Current State of Real Estate

Recently I have begun to dip my toes into the waters of real estate. I have tried to tame my urge to buy a beautiful home for my family to live in - But, I am slowly getting tempted. Why? Well a few reasons. Our place is horribly small, 920 sq. ft. We are outgrowing this place with more and more crap. And ideally, I want to work on a house, giving me projects to do over the weekend.

So, I began talking to a real estate agent, and I started hearing the same lame excuses as why it is a good time to buy - Real estate is lower than it's been in a long time, renting is just throwing money away, interest rates are lower than they've ever been, etc, etc... So, I started realizing what is going on in the real estate industry - and it is now time NOT TO BUY.

Here is what I see as problems and forecast for this.

#1: Interest rates are lower than they've ever been: Okay, this may be true. But, here is the truth of this. Affordability has increased due to the decrease in interest rates. What does that mean? Well, a home that is normally 200,000 at 10% has a payment of 1755.14 for 30 years. Now, when interest rates decrease to 5%, the payment then goes to 1073.64 making for an apparent 39% increase in affordability. These numbers are obviously not accurate, but for the simplicity of it, take it as a roundabout truth. With this, "fact", then more people can afford a home causing an increase in the demand side of home prices. The supply side must then reduce, causing a price increase. Therefore, with a reduction in interest rates, prices will rise... THIS HAS NOT HAPPENED: Prices have been reduced because of alot of varying factors. #1, personal credit has been shot. #2, the economy has shrunk causing real incomes to reduce, causing deflationary pressure on all prices #3, over building has caused increase inventory which has increased the supply side #4, the lowering of asset values has left people to walk away, thus increasing the supply side #5, foreclosures, etc increase supply side.

Sure, demand is rising, but not enough to keep up with the supply side. Moreover, with interest rates lowering, the prices should be rising, so effectively, there is a "real" reduction in home values more than what would be seen if interest rates have risen or stayed the same.


So, what is going to happen? The problem also lies in the fact that inventory
has been bought up, and speculators are coming out buying thinking it's a great time to buy - causing artificial demand. On top of that, we've had a moratorium on foreclosures, giving the false sense of inventory levels decreasing and an end to the real estate mess. So, where are we now? Now that the moratorium is over, we will see a rise in inventory levels. That will further depress prices, causing some to walk away from their homes if they lose value. The economy has yet to see it's bottom, and that may take another hit on people who have just bought a house believing their jobs were stable, and they aren't.

With interest rates being at historical lows, there is only one way up. With the government increasing it's debt size, the interest rates are going to rise due to default risk. Inflation is a thing of the past as there is not enough money chasing the number of goods produced, depsite the governments best efforts. (Think about this: how many trillions of dollars have been lost in the stock market from March of 2007 to the present? Now, think about the paper losses of real estate that have happened from 2005 to present - Next, think about how much the government is spending to help "revive" the economy? Yeah, it doesn't come close to what was lost). So, with the fact that interest rates are going to go up, that will cause prices to further be depressed. Many other factors are inclusive of this, but I am trying to keep it as simple as possible.

Now, let's think about down payment. On that $200,000 house at 5%, you'll need 3% for FHA or 20% for conventional. So, $6,000 or $40,000. Let's go back to our 5% rate 10% rate example. If interest rates double, let's assume real estate drops 39%, as evident by the decrease in payment. That then brings that 200,000 home down to 122,000. If you wait, your downpayment is now 5% or 33%. Your payment at 122,000 at 10% is the same as it would be at 200,000 at 5%, difference being that you now owe less...

So, anyone thinking it's a great time to buy a home - Wait it out... The recover won't be a V, nor a U - It'll more than likely be an L - And that is my prediction on real estate... We are a long way from the bottom.

:::Disclaimer:::

Greetings out there to all who are reading this. I am starting this new blog on blogspot because I like the format and the layout of it. Not just that, but because of search engine crawlers, it will be able to pick this site up, and hopefully get it publicized better than that of myspace - Plus, I hardly use that at all. Not just that, but it is much easier and user friendly. As a disclosure, I have not read those postings for years - I merely copy and pasted them into this blog. Therefore, I apologize if I offend anyone with my transparent language. I tend to speak my mind and the truth and sometimes fail to realize that it may offend people. So, if you have a problem, I will be more than happy to change it. I know I once posted on myspace a specific name of a financial advisor that I thought of as a douche because he lied to his customers merely to make his commission - I subsequently removed his name.

I have in the past 15-20 minutes transcribed all of my pertenant postings from myspace to help you understand that I am not new to this. I have been following the economy quite closely since 2002ish, and following the equity markets since 1998. The previous postings are written from an unbiased approach to the markets, as I have no financial interest in anything I speak of, and if I do, I explain what my interest is. I am not a cheerleader, and the underlying fundamental for myself is that there are certain times to buy assets and certain times to sell. I have been a stock broker for the past 4 years, been in the stock market since 1996 with my first mutual fund - actively traded stocks, mutual funds, options, and commodity ETF's since 2005. I have my undergrad in business finance and minor in economics. But, the basis among my rants is that I speak the honest truth as to how I see it.

