In Frank Sinatra’s famous tune “That’s Life”, he penned the lyrics: “That’s life, that’s what all the people say. You’re riding high in April, Shot down in May” I am going to change them to “You’re riding high at 4:36pm on Tuesday, Shot down at 3pm Thursday” Lame intro–I know–but my point is made. The market was all over the board last week.

In response to market volatility, mortgage lenders issued as many as 8 distinct rate sheets in a holiday-shortened, 4-day trading week.  Lately, shopping for a low mortgage rate has been as much about timing as anything else.

There wasn’t much economic news to digest last week save for Friday’s Retail Sales data.

The numbers reflected what most of us already know — consumers are not spending as freely as in the past.  And, because consumer spending accounts for 70 percent of the U.S. economy, retail restraint can mean the difference between a growing economy and a slowing one.

October marked the 5th straight month of declines for Retail Sales.

This week, markets will have their hands full with new data, 7 Fed speakers, and ongoing rescue effort discussions from Washington.

From a data perspective, the two most important data points are the Producer Price Index and the Consumer Price Index.  Both measure the “cost of living” as it applies to businesses and consumers, respectively, and both can signal inflation when the readings are too high.

Falling energy prices will likely cause PPI and CPI to post negative readings, but if those negative numbers post higher than expected, mortgage rates should rise in response.

Regardless, mortgage rate shoppers should standby in Ready Mode.  Changes to the mortgage market — like changes to the stock market — have been furious and swift, measurable in minutes, not hours.  The only way to beat a market like this is to not play in it.

Once you find a rate-and-payment combination that suits your household budget, consider locking it in with your loan officer.  The risk of not committing can be too great in a market moving as quickly as this one.

(Image courtesy: The New York Times)

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Tags: Economy, housing, mortgage rates, volatility

Last week I made the case against real estate as an investment class. My recent change of heart is due to the ridiculous amount of market tinkering the Fed, the Treasury, and the central bankers around the world are doing to “support the real estate market”. All the bad loans, the foreclosures, and the schizophrenic Hank Paulson with his “on again - off again” bailout schemes, is putting the banks on hold…not knowing quite what to do with the growing REO on their books.

They are holding on to a ton of it because Hank said he was building an auction platform to buy all their troubled loans. Hank called this program TARP….or the troubled asset repurchase program…and he put a really sharp Wall Street guy (…haven’t we had enough of these guys?) in charge by the name of Neel Kashkari. Hank went to Congress and got almost a trillion dollars so he could buy up the bad loans and save the real estate market. Help the guy on the street, you know…you and me.

But a funny thing happen on the way to “helping” the American public….

The banks stopped lending to each other…like some errant children, they decided to stop playing nice and started killing each other right in the middle of the mall!

What is Hank to do? It’s embarrassing….trying to separate these children…get them to stop fighting…stop them from being petty, greedy, and only out for themselves. Hank remembered he had a pocket full of money…your money. So he offered nine of the “bigger” kids a truck load of “ice cream” if they could shape up and fly right. This took $250 billion of the $750 Congress gave him to fund TARP.

And it seems to have “worked” since the LIBOR and the TED spread are down some, but bribing kids or bankers to behave wears off quickly. So on Monday of last week, Hank said in a press conference, he was not moving forward on TARP. He was going to stick with direct investments(bribes) in banks to get the markets working again.

What?

Hank realized he’ll need the remainder of the $750 billion just to keep the banks from destroying each other …and us in the process.

There are rumors running all over Washington since Monday, that Hank’s job is hanging by a thread. Every Congressman who voted for the bailout bill looks like an idiot now that Hank’s approach to fixing the “worst financial crisis in a century” shows less insight than your 14 year old babysitter shows when the kids act up on her watch. Bribes, picking favorites, and appeasement at the highest levels is exactly what I’d expect of a part-time baby-watcher, but we deserve more from the Secretary of the Treasury.

With the government and the Fed knee deep in “fixing” things, where can one find an investment that is less susceptible to this meddling? Better yet…what investment could actually benefit from it?

