Ask Dr. Christopher"Life After Money: Real Estate and Economics " (pg 5 of 12)

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G Second Warning: Deflation Ahead!

In our previous article and the first in this series we briefly discussed the prospect of an extended period of deflation in the United States.

Anyone dropping a cool 63 large just to close the deal and bring the house up to snuff legally, contractually and otherwise also remains subjected to elevated risks of a total loss of their so called investment which is now subject to unprecedented further depreciation and/or deflationary pressures as prospective buyers hold out anticipating that the purchase price tomorrow will be less than today. Prices at the wholesale level plunged by the largest amount in seven months at .6 [33] or annualized at 7.2% as of February of 2010. Deflationary spirals may continue leaving previous purchasers and current homeowners awash in red ink.

Deflation in Japan continues unabated for a second decade. The advantage of deflation is that the currency will appreciate in value and consumers will spend less to maintain their standard of living.

Eventually a bottom in the Real Estate market will be marked by the entry of cash only buyers who can opt out of garbage insurance products choosing to self-insure while pocketing tens of thousands of dollars in savings. Their motives to purchase the home exempt from scrutiny is pure even if speculating as the transaction is debt free and unencumbered by a hosts of add on expenses designed to ‘protect the lender;” Property taxes and maintenance represent two of the few remaining liabilities for these buyers.

We love Deborah Farmer of Starlight Realty in Tampa, Florida who said: “If you don’t have a job you’re not going to be able to buy a new house” [9]. Can we say the same thing for health insurance Deborah?

Rob McIver, co-portfolio manager of the Jensen Portfolio in Portland, Ore., doesn't own stocks of homebuilders because he doesn't expect a sustained recovery in housing until the job market improves. With the job market still shaky, people won't have the confidence to buy a home. And many people still won't meet tighter standards for mortgages [36]. Please reference part I of this series for more about Labor Economics.

Taxpayer on the hook for trillions of bad real estate paper!

In their arrogance our fearless financial leaders have doubled down on a heavily subsidized and losing industry. We have transferred up to six trillion+ of dollars {$6,500,000,000,000.00+} or more of mortgages to the balance sheets of Freddie Mac and Fannie Mae. Both formerly private or semi-private corporations and both de-listed from the New York Stock Exchange so if interested in speculating in either Fannie Mae or Freddie Mac over the counter is your new access space FNMA.OB and FMCC.OB now trading basically as options.

Many of these hopelessly underwater mortgages are worth less than the face value of the loan. We continue to subsidize failure by offering tax credits for first time home buyers. We were required to take a real estate course in college but we had no idea that the marketing of real estate and real estate law would mushroom into such powerful industries over the last two decades. Where we come from; we lived in our home for what seemed like forever and loved it as a place of nurturing, stability, love and growth. We failed to comprehend the value and concept of flipping illiquid assets like houses {except on monopoly boards} no document loans, straw buyers, or purchasing a home for any purposes other than residing as a principal residence to live and raise a family in a safe nurturing environment.

Did we mention we love our Real Estate Agent? She sold our home at 5189 Ridge Heights in Las Vegas, Nevada in one day! We suggested she not purchase any additional properties as “rentals”. But she didn’t listen. Las Vegas now leads the nation in home price declines year over year with a stunning drop of 26.6%. [3] Approximately seventy percent 70% of residential homes in Las Vegas retain negative equity. [4]

We appreciate an industry that provides an opportunity for persons sufficiently motivated some with doctorates or master’s degrees {as our agent} and others with little formal education the key ingredient the daily reflection of a positive attitude, sincere desire to help people and of course the willingness to drive innumerable prospective clients, seeking their version of the American Dream, around town each and every one of the remaining days of your life.

We love the way agents dress as very classy and the cars they pilot which were almost always worth a second look as were their drivers, but remain adamant in our opposition to subsidizing any industry as a means to manipulate or influence human behavior.

Social engineering is beyond the comprehension of man and the costs of failure may imperil the very solvency of the republic as we are witnessing now; this administration unable or unwilling to comprehend the pain, suffering and ruination borne in some degree not just by the fringe of society but by almost everyone who remains a homeowner with mortgage debt; their equity since incrementally vaporized over the last few years.

Instead this President blames previous administrations and remains committed in his exercise of zealotry fervor to subjecting the crown jewel of American business referred to as healthcare reform the same fate; the true definition of insanity. Please Mr. President allow us an opportunity to bury our dead and administer to the dying victims of this financial tsunami and then move to higher ground prior to creating another bubble in health care where the iron rule of unintended consequences shall prevail once more.

Few industries remain more regulated by the Federal Government than oil and gas. We can’t wait for the catastrophic failure induced by Healthcare Reform replete with additional heavy taxation for projects and spending, you have determined are good for all of us, to really rip into what’s left of our economy.

Art Laffer described the coming debacle in 2011 as a train wreck. We invite Americans who want to see the effects of economic decline catch an Amtrak from Seattle to Portland or from Orange County California to Chatsworth or anywhere else where the train slows and accelerates to view the economic decline of “Lost” America sometimes only blocks from the high rises and gleaming towers of Chicago or New York, although for photo op purposes on Yahoo and other links we remain fixated on shiny steel structures; a form of access denial if you will.

It’s one thing for President Obama to acquiesce to his inner spiritual demons, smoking addiction, ignorance of economics, promotion of false hope and overexposure all while driving his career to ruination over the cliff; we just prefer not to tag along. Can you stop the bus so we can get off; or at least slow down long enough for us to jump out the emergency back exit. When the alarm is activated you’ll know we’ve departed so you can roll unattended into historical oblivion.