I don't care about making money - If I want money, I will go get another job to get more. I am not motivated by money. I have cheap taste, my dream car being a Jeep Wrangler - which I have. I've always wanted a cruiser motorcycle - which I now have. I've always wanted an amazing wife - I have this now. I've always wanted a great daughter - I have that too. What does all this mean? I am not looking to grow my possessions, as that doesn't make a person. So, my rants, posts, blogs, whatever you want to call it - They all stem from an unbiased approach and look on the markets.

With that, I move to my first real post of this blog - the others are all from myspace that have been written over the past few years.

State of everything today

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Ladies and Gentleman, out there reading this blog right now - This will probably be my last financial blog, because I am working on economyandmore.blogspot.com - Check it out and comment...

I just went back through my past postings and realized, wow... I was right about just about everything going on in the economy. I made some dire predictions, and they were right. From the stock market falling, to real estate, to interest rates, and even unemployment. Well, why is that? It is simply because I speak the truth. I am not afraid of NOT making money based on my statements. In the financial markets, it's all based on fear and greed - the person to speak the truth is silenced in one way or another. But, the truth is that peoples actions and impulses are predictable and foreseeable. But, because people want to make money, they won't tell the truth. This factored in with the truth, it will always come through - the truth.

So, what is the truth today? People are losing alot of money. People have lost savings that they made over the past 5-7 years. People are scared for their financial security. Their spending patterns are changing because of this. Banks are being greedy - and aren't lending money. What is happening? The future will pan out like this. We are in a changing time. We are in a revolutionary period where people are going from spenders to savers. The reason being is because they have no more money to spend. Children are going to grow up in the next 10 years being more frugal than the generation just before that. Over the next 10-20 years, people won't spend like they used to and the economy won't grow like it once did. We are going to see massive deflation, prices will come down, but jobs will be hard to come by also.

You can tell the future by seeing the truth. Everything is a lie, but there is truth to every lie. And if you find that truth, you will see the future.

Truth of Mutual Funds

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Okay, so let me break it down for you, whoever is reading this. Mutual Funds Suck. Yeah, and the buy and hold strategy is shit too. Why do you ask? Brokers are trained to say day trading isn't good. Even if you miss 1 up month out of 2 years of day trading, your returns will be much less than a buy and hold strategy. You know what, if you want to hear all the rhetoric, just go talk to Michael Hanson from Wells Fargo Investments. He is full of shit. So, why do these people say such things if it is stupid? Well, a buy and hold strategy is merely a marketing plan that was put in place to make the mutual fund company money. In fact, I truly believe it is risk free business, and it is one of the best businesses to start - hence all of the hedge funds that have come about.

Okay, back to mutual funds - So, you buy in, they charge... you hold, as they say to do, and they charge... So, let's look at it on the flip side of things... If you are to have a mutual fund company and merely try and gain assets, you charge, let's say a modest 3% to get into the fund - Right then and there, that is great money. Then, every year, based on this proliferation of information saying to buy and hold, you will then charge 1% a year... That means that every year, you will be making money off of the amount of money brought into that fund. So, then, the sales charge gives you the commission to your sales people and the rest is just gravy...

Okay, so let's use a real life example. Let's take Dreyfus Technology fund (DTGRX). Just to buy it, you are paying 5.75% - Then, to hold it, you are paying 1.42% PER YEAR - Let's say you hold it just for 3 years - You need to make 2.875% to break even. To keep up with inflation, you need to get almost 6%. And that's just to start making money - Still, after taxes, you are going to lose. But, let's flip it around again. DTGRX has a total of $267,350,000 invested. So, just to buy in, the mutual fund company has made $15,372,625 and keeps making $2,673,500. per year for doing nothing more than managing money...

Okay, so they need to make money by managing it, understandable... But, what does managing mean? Well, depends on if it is Tactically managed (Which most funds are NOT), or strategically managed. What does that mean? Tactically simply means that they do what is needed when is needed to manage the portfolio. Strategically sounds really cool, but it means they have a strategy put in place that is set by default. Meaning that they choose to do a punt, but the situation arises that they could do a fake punt pass - they won't, because they have planned to take the punt... In other words, they are set to principles that are preplanned.

Okay, so it doesn't seem too bad. They rebalance the portfolios 4 times a year, usually quarterly. But, what do they do in the mean time? Well, they're making huge profits... Okay, so for the lay person, mutual funds are good... They allow the ignorant to invest with minimal hands on and, afterall, you tip your waitress 20% - this is just 1.5% - Well, maybe I should open up a mutual fund company...

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All things have an inherent value that fluctuates with many variables. For example, a fast food place that is working has an inherent value – it is nearly never at 100% efficiency resulting in a 100% possible value. The resulting problem lies in the fact that the value is reliant upon those efficiencies. The risks involved are the employee problem, the structure problem, the services problem and the problems that limits efficiency for example the infrastructure problem. In the problem with the employee, it is linked to the fact that employees more often times than not have different agenda’s than that of management, where the structure problem is the management that is implemented have problems. The services problem is that the utililties used by and for the employees isn’t stream lined nor is it possible to stream line it. The infrastructure problem is simply the problem that is caused by the infrastructure being mismanaged and leading to huge inefficiencies that run down the entire leghnth of the management. This leads to greater efficiency problems and can only be fixed from the top down.

