place else to look for income at the moment and the only light I see in this tunnel is a train coming at me.

I'm a Millionaire!

Hah! Not really. If you click on my NetworthIQ you'll see that I have assets of over $1.2M now. On the downside, I have liabilities of nearly a million dollars. My net worth has moved slightly downward over the last 2 quarters as my stock portfolio has taken a hit over the second half of the year. My real estate ventures did not pan out as I had hoped either. On the plus side, real estate values in this area are not taking the big hit that they are in other parts of the country, so this is counterbalancing my stock market losses.

I've been trying to re-finance the property that I rehabbed last year (it has an ARM that's at 9.7% right now). However, the bank (CountryWide has been really dragging their feet on this loan. I'm hoping to get that done soon so I can pay off some of the increased debts I've accumulated in the last 6 months.

I'd say my big mistake this year was not trying to lease-purchase out my rehab. I thought that I could flip it and make a profit, but flipping is for people in markets that are growing. Buffalo is not such a market and that exit strategy doesn't work here.

I still haven't come up with a plan for 2008. I'm recovering from pneumonia which I have had for the past 2 months and have not had the energy to do much. Moving in December took the last ounce of energy I had and put me over the edge.