State of the Union Feb 2009

Obama will deliver his first State of the Union address today. So far the stock market is screaming "no confidence" in his plan as evidenced by the huge drop in stock market value since his election and the worst market in 113 years. My 401k is 50% of what is was at it's peak and I'm not sure how much lower it will go. For a 20 year old this is probably a great time to invest in stocks but not so much for people near retirement (what ever that is?!?)

My only solace is my real estate investments. Real property values continue to rise in the greater Buffalo region. Demand for my properties is high (using my Rent to Own methods). My only concern is what will happen to interest rates.

Right now interest rates are at historic lows. However, the government has expanded money supply so much that it will come back to bite us. Are we heading to the stagflation of the Carter years? My guess would be yes. Unfortunately, I have a mortgage and several HELOC's that are linked to the prime rate. Once inflation hits the FED will be forced to raise interest rates. And I don't think Obama is going to rescue the investor class anytime soon.

TV shows caused the real estate bubble?

Here's a new one - TV shows caused the real estate bubble:

The real villains here, the truly bad seeds at the heart of this crisis, have gone unpunished thus far and are still in operation. They are Jeff Lewis and Ryan Brown of Bravo's Flipping Out, Armando and Veronica Montelongo of TLC's Flip This House, Kristen Kemp of TLC's The Property Ladder, Kendra Todd of HGTV's My House Is Worth WHAT?, and the TLC, Bravo, HGTV, and Fine Living networks in general. All of them encouraged people to take out massive loans in order to buy and
renovate homes and sell them at a profit when, really, most people have terrible taste, and furthermore, are bad at laying tile. These shows are still on! WHY?

Want to have a web based business?

I mentioned in an earlier post that I was looking into SiteBuildit as a potential source of income. Two years ago when I decided to invest in rental property I used a web business called InvesterPro to build a web site for me. It cost me nearly $600 for them to develop a site for me and about $50 per month to maintain it. During the two years that I had the site live I had very little traffic and only a few contacts. None resulted in a real estate transaction.

After purchasing SiteBuildit for $299 my eyes have been opened as to why the previous web site did not attract many visitors. The InvestorPro web site was just a cookie cutter site (every subscriber had the same site except for the name of their business. Search Engines like Google tend to ignore these type of sites.

The main concept behind SiteBuildit is what they call the C-T-P-M process. Intuitively this makes a lot of sense to me. The extensive instructions tell you how to find niche key words that can attract traffic without a lot of competition. Lots of advice on building content and monetizing your site. After working with the software for a couple of weeks I created a web site called Investing-in-rental-property.com. (It's not completed yet but I'm starting to put into writing some of what I know.) I've been really impressed by how easy it is to build web pages. Once I have the time, I'll be able to improve the look and feel. Lots of information in the forums as well.

Overall - a very impressive service for building a web based business.

Rent to Own homes concept reduces pressure on rents

I read the other day that 50% of foreclosures are limited to 4 states - California, Florida, Nevada and Arizona. I have noticed any changes to the number of foreclosures in my area based on the foreclosure list subscription service I subscribe to. I expect that real estate prices in those 4 states were driven by speculators who bought properties before they were even built.

The Wall Street Journal carried a story today that the bursting of the real estate bubble has put downward pressure on rents. The Buffalo area is losing people and jobs and so I would expect that there would be some downward pressure to reduce rents here as well. So far, I continue to receive calls about when one of my properties may come available. This despite no advertising on my part. I would guess that this is due to the "rent to own" homes concept that I have been using. Not having to worry about whether I can find tenants is a great stress reliever for a landlord.

Increasing Income

My company has announced no raises for 2009 and no bonus. I have to make an extra alimony payment to my ex-wife out of a non-existent bonus and I usually use it to pay down on debts. Like many people I either need to increase my income or cut expenses. My expenses are pretty barebone right now, so there is little to cut

What do I do now? Invest in more real estate? Take a part time job? Find another source of income?

Is the real estate market at a bottom yet? Probably not in the hot markets of the past few years if you look at this graph. The market neither increased rapidly nor dropped in the Buffalo area (it's up 4% in the past 12 months). Underwriting for investment loans has become very strict the past year. If I could get a real estate loan, I would re-finance one of the properties I own that has a variable rate loan. I just cannot see any purchases of real estate at the moment. Besides, cash flow from my properties is revenue neutral and I wouldn't expect that a heavily financed purchase would produce a positive cash flow.

I mentioned here and here about my experiences with multi-level marketing through Amway/Quixtar (I read this weekend that they are now dropping the Quixtar brand and reverting to Amway). I don't really consider Amway an option due to the high people skill requirements for success.

I "tried" the Internet with this blog. But my 25 months of blogging has earned me a cumulative $2.46! Of course, I do not have a good sense of how to make money on the net. One of the aspects that I really grasped with Amway was the "franchise" concept (see point #2 here). Distributors like Dexter Yager had created an excellent "system" for success.

As I mentioned a couple of posts ago, I have been looking into SiteBuildIt. It seems to me that the creator of the site has done a pretty good job of building a good system that can be followed by most people. The system looks pretty comprehensive. If you are (like me) uncertain what type of Internet business to create, there is a Brainstorm section which provides lots of data. You can use the data to determine supply Vs demand for any particular keyword (i.e. business idea). His C-T-P-M model makes a lot of sense (and points out why this blog doesn't make much money!).

I am applying for a Census job and have thought about taking a second job. The problem with second jobs is that they have little flexibility. Since my boys have not been willing to get their driving licenses, I still need to do a lot of chauffeuring.I thought about becoming a Real Estate Agent and took an on-line CCI - but, as I suspected, the competencies needed are much like Amway and I scored in the lowest 20%.

So, over the next few weeks I will explore a web site in more detail and may pursue that for the time being.

When is the best time to buy/ sell your house?

Here's an interesting plot I made from data of the Buffalo/Niagara regions median home prices over the past 5 years. Typically there is a 60 day lapse between an offer being accepted and when a home is closed here.

So, if you want to buy at the best price, the ideal time to make an offer is in December. On the other hand if want to sell at the highest price, you should probably put your house on the market by the end of March.

Ending 2008 Net Worth update

Well, I've updated my net worth on NetWorthIQ. Like many (or most) others, my net worth suffered a sharp drop in the forth quarter of this year and is at its lowest level since 2006. The big killer was the sharp drop in my 401k which is largely invested in equities. And, fortunately, unlike a lot of others in many real estate markets, my property values are not declining.

That being said, I don't plan on buying any properties this year. I'm hoping that one or more tenants will exercise their options and purchase the house that they are leasing, but I'm not holding on to much hope. My big concern is the one property that I have which is on a variable interest loan (currently at 10.1% interest). I tried to refinance it several times last year and expect that it will be just as difficult to obtain a new loan this year. I have no hope that the current occupant will buy it and am concerned that all this money that the Fed is pumping into the economy will cause massive inflation. If that happens any variable rate loans will jump since the Fed will have to rapidly raise interest rates.

I'm in the process of applying for some temporary work with the Census. Beyond that I've also been exploring SiteBuildIt and the possibility of an Internet business. But for what, I'm not sure.

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.