Well let’s look at the alternatives left after eliminating real estate. It can’t be stocks with a recession headed our way. It can’t be the bond market; those yields are so low they don’t cover inflation. The same goes for sticking money in a CD or money market account; yields are horrible. Commodities like sugar and pork bellies with a global recession aren’t the way to go either…but we all have to eat, so their might be something there a little later.

But right now…the only investment class that makes any sense to me is …. drum roll please….

Gold!

I know what you are thinking…I’m not about to trade the gold futures market….and you right to say it. I’m not thinking that either.

I’m saying buy actual physical gold bullion…and coins if you like…but mainly the bullion.

(If this is the first time you’ve read my stuff, you’re probably scratching your head right now. If you go back and read some of my earlier stuff here on BiggerPockets Blog, I recount the story of my call to short Fannie and Freddie 26 months ago when they were trading at $60 a share…and the home builders…and the subprime lenders.

I even gave a five live seminars here in Denver on it back in the fall of 2006! Telling folks to short those stocks when everybody else including Jim Cramer was advising the opposite sounded crazy too…but those who took my advise don’t work for a living anymore. Which begs the age old question - “Is blogging work?”)

Here are my reasons….

First, as we saw, there are no other reasonable investment options. Soon the big money will come to that conclusion too.

Second, if you like real estate for it’s hedge against inflation, you’ll love gold because it’s a storage of wealth just like real estate. The only differences is in a down market I can still sell my gold in a matter of minutes, not months.

Third, if you believe like I do, that all this lowering of rates and printing money at a pace the US has never seen before will end in 1970’s type stagflation, owning gold could prove to be the wisest decision of your life. Once you own some gold, you actually want Bernanke to keep printing money( he’s not likely to stop regardless).

Well I could go on for an hour about fiat currencies, a seriously out-of-whack M3, and the under reported unemployment numbers that lead to a very ugly economic picture moving forward, but suffice it to say, if even a tenth of it happens, gold will be the only safe haven.

If we could only buy physical gold the way we buy rental real estate….25% down, finance the remainder…gold would be the best investment - at least for now.

Oh, wait…you can! Check out my BiggerPockets blog this week for more on gold…I’m planning on posting a few ideas for you!

Next week I’ll be writing on why Paulson resigned…and explain in more detail who his successor, the mystery man, Neel Kashkari really is…at least I hope so!

Bye for now!

Tags: Economy, gold, investment, paulson, real estate investing

It wasn’t that long ago that people were touting the extraordinary power of leverage. Use as little as possible to control as much as possible. Leverage was used in business and especially in real estate. You were considered an amateur if you put down 20% to buy a property, 5% and even 0% down became the rule rather than the exception. Businesses used easy money, or leverage, to expand their business empires. When used properly, leverage is a great tool. But it is also a double-edged sword that can lead to a fall that is as spectacular as the rise. How many businesses have failed and how many more will fail because they borrowed, or leveraged, more than was prudent?

Of course, it wasn’t only businesses and investors using leverage, consumers were doing it too. The run-up in real estate value caused so many people to feel richer than they really were. They then leveraged their homes, using home equity loans and bought things that made them feel very well off. The idea of $0 down and no payments or interest for 6 or 12 months made it seem like they were getting things for free. Of course, the piper had to be paid on that eventually.

Credit Fueled Expansion

What we had was an economic expansion that was fueled almost entirely by credit, or leverage. When the credit spigot was turned off the economy came grinding to a halt. It seemed like finding a living wooly mammoth or capturing Bigfoot was easier than securing financing for a real estate deal. Of course, the house of cards that was erected with all of this leverage came crashing down.

With the economy in shambles and facing the prospect of a total financial meltdown, the Government steps in to save the day. So how do they fix an economic catastrophe that was fueled by the use of too much easy money and credit? By borrowing more money of course! It’s like drinking a shot of whiskey to cure a hangover. Printing money that we don’t have is only using leverage to an extreme degree. The burden of this skyrocketing national debt will inevitably lead to inflation, and possibly hyperinflation. Governments that have over-leveraged their economies in the past (Article) have ultimately paid a heavy price.