Because of this, all businesses have an intrinsic value. Depending on the industry, market conditions, and other external forces – a business is only worth so much. But, within the same industry, there are internal problems that make the businesses worth more or less based on certain aspects of what is spoken of from above. Analyzing the corporate structure and how these inefficiencies are managed can result in an arbitrage situation where you are able to restructure management and cause an increase in it’s intrinsic value.

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I got a call the other day. It woke me up to the reality of the world. This call was no ordinary call. This was a call from the higher ups that I have spoken about once before. The call was to tell me that the bank needs more money. The bank is hurting for money, so regardless of your point of view on the economy and how the market will do - you must invest peoples money. By investing peoples money, a sales charge will therefore then be created and every year after that there will be a fee paid to the bank. Am I slacking in my numbers? Absolutely not. I have well over a million invested in this year alone. The problem is simply I am discouraging customers to put money into the stock market via mutual funds. I believe it is a great time to be liquid, or in short to medium term fixed income. There are theories that say not to time the market, that as long as you get in, that will be fine. However, I believe that there is no point to get in at a top when all of the clear indicators are saying the economy and the credit markets are tightening so much that the stock market is going to fall flat on it's face as all of the future potential revenue from corporations will dry up as the almighty spender begins to curtail it's spending by not making those purchases needed to support the economy. There are reasons why this is happening that I've written about before - but, it is getting VERY serious. So serious, the Federal Reserve is lowering it's target rate, now down to 4.25% - However, they are realizing this isn't doing anything, and are beginning to do something completely new by trying an auction to the banks for their money - to see how low the rate will go before banks begin to borrow to bolster the lending. The problem with the lending is that the risk is getting worse and worse and the banks have tightened their lending practices so much that the average person can't get a loan for a home. I am seeing this first hand.

So, now, back to my phone call. The problem that I had with the phone call is that I was told that I need to leave my opinions and advice to the side and begin selling regardless of my views - This I can understand. Afterall, I am in a position that is sales related. However, the problem lies in the fact that I can't bring myself to sell something that isn't worth the price they'll pay for it. I can now see how homes were selling for 400,000+ for a condo. (Notice I use the word were - they are dropping like a rock, and will continue to do so). The problem is that people don't care about one another. It's kill or be killed. The system is set up to take advantage of the poor and uneducated. The more uneducated a person is, the more likely they are to be taken advantage of. This could possibly be a reason why the public school system is going down the drain - the reason why there is no personal finance programs mandated in the public school system. The more ignorant one is, the more it is possible to take money from them. I think I've written about it before, but the entire system of going to high school with, "College Prepatory" classes teach you to go to college, get an education, and get a great job. Or, in other words, go to college - get in to debt - and then work for someones company because you feel so trapped by the debt you have you will then have to work for someone's business to help them make millions while you pay off those loans that are essentially are for a worthless piece of paper that gets you a mediocre job that barely pays for those loans - and then once you pay them off, it is pressured that you go to grad school to be competitive in the market and get a better position - but, let me reiterate. That is take on more debt so you can perfect your expertise so that you can be paid a little bit more to pay off those loans in order to make that business (owner) millions more while you are getting paid even less. Take those loans that you took out for school and plow them into a business that you would love to work at - not even that, just your dream, and you could possibly build your own business with all of those loans... But, taking on large amounts of debt is extremely risky.. right? Well, you're doing it with school...

Anyway, enough of that rant. But, on the other hand - The uneducated aren't proactive either. So, it's no wonder they get taken advantage of. I see hundreds of customers that are overdrawn on their accounts - and I try to teach them how not to do it... But they still do it. They must get that snickers bar at the checkout line... They must buy that scratch off lottery ticket... However, it's not just them. It is also everyday individuals that don't care to have a financial plan done. Why? They feel they are in control of their finances. Well, most of these people don't even have an IRA set up - They aren't saving for retirement nor are they ready. I am more ready than most of my customers, and I just started 2 years ago. So, why not take advantage of these ignorant, uneducated souls? They are asking for it. If I don't take advantage of them - there'll be another one that does and will profit immensely. So, why not help them, while getting a limited amount of their money, while the other person that would royally screw them (Real Estate Agent) ends up going out of business or not able to get that one customer I did? Afterall, the poor somehow always seem to stay poor. Why is it that public libraries seem to be in the poorer areas, and yet when you go inside, you don't see anyone except middle class individuals? Is it the education we give them, or is it that they do not want the education? Ignorance certainly is bliss, but the question remains - Do these people choose to be ignorant in order for others to take advantage of them, or is the system set up like that so that they have no hope because they don't even know?

These are the dilemmas that bother me. I am only one person, but can I save the ignorant and uneducated? Maybe I need to begin getting a share of this profit from the poor and uneducated. There are literally hundreds of millions of them, and there are only around 5 million or so multi-millionaires. Meaning, there is enough market share to take a bit from. Or, should I go the other route and increase the education and wealth of millions and take market share that way? Profit for myself, or help others profit?