Breaking up is hard to do

The marriage may be over but the home is keeping them together. We have witnessed numerous television reports of couples who maintain the same address but little else; their future and financial survival reliant on each other and a recovery in the housing market that may not be forthcoming for years if not decades to come.

Americans remain delusional about the value of their homes according to Robert Shiller’s survey regarding the long term trajectory for house prices [5]. So what is a married or recently divorced couple sharing their former love nest and floor plan to do especially when neither one wants the home now that it’s a liability instead of an asset?

We remember years ago when a Judge awarded one half of their home to the divorcing husband and one half to the wife. The husband departed and was last seen with a chain saw cutting the home in two from top to bottom. We also recall how splitting couples used to fight like hell to keep the house. My how times have changed; you keep the house, no you keep the house! This means that couples who divorce and remain together in their home are splitting liabilities instead of assets. [15] If the couple decides not to live together the remaining spouse must refinance the mortgage which is the only way the bank will allow the other person to leave, otherwise the departing spouse is equally liable for the entire mortgage. If there is negative equity it is most difficult to refinance the home. [16]

Help I’ve fallen; my house is on top of me and I can’t get up!

Waiting out this financial storm while residing together is financially efficient and may lead to reconciliation but sometimes we must seek help outside of ourselves as in marriage encounter, other marital restoration therapy or 12 step based recovery programs many of which are free! Our personal favorites are Codependents Anonymous and Adult Children of Alcoholics.

Couples or any homeowner can rent their house to an uninterested third party so they can move, however when we considered this option not for divorce but to purchase a home in Maine, friends of ours warned us that when the house is returned to us upon expiration of the lease we would probably have to invest upwards of $25,000.00 to rehabilitate the property from wear and tear or rental depreciation.

Short sales offer the advantage of unloading the home for less than the house is worth thereby limiting further price depreciation accruing to the seller. The downside is that remaining debt remains with the seller. Savvy homeowners may request that the bank accept a cram down and forgive a portion of the loan which the bank may consider as less expensive than processing a foreclosure or extending the terms of the mortgage which only buries the mortgage holder with more debt as part of their new {40} forty year note.

Think of foreclosure as not the end of the world but a vehicle of escape from a dream turned nightmare. Please remember it’s not the house’s fault so please respect the old rule of leaving the world a better place than when we arrived. In this case we should respect the home where we laughed, cried, slept and some of us died. The spiritual energy we leave should be respected and the structure left in immaculate condition. Cleanliness is next to Godliness!

Pouring concrete in the toilets, punching holes or painting graffiti in or on the walls and in one case off of Tropicana Avenue in Las Vegas lighting fireworks inside the house is not conduct becoming of any person. Repeat after me! “I am not my stuff and I am not my house” Now look in the mirror and practice this verse daily. You are a child of omnipotent almighty God; please act like it!

Please check back for our upcoming article number IV in this series regarding Credit and Debt on how to restart your life after disaster strikes.

Homeowners Feel the Power: [16]

Financial Weapon System #1: Cram Down

Financial Weapon System #2: Strategic Default

Nothing runs faster then a scared banker especially when a homeowner invokes these terms. We were talking to our branch manager one afternoon and he told us a story of how another client asked him what would happen if he gave his home back to the bank. This conversation transpired in late 2008. Our banker accessed the account of the inquiring soul and when he realized that the loan was current he informed the gentleman that his loan was performing and that there was no problem. The client responded that he didn’t care and intended to dump the home and walk away. That day we learned the meaning of the phrase “strategic default.”

Now some 500,000 persons have utilized strategic defaults to leave a home that they could afford but chose not to carry as a “dead asset” and liability on their personal balance sheet. Over {5,000,000} five million homes remain 25% or more underwater [28] which means the home is worth 25% less than the amount owed to the bank. How many of those homeowners will simply send their keys back via “jingle mail” and walk even though they are not in arrears and can afford to make the payments? If only 10% of the owners of these affected properties exercised a strategic default then an additional 500,000 homes would instantly become bank owned a true nightmare scenario for the deed holders.

A performing loan that instantly goes bad may qualify as a bank breaker especially if the bank has continued to retain “toxic assets” off balance sheet rendering many institutions as functionally insolvent; therefore because the bank chose to play stock market roulette and failed to take an immediate write down on non performing loans their resistance may also represent leverage to you the homeowner if your loan is current and you retain negative equity in your home.

Any homeowner in good standing can approach their banker and request a “cram down” where in lieu of exercising a strategic default the bank is willing to reduce the mortgage by an amount equal to the negative equity in the home usually up to 25%. The cost is less for the bank than rehabilitating and marketing another foreclosure so everyone wins! But one must plan in advance. Don’t expect your banker to meet you at his or your door with wine and roses as this excerpt suggest with the implementation of a new Obama program that pays people to short sale their home and receive $1,500.00 in relocation assistance to do so. The program will commence on April 5, 2010. The previous $75b homeowner assistance program only helped 116,300 homeowners in the last year. [22][25] However J. K. Huey of Wells Fargo told the New York Times: “This is not an opportunity for the customer to just walk away”….“If someone doesn’t come to us saying, ‘I’ve done everything I can, I used all my savings, I borrowed money and, by the way, I’m losing my job and moving to another city, and have all the documentation,’ We’re not going to do a short sale.”[23] Wow! Do they need to leave their clothing with you too and walk away wearing a barrel?

Life After Money Real Estates Economics:

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