More Than A Buzzword

Many corporations, large and small, are feeling the burden of excessive amounts of debt. In a shrinking economy they are taking steps to cut costs in order to remain profitable or even, in some cases, stay afloat. They talk of deleveraging in order to improve their balance sheets. In plain English, they know that they need to stop borrowing. If they don’t take these steps they may pay the ultimate price and cease to exist.

The entity with the greatest need to deleverage is the Government. Instead they keep creating more programs, more stimulus packages, and massive bailout plans. There are not enough tax dollars to pay for all this so they just use more leverage. Governments are not immune from failure, it has happened all throughout history. Economics has been the main catalyst for Government failure, don’t think it can’t happen here.

What can you do? Take steps to deleverage your own life. Avoid taking on any new debt and work to eliminate what debt you do have. Remember that leverage is a double-edged sword that cuts both ways. While you will generally use leverage, or loans, to do a real estate deal, be sure that it is manageable and that you have sufficient reserves to weather any storm. Avoid financing everyday purchases, do you really need that new flat screen TV or the latest electronic gadget? We all need to live within our means, if you want more, then increase your means.

A government big enough to give you everything you want is a government big enough to take from you everything you have.
- Gerald R. Ford

Tags: borrowing, Credit, Economy, leverage

We all know both the US government and the Federal Reserve are going full bore with one tweak after another to “save” the banking system and supposedly, thereby the economy. At least, that’s their argument to Congress and the American people. Hank Paulson and Ben Bernanke on news talk shows or testifying in front of Congress are constantly using the tired refrain of “helping the American public”.

The real truth is all this government and central bank meddling will do very little to help the average American. And in all likelihood, the economy will actually suffer from it.

Let’s take a look at some trends since Hank and Ben have been hard at work.

1. Unemployment is up…and getting worse…hurting those looking for work.
2. The stock market is in the tank hurting pensioners and others who live off of equities or dividends.
3. The price of gold is steadily declining as of March this year hurting those who were counting on this safe haven instead of stocks to provide for retirement.
4. Real estate prices are still falling hurting anyone wanting to sell or refinance and draining government coffers which depend on property taxes.
5. Consumer confidence is at all-time lows meaning retailers are screwed in the coming Holiday shopping season and the economy in general since consumer spending is what drives it.
6. All of the above is getting replayed in Europe and around the world.

Great job guys!

After months of governmet tweaks from Billion Dollar Stimulus Packages to Billion Dollar Bailouts to Billion Dollar War Spending…the economy is heading where it was always heading…south.

The cold, hard truth is government is not bigger than the economy. Government is not bigger than consumers. Yet those in power would have us all believing they are.

At the Fed meeting next week, Ben will lower rates again showing us just how much control over this economy he thinks he has. But this latest lowering of interest rates will do nothing to kick-start the economy…and in all likelihood is responsible for the stock market sell off this past week.

Every time Bernanke or some foreign central banker lowers rates he is signaling his disregard for future inflation. There is nothing more devastating to the real economy, the average worker, or the retiree than even modest inflation.

Be prepared. Many economists, pundits, and market watchers (including myself) believe a bigger stock market crash is coming since this massive inflation effect is already baked into the cake…it’s just a matter of time.

Of course, one silver lining of an inflation tsunami…real estate prices go up!

Photo Credit: hansol

Tags: bernanke, Central Bank, economist, Economy, housing, inflation, markets

With the Dow Jones Industrial Average having seen a steep decline along with most other major US and international stock indices, many American investors now are in despair about where they should position their investment capital. Meanwhile, the savings rate for American consumers has never been lower. As the credit markets continue to tighten and people have less access to spending cash this could further hamper an economic recovery.

The US government seems intent on doing everything possible to save the banks that are too big fail but they are also funding the high flying lifestyles and big bonuses of the Wall Street executives at the same time. For example, according to a Bloomberg report “Morgan Stanley has accrued $10.7 billion of employee- compensation expense this year, almost twice as much as its pretax earnings. The vast majority of this remuneration hasn’t been paid yet. Now it probably will be, assuming the firm survives through next month.” The outrage over tax payers funding the bonuses of reckless Wall Street traders with US taxpayer dollars should, in my opinion, be much more vocal.