Oh, and the next day after that conversation with that higher up, the DOW plummeted 300 points/2.5% - So, I guess I'm not too far off base.

The Financial Markets are Melting

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It's happening - The mortgage market is now coming to a standstill, as the largest lender in the U.S. is about to file for bancruptcy protection. Will the Fed let that happen? We'll see...

Bottom line is, with CFC coming to a close, this will cause thousands to be laid off. The refinancing of a property is now coming to an end because it'll be near impossible to do. ARMs coming due will not be able to be refinanced and those people will walk away from their homes or get foreclosed on. All of those people that have used equity loans and lines to buy investment properties are going to see their properties cheaper than ever thought possible, and when you're upside down around the million dollar mark, it doesn't matter how good your credit is, you'll feel the strain. Soon, banks will see defaults on their A paper, banks will be at risk, laying people off left and right to salvage their financials, and this will lead into a huge meltdown of the world economy.

What I have predicted in the past is becoming more and more evident, but the scary thing is that it's playing out a whole lot faster than that I anticipated. I expect us to be in a recession by the middle of next year, and the depression to hit, obviously 3 periods after that. But, this is going to be bad with millions of people out of work, and major banks going under. This is because all of the financing that banks have taken up and incurred are going to be defaulted since these people are going to lose thier jobs and not pay. When it comes to survival, credit scores aren't a big deal.

In the end, it'll get better as the stronger currencies of the other countries around the world will help boulster our economy with exports increasing to levels not seen since the 60s. This will cause a manufactering boom, and keep people employed, but at substandard living. There won't be anymore families purchasing a half million dollar home on credit with stated income. It'll be renting a small apartment, if they used to be home owners, or owning a small home.

Granted, this is all speculation that the fed keeps interest rates where they are. Who knows... It may change! But, at this point, the roaring 00's are over! The teens will be known as the GD2.

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I have been trying to figure out the starting point to my theories on wealth and the masses. I haven't come close to it yet, but I am closely examining the interworkings of society and what drives it and I have come up with new theories along with the overall - The fact that the economic cycles are in place to make the rich richer and the poor poorer and when someone is a threat to that status quo, they are either paid off and become one of them or are simply killed, as we saw with JFK and MLK Jr., and many others that we haven't heard of for this very reason, and which is the reason why I write on this blog, keep my profile private, and say what I say, because I have nor the power nor the money to be a threat, but is an easy kill, as no one would ever know my idelogies.

With my current thoughts, I have come to the conlclusion that CEO's and other top ranking executives are merely the generals in this battle. They are paid handsome subsities to control the wealth and power of those that I speak of, with no ends. The troops are you and I who are fighting this battle to attain as much money as possible in order to keep these people rich and powerful. Who are they? I Am still trying to figure out - read above. It wasn't until a certain time, which I am trying to pin point, that those people began to realize that they must appease the masses and put on a smoke and mirror show in order to make it so they are happy and content in the way things as to not entice a coup, rebellion, or any of the sort. This is most evident in the American society as we have more forms of entertainment than did anyone in the past. Romans used to have their shows in the coliseum, and many others have had their forms of entertainment. We have television, sports, etc, etc... and that is an excellent way to mask the facts that there are people controlling this aspect of our lives - And profit off the smoke and mirrors to conceal this identity. Small businesses are allowed to start up in order for the masses to feel a sort of empowerment as to appease the masses. When they get out of hand and people begin to think that they can make money and a life of their own, the status quo begins to break and that is when "inflation" or credit worthiness begins to deteiorate, and that's when it gets harder for people to start a business until a recession begins and people start losing their jobs and small businesses aren't able to profit because there aren't enough people with money - That's when the depression hits, which should be had every 60-80 years to clean up the people who think they don't need the system... Finally, the status quo is back in place and a whole new cycle begins of trying to have people stay happy by entertainment.

I recently began the theory that this ultimate starting point I speak of is inherently the shareholders of companies. Meaning, that everything makes sense, that the reason we push products and we do what we do is to increase shareholders values - which is true. But, then I realized that the stock market is merely a source of liquidity for these people that want to leverage themselves to make more money. Who profits from all of this? I am trying to figure this out. Who is in power? Why do I ask these questions - It's because the ultimate goal of any successful individual is power and money. You can't have one and not the other in order to be successful and be one of the elite that I try to find. Is Bill Gates one of these elite? I don't believe so, because he only has money. His power is limited to the extent of his wealth, and is limited to only his company. However, he has much influence on people and aspects of life.

Politics - I do want to get into, but the problem being is that my ideoligies will get me killed. It is not accepted to have these ideas. What must a person do in order to achieve a level of prosperity?

Capitalism... Is it working?

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I'm trying to figure out if Capitalism is truly the way to go. As an economist, I try to look at short term and long term effects of decisions. Capitalism, by nature, allows people to choose the best products, the most convienient prices, and adds to competition between suppliers of such products. With the competition comes better products and yet greater innovation, as the competition keeps trying to, "one up", eachother. In a perfectly competitive enviroment, the greatest market share will lead to the greatest revenue base to expand operations in order to increase it's R&D to advance their technological advantage over their competitor.