It is one thing to raise a voice in a blog or to make a change with your vote in the presidential elections but I believe a much more effective means of protesting reckless corporate behavior is not to invest in the companies with your own money. An alternative to buying stocks from Wall Street is to invest directly in Main Street. There are numerous ways to invest directly in Main Street. One investment idea that is gaining in popularity for many is the purchase of an apartment building. It does make a lot of sense to have your money invested in a hard asset during times of inflation and economic uncertainty.

Here are some popular Main Street real estate investments along with their potential rewards and risks.

Buy a residential home and rent it out:

Rewards:

Prices of residential homes have declined dramatically over the last 12 months. You should be able to get a good deal. There are many foreclosures and bank auctions to chose from.

Risks:

Prices could continue to fall. Tax rates for residential homes in many areas are very high. Continued residential foreclosures could cause prices to remain weak for an extended period of time.

Buy land:

Rewards:

Land prices in many areas have remained somewhat constant. If you purchase land in a rapidly growing metro area you could see great appreciation.

Risks:

Raw land does not produce any income. Land is notoriously illiquid. This means that you may have to wait a long time to sell it when you need money. Prices of land increase and decrease rapidly. There is a lot of volatility in land prices.

Buy a shopping center:

Rewards:

Top national chains can be a source of predictable and stable income.

Risks:

It can take a long time to replace a commercial retail tenant. When you have a vacancy you still have to pay your taxes and insurance. More and more sales are taking place online. The future for commercial real estate in the retail sector looks very weak.

Buy an apartment building:

Rewards:

Apartment building investments can show a steady rate of return with stable base of renters paying monthly rent.

Risks:

If the economy continues to weaken many jobs will be lost. There will be an increased number of people who are unable to pay their rent.

Photo Credit: ckubber

Tags: apartment building, Economy, housing, main street, real estate investing, rental-property

It is time for a history lesson now that this thing called a bailout has been passed into what passes for law under this administration. To help me with this lesson, three well known gentlemen have come into the classroom to assist me.

So we don’t put the student body to sleep, I’ve limited each to one remark. I also placed the parameter of importance on their one remark. Of course, what is important to them may not be important to you.

All I ask you to do in the way of a quiz is to relate their remarks to your life in this modern America. The first guest is still with us today and is oft quoted because he is considered a guru in the field of economics.

Speakers Three…

His name is Milton Friedman. His resume is impressive and his remarks have impacted government world over.

What is your remark Mr. Friedman?

“The elementary truth is that the Great Depression was produced by government mismanagement [of money]. It was not produced by the failure of private enterprise.“

Thank you, Mr. Friedman. I feel certain both the class and myself can grasp the magnitude of your words. After all, most of us in today’s class reside on the private enterprise side of the ledger. At least we say we do.

Our next speaker, John Maynard Keynes, is no longer among the living. However, he still enjoys a wide following among our present day government elitists. Please tell us your remark Mr. Keynes.

“Lenin was right. There’s no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

I had no idea Mr. Keynes was going to mention a red, white and blue Communist so to stay politically correct let me hurriedly place my denials on the record and say that maybe Mr. Lenin was a member of an alternative political party and certainly not the main stream Democrat or Republican party of today.

After all, would today’s Dems or Reps pass legislation that would continue to enslave the populace and their third to fourth generation offspring? I highly doubt that would ever happen in modern America simply because it would continue the debauchery and that is truly un-American.

On the other hand, our currency is certainly debauched, isn’t it? I don’t know about you, but I’m in mental flux. Maybe I should not have invited Mr. Keynes.

Let’s move on to our last speaker. This gentleman passed away a long time ago but his remark is evergreen (some would say universal). It seems to be the foundational remark for political economics as we experience it in today’s world.

His name is Meyer Rothschild and many of you instantly recognize the name is the same as that in the House of Rothschild. Rothschild is their name and banking is their game. They have centuries of experience lending to kings, queens, prime ministers, dictators, etc.

Mr. Rothschild please make your statement.

“Give me control of a nation’s money and I care not who makes her laws”

Thank you, sir. If I comprehend the gravity contained in your words, what else is there to say about political economics and the laws of nations? And, if what I’m thinking is correct, your words could mean the Wall St banksters would benefit at the expense of the citizen in the event they robbed the said same citizen blind through phony and (probably) fraudulent securities.