Okay, I'm done writing, I lost interest in this subject, but I have a whole theory on this if anyone likes to talk economics/politics

The horrible recession to come

The horrible recession/depression to come

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Welcome to another one of my economic blogs. But, this one is serious. Call it inside information, call it observances, call it what you will - Bottom line is that we're heading to a hard fall economically which will laeve us vulnerable on many fronts for economic subordinace.

It started today when I put in another equity application. This was the 4th equity that I put in this month like this. The customer had adequete equity in their home - about 100K. The value was stated by the customer about $550K, and the customer just refied with BAC for 420K - For those of you not in California, this is a normal thing... You still can't find a small condo for under 300K, at least not in the past... So, I submit the application. When I go to check out the details, the appraisal comes in at 450K. That leaves 30K of equity, and that leaves the customer not able to refinance their auto debt, their credit cards, etc, which they wanted to do. This is the 4 th loan like this. On average, the appraised value of the property came back about 70-100K Lower than the customer thought, or even Zillow.com said. Amazing.... BUT WAIT - So, I talk to Ricardo, the business specialist. He said that he is experiencing the same thing on the business end. Its harder to qualify customers.

Now, you have to understand, Wells Fargo is AAA rated by moody's and S&P both, and has the best credit rating. So, in light of the recent subprime debacle, I can understand them tightening credit - but this much? Apparently they are taking the low end of appraisals and being on the safe side of all credit lending.

Okay, so Wells Fargo is conservative. But, what is that to say about the future? Is Wells Fargo actually a leading indicator of what's to come? If so, the banks across the U.S. are going to tighten their lending practices - Which will decrease Consumption and Investment - Both contributing factors in the GDP, the benchmark to measure economic performance. This is not even taking into account of an economic downturn, or interest rates rising. This is merely the tightening of lending practices.

What does this mean? This will start filtering through the business community. As small businesses need to finance the inflating cost of goods, that is actually an affect of the increasing cost of capital that is passed on to the consumer/small business, that the small business won't be able to borrow like the could/should. This will start having the small businesses laying off people, which will start hurting the Consumption in GDP. Not only that, but the Consumption will also hurt because Consumer credit is getting harder to approve. So, for those that haven't taken out equity lines of credits on their home for emergency's, thinking it's there for a rainy day, it won't be, because they won't qualify when they get laid off. This will reduce consumption significantly that luxury goods will start decreasing. This will, in turn, put more people out of jobs and decline the economic activity even more.

The problem here is that we will be sliding into a recession and inflation will be rising, because the cost of capital is higher, and corporations will increase prices based on this. So, the government has already stated that inflation is more important than economic activity, so this will raise the probability of Fed Funds rate tightening. Once this begins to happen, we will see the real declines in real estate and the economy, and this is when the depression will hit.

Once this happens, it is inevitable that prices will come down, and deflation will take hold, and things will come back around. But, this is going to be a hard time for the United States. The biggest fear I have is that it will depress our economy so bad that we will be more vulnerable to take over, economically. However, if China and Japan quit financing our debt, then we will experience Germany during WW2 - Google it. With a lack of faith in the American economy, Government spending, another component in the GDP will also take a beating. This will set us into a deeper depression. Will this happen? I guess we'll see, but I doubt it'll get to that extent.

Bottom line is, things are a changin' - Stock are at all time highs, Real Estate is at all time highs, Bonds are at all time highs, commodities are near all time highs, and international stock markets are at all time highs... WHERE DO YOU PUT YOUR MONEY TO MAKE MONEY?!? ALl things correct after some time, and by correct I mean go down... It's the cycle of business and life. Unfortunately, I think that if we go into a depression, the whole world will as well, and we won't go into the deep depression I talk about, because we will work it out. So, hold onto your cash, be patient, and get ready for a downturn unlike anything we've seen in the past 25+ years... I'm thinking on the levels of the late 70s, early 1980s...

Real Estate Crash

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Real Estate Crash

Check out this article

http://www.bankrate.com/brm/news/real-estate/20060121a1.asp

Here is the deal... Real Estate is a renewable resource. i.e. All those people that say that land is scarce and there is, "nowhere else to build, so property values have to increase", are uneducated, ignorant fools. The price of a renewable resource is dependant upon it's demand - and the quanitity is inelastic and independant of that of the price. However, the quantity as described in the example above is the amount of homes actually for sale. As real estate prices become to come down, more and more people will be either trying to sell their homes in order to keep their gains, some will have to sell because they are upside down on their mortgages, and some will be foreclosed on. I believe the two latter will be the worst of this cycle and anyone buying into real estate from now and for the next 4-5 years will experience a horrible financial burden.

Here's the problem. Real Estate will not crash. It will be a slow leak that will not prove to be a problem until a home owner goes to sell. When they believe that the $500,000 home that they now have for sale is worth that much, but they can't get it, they'll wait for months to get that price, and only lower it in small increments. All the while, home prices will be falling and they will not see the pain until it comes time to sell - Be it having incentives such as paying the closing costs to even paying for people's moving expenses... Worst yet, those that have no equity, and are upside down are going to experience the biggest pain of all.

If Real Estate even corrects a mere 10%, which I believe it will be more than that, the price of the average Los Angeles home being about $500,000 will decline to $50,000 - Now, for those that have interest only loans that come due in a 5 year period now need to refinance, but aren't able to because they don't have enough equity. So, they'll either have to take a higher interest rate to do over 100% financing, not to mention the title insurance needed for it, or face selling at a loss, and now OWING the bank $50,000 for nothing more than trying to buy a house, and now in debt $50,000. As seen with the example above with the article - It is happening...

Welcome to the reality... Real Estate is dropping... Those that are trying to get in the game are too late... Those that have bought in the past year are screwed... Those that have bought over a year ago can kiss their equity goodbye. If you want to buy house now - I highly don't recommend it...

Good luck to all who like Real Estate.

Looking back in history

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It all started on 9/11/2001. The attacks on the downtown skyline of New York left a country in shock and the possibility of an economic slowdown was inevitable. People began thinking they should save for that emergency that all of the advisors told them may come. But, with pressure (possibly from the Bush administration – I am a conservative though!!), the fed began lowering rates below what they thought necessary to show that we are a strong country that can bounce back from an attack of those measures. This began the debt driven boom of the early 2000's.

With the cost of borrowing at it's cheapest levels since the 1960s, the debt driven economy began to expand. Memories of the stock market crash were fresh in people's mind, and people wanted to find an investment that was safe. Savings accounts were yielding merely 1-2%, money markets weren't much more… People began to realize that they could then save money by buying a home instead of renting. People began flocking to the residential real estate market to purchase homes. With the limited regulation, lenders began to find that this was very profitable and began lending to anyone who could afford it. Not before long, lenders then introduced creative mortgages in order to help those that couldn't afford a home, could now afford one by paying interest only over a certain amount of time. Laws of supply and demand played a part in the big metro areas, where people wanted to live the most – where the jobs were. Home prices began rising, and with that people began to feel wealthier. Inevitably, people began spending more as they felt like they could afford it. The roaring 20's couldn't match the early 00's, as the American dream became owning investment properties and renting them out. Jobs were plentiful with the spending habits of Americans and savings rates were the lowest in years.

There were moderate price corrections in parts of the country by the end of 2006, but it all started when regulators began imposing stricter policies to have lenders qualify potential mortgages. This sent a variety of lending companies bankrupt. Even the CFO of Countrywide said that 60% of their customers that had these creative mortgages wouldn't qualify under these new guidelines for underwriting. By mid to late 2007, there wasn't much of a change – But, the numbers were increasing in delinquencies of mortgage payments, foreclosures and prices of homes began coming down.

The economy began slowing down in early 2007, but the fuel for the boom became the anchor for the bust. The mortgage industry led to a large number of job growth. With real estate prices dropping, people began spending less and saving more, but what they didn't realize is that they already have forgone the majority of their future wages due to increased financing through vehicles, equities, and mortgages. As the economy became more unstable, the yield of bonds came down as the demand rose, and this gave people the idea that they could refinance their homes. For those that got in the game late, the price of their home dropped below the price they paid, and they weren't able to refinance at the lower rates. Not only that, but because of regulation, the ones that got into the game moderately late couldn't refinance because they couldn't qualify. This led to an increase in homes for sale and foreclosures, which brought the price of homes even lower. The homeowner had felt the effects of buying on margin… You can make a lot, but you can also lose a lot.

With consumer spending drying up, the economy slowing down because of this, and the price of homes dropping to a level never thought seen, deflation began coming into play. What was once a half a million dollar home was now for sale as a foreclosure or on deep discount. Many small businesses began closing because the prices that were demanded in the market place couldn't support the costs associated with doing business. This caused more unemployment and sent the economy into a recession. Since the majority of people already committed their future earnings to their debt through financing, people began to feel the pressure associated with financing. Some tried to seek refuge through bankruptcy protection, but because of the new bankruptcy laws, it made it harder for people to walk away from their debt. Unemployment was at an all time high because of the consumer spending drying up and the personal savings rate at an all time low.

It wasn't until the economy was seen unstable by the major bond holders – China, India, Japan, etc. Baby boomers began retiring and the strain of the unemployment on the federal government's revenue through taxation began affecting the national debt. There were huge amounts of money going out, and not enough coming in – because of the unemployment and the recession that the country was in. The government began raising taxes since they needed the increased revenue. The government also tried lowering the fed funds rate, but people were stripped too thin from their borrowing habits. The depression hit when the price of the bond dropped as the major holders began selling out because it was seen as too risky. The U.S. then didn't have the funding needed to support the programs that were in place to help those that needed it most during this recessionary period. The depression hit and hit hard. Spending was at an all time low and unemployment was at an all time high.

Laws of investing

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I am starting a new blog - Laws of investing. These are some of the things I have recently learned while trading... They are laws, meaning you must follow these when trading for your own account.