Nah, can’t be, won’t happen in the U.S. of A. We would never allow our representatives to bail out their campaign contributors at our expense. After all, we ARE the free and the brave in that song everybody sings at sporting events.

Fuming, But Without Answers

If you guessed I’m still fuming over this ridiculous bailout, you are 100% correct. If you guessed I’m fuming over the in-your-face fact I will shortly see another avenue of potential revenue close, you are 100% correct. If you guessed I’m fuming over the fact we will see, yet again, another 98 to 99 percent incumbent re-election rate, you are 100% correct.

I don’t write these posts as political posts. I write them as financial posts under the explanatory umbrella of politics. It is the legals passed by Congress that get my blood boiling. I’m still waiting for them to pass laws.

This brings me to the subject of my next post – legal versus lawful. If, in my opinion, a person understands the very important difference between legal and lawful, a person will know why mortgage documents, for example, are merely “legal” but demand “lawful” money.

It is our money, our country, our children’s future and our heritage. Shouldn’t we, de minimis, at least fulfill our “lawful” responsibilities?

Photo Credit: srboisvert

Tags: $700 billion bailout, bailout, currency, Economy

Great. Taxpayers now own banks, investment houses, probably an auto company or two before long, and the British have shown that, despite having lost their empire, they still know a thing or two about handling a financial crisis that the U.S. and others can take lessons from…

But does this mean that people who were on the cusp of being kicked out of their homes are all of a sudden safe –if not sound–once again?

The wolf may not be at the door, but he is still lurking just around the corner, for sure.

We keep being told that these massive government measures are aimed at helping Wall Street as well as Main Street–and, to some degree, this is certainly true.

And yet, we still do not have a firm plan in place that has as its primary purpose the preservation of home owners facing foreclosure. The housing plan passed earlier this year by Congress still hasn’t had much of an impact. And, one can only wonder whether the government buying stakes in troubled banks will actually force them to amend the mortagage terms of their most troubled clients?

If banks are really going to use their new financial lifeline provided by taxpayers to extend a helping hand to home owners, why are they still so vigorously opposed to changing the bankruptcy laws to allow judges to amend mortgage terms to help people stay in their homes? Most experts think that is the best way to ease the housing crisis, so why are they trying to block it at every turn?

One can’t help but wonder whether the big banks will take the money and help themselves while giving the cold boot to the rear ends of cash starved homeowner/clients?

90 days?
Barack Obama is proposing a 90 day hold on any pending foreclosures, but is that really going to help much? Seems a bit like a band-aid being applied to a cancerous mole. But McCain’s notions don’t really seem better. So, on this front, it may just end up being a draw.

What should have Americans really worried, if they are not already, is the lack of political leadership across the board. Neither Obama nor McCain have exactly been ahead of the curve on this one. And, the Bush administration is apparently taking its bailout cues now from the U.K.–talk about Masterpiece Theatre!

The more things change, the more they stay the same?

The other day, I received in the mail an invite of sorts from WAMU–now Chase–telling me how I could, if I qualify, get a nice, cheap mortgage at incredible rates. Odd, isn’t this how we sort of got into this mess allegedly in the first place? I know, the bank will no doubt say that what has changed is that it will now actually try and make sure that it only lends money to those likely to pay back. But, one can’t help but wonder, what with the US government pumping billions into these institutions, whether or not they won’t quickly revert to their past practices? That WAMU letter I got would suggest that is a real possibility.

If it does start getting easier to get credit, then, it would stand to reason, those cheap homes now on sale all over the country should be bought up fairly quickly.

But homes prices are still expected to drop so , even if credit become more available, buyers may still elect to stay on the sidelines waiting…which would only bring home prices down more.

Also, some economists are now predicting–even with this massive bank rescue plan–that U.S. unemployment may rise to more than 8 percent this coming year! Not great news for the housing market, either.

Don’t let the current excitment fool you. We are not out of the woods. Not by a long shot.

Photo Credit: kyz

Tags: bailout, banking, banks, Economy, government bailout, mortgage, REO