1. Never trade on emotion...
2. NO investment continually goes up forever... You can trade on the natural fluctuations that are caused by emotion, but you will never find any asset to continually rise.
3. NEVER get greedy. You know you are greedy when you tell yourself, "Just a little higher and I'll sell out". Take your gains and be satisfied you made money and didn't lose.
4. Never use limit orders unless you are up and want to hedge against losing your profits.
5. Never trade after the market closes so your trade gets executed the next day.
6. Never invest in illiquid assets for short term profits...
7. Buy what you believe to be good - Not what friends, coworkers, analysts, or anyone else.
8. If your stock goes down, have a set percentage it drops and then BUY MORE!!! If you are having second thoughts, see law #7
9. If you wouldn't invest in the investment you currently have because the price is too high - That's when you sell... If you think it'll keep going up forever - See rule #1, 2, and 3
10. Residential Real Estate in Southern California sucks for an investment as of 2007. Do not invest in residential real estate, even as an investment property that you'll rent out.

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... Education... Go to school and get a good education... Everyone has heard it before... You've probably heard it in the past few days if you're in school... Well, here's the reality of finishing school

- Once you finish with your degree, you're not guaranteed a good job... what more is that you're not even guaranteed a job...

- If you want a good job, you must go to a big name school like a USC or UCLA

- What is that going to do? Well, stemming from my previous posting... It's going to immediately put you at a huge disadvantage in that you are officially going to have a shit load of debt. Unless you come from a wealthy family that is able to pay $40-50,000 for a good education, you're immediately behind. MOreover, you're officially stuck in the rat race... You're in a job once you get out, and making payments to your new debt... Debt grows alot faster than that of assets, so you need to pay it off faster than it grows - which is possible.

Needless to say, why go to college? It is simply to be able to put something on a resume so that you become more marketable. It shows dedication and commitment, that you're not going to up and quit a job a few months down the road. Is it needed? Yes, to know a specific field of trade. Is it recommended? Well, it depends what you want to do. If you want to start a business, and you... Just got writers block... Nothing more to write...

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So, here is my thinking. Ever since I started working at the bank, I have found that the majority of the people in the world are not financially sophisticated. This isn't the fault of them, it's the fault of society. I am starting to believe that the reason for this is because that is how the system is set up. The rich are getting richer, and the poor poorer. But, why is that? What is the reason for this still happening to this day? Why is it that no one does anything about it?

To put it simply, it's because the system that has been tried and tested hasn't worked in the past. In the past, the rich was passed down the lineage of the family. If you weren't born into it, you were either poor or a nobel of some sort. If you were a nobel, that probably meant that you were intellegent enough to realize what the system was all about and could actually lead a rebellion against the rich/royalty. In today's society, it is similar, however the rich have learned from the past. You must appease everyone in order not to have a rebellion.

John Locke wrote about the right to life, liberty and property. He began this modern day society by way of figuring out the things that people would uprise about. You endanger people's lives, you take away their liberty and if you don't give them property, you are more apt to become another statistic of a rebellion of the massive amounts of commoners. There can only be a few rich and alot of poor, otherwise the system will not work. Adam Smith, I believe, came along and changed that from property to the pursuit of happiness, as this general definition is alot more loose and can't be interpreted as such.

We leap forward to today where you have a massive amount of people that are poor. Not by historical definition, but by living standards (And yes, I'm well aware of conditions in Africa - I've seen it myself with my own eyes. But, I am talking about the American society and the way it's set up, so don't question my theory, even if it is a conspiracy theory, because it does make sense if you look at it). You have a large majority of people living from paycheck to paycheck. But, where is this paycheck going? You need to analyze the expenditures that are being done and find a correlation to what is expected of the current living situation that one is in. By doing so, you will have my thesis that I am proposing.

Let's take, for example, the average person. The majority of expenses are going to living arrangements, mainy from their apartment, home, or condo. Most people have a car expense in the form of a lease or purchase. Then, they have their debt that they are paying, from credit cards to student loans to the simple utility bills. Sure, some expenditures are needed, but what are they for? The reason people used to uprise and rebel against the rich/royalty/whoever else you want to put there is because their living situation wasn't up to par. But, with the advent of financing, even the poor could afford a beaitufl place to live, resulting in a feeling of luxury. Why would you revolt/uprise when you are living in a place that is beautiful? So, forever until someone either pays off their home or has the money to purchase the home, a certain percentage of future wages are now being garnished. Then, you have your vehicle loan. The vehicle is one's own chariot. Before the advent of financing, the way to get from point A to point B was either by walking or by taking a form of public transportation. GM and GE found out early on that the sales of personal transportation was alot more profitable than that of recurring expenses for public transportation. This is proven with the dismantling of the red cars in Los Angeles - Yes, do your history and you will see that Los Angeles had the best public transportation in the United States, next to possibly New York. But, with the personal transportation afforded by financing, there was huge profits to be made. This also released the amount of liability and overhead associated with running public transportation onto the purchaser of the vehicle... The Dow Jones Industrial Average now begins it's ascent... The Automotive industry has taken off... With that comes electrical industry... GE and GM both knew this... That is just another way to garnish future wages.

Now, we look at expenditures on a smaller level. Most everyone buys items that are marketed. Follow the food chain up, and you have your huge corporations like P&G that are getting a large percentage of this pie. Invent a thing called a credit card, and you now have future wage garnishments for a longer period of time... Then, have interest rates on the oney borrowed that can be set to whatever the credit card company wishes, and you have even more mnoney to be had...

What am I getting at? People strive to be kings and queens... They purchase the homes, they purchase the cars, they purchase the items necesary to feel as if they are kings and queens, and in doing so... They are content... This is how the system is set up so that they do not rebel. The rich have the system set up so that they get the dividends of the massive amounts of poor people that are paying their payments to the rich and it filters through the system so that they get richer...

Okay, so now you have people that own their homes because they just sold in California and moved east and bought a home with the cash they made. Well, keep in mind the American dream is to own a home... Well, now it has changed slightly to not just owning a home... But, more than one... Owning property as an investment has the newest approach to being a king... Because, now not only do you have your castle, but you have your, "commoners" that are paying you, "taxes", in order to have a place to live. Who are the people really getting rich? It is the people who set up the system. Big corporations such as CFC (Ticker Symbol) that are collecting on the huge commissions paid by the kings and queens. But, how do you make it so that these queens and kings don't get too powerful and rich? Well, lower interest rates so that they are so low that even the most unsophisticated people can feel as wealthy as Donald Trump, and let them purchase alot of homes that they view as rental/investments... Then, come out with things called 5/1 interest only ARMS where you only need to pay a fraction of what you really should pay and have it reset in 5 years to a higher payment - Or, what it's going to do, is make alot of people go to sell their home since they can't afford the payments/they can't get renters to pay that much so they are no longer making money on their rental. Let these kings and queens get a taste of luxury, but then... Shut the door. When it comes time to sell, the king and queen have invested so much into such a sure thing that, "always goes up", that they end up worse than they were before and are now owing thousands to the bank... Well, that's where bancruptcy comes in, where there is more money to be made by the lawyers...

Okay, maybe I'm crazy here... Sure, there'll be those that become rich. What about the google guys? What about the youtube dudes, you ask? Well, those are the most sophisticated... So sophisticated that you must include them in the upper levels with you, or else they will be the leaders of the rebellion... Imagine what would have happened if William Wallace would have joined in the royalty? Scotland would still be apart of England... This is just how the system is set up. I for one would be more than happy to shut my mouth if I made millions per year... Because, after all, I am living great...

Well, wait... There is Bill and Melinda Gates that is giving BILLIONS of dollars to help... Well, where are they giving it to? What are they giving for? They are looking to help poor in Africa... Help cure diseases... Helping to bring 3rd world countries into the new age... I love it - I agree... But, who is going to benefit? Microsoft, of course!!! Increase the numbers of people to sell to... In fact, they'll remember the people who gave to them and then buy from the people they trust... Look at how Coca-Cola has been marketed ALL OVER THE WORLD...

The bottom line that I am getting at is this - The rich are getting richer, and the poor are getting poorer... Why? Because that is how the system is set up. The poor want to feel rich.. That's why they spend thousands on nice things that won't get them anywhere in their status in life... That's why they do drugs, because they want to feel like a million bucks... (Though, the rich do it because they can afford it and it does make them feel good). That's why people buy big homes with interest only loans... That's why they buy BMW's and only make $20,000 a year... They want to feel rich... Who profits from all these minute expenditures? The rich... a $1 profit margin on a bottle of coke multiplied by 10 billion a year is $10 Billion... Cut the overhead expenses and you have millions in profits... BUt, for who? For the shareholders... Who are shareholders? You and me.. and super rich people... It's a whole lot easier to make $500,000 from $10 Million than it is rom $50,000. I could guarantee you $500,000 per year if you had $10 million to invest...

What do I propose to do about this? It's very hard and near impossible to do. The system is set up perfectly... People won't rebel because they are happy with their state in life... They can afford to pay their monthly payments and have some left over for fun, which is needed... But, nothing left over for the future... In the meantime, they are stuck in their job because they need to pay those payments, or else ruin their credit which is the basis of everything... Otherwise, we need a paradigm shift in the way we think and realize that to get anywhere, we need to quit buying these big ticket items that are making people so rich... When we do that, what's going to happen? The economy is going to collapse and the almighty dollar will lose value. When you hear GDP is slowing, that means the rich are getting poorer. When that happens, the Fed lowers interest rates so it's cheaper for you and I to buy things, like houses and cars, so that we get sucked back into the trap... and the rich keep getting richer... Soon enough, the rich will become so rich and the rich so poor that we will be back in the days of England where we have the super rich controlling everything from the way we live our lives as not being able to build things onto our homes without permits (A way for the rich to get money), not being able to bring drinks onto airplanes (Further making the rich richer as we have to purchase things in a store) to what we say to what we eat (So much so that they will say that certain things must use pesticides in order to grow it better and healthier, and there will be bans on things like trans fat)... We will have no control because we don't have the money nor the voice... If we don't pay our payments, we will go to jail for fraud... We won't be able to do things like sell things on the street with paying a permit... We won't be able to live in a home we purchase for without paying a tax... A simple luxury as driving on the street will be regulated by taxes... Be it through the fuel we put in our car to the street we drive on... We won't even be able to go see nature without paying...

... hmmm... hmmm... This sounds increasingly realistic... Maybe I'm not that far off after all... hmmm...