After the Bust

Ok, now I understand why this healh care plan is going to be so expensive.  12 million foriegn aliens are going to get free coverage, yes, that makes sense.  If we buy some additional printing presses the U.S. Mint can run the ones that we already have and the new ones faster, and we can print enough money to cover everyone with health insurance in both North and South America.  Why not?  It’s a great idea.  Talk about good international relations!

I guess not guarding the borders well will now be a whole lot more expensive than it used to be.  For every undocumented alien who gets into the U.S., the health care cost will just keep on going up.  I have to say that if I were thinking about moving back to the U.S. given the proposed coverage I would do it for that alone.

It used to be that being a citizen of the U.S. meant something, but I guess that now it does not.  I can hardly wait to hear what happens when they turn away veterans and people who are paying massive taxes because the services are being soaked up by those who are here illegally.  That should turn out to be an interesting sight.

I don’t know about you, but I think this is a terrible proposal that has been added to the plan.  Health care coverage was never supposed to be about taking care of everyone, it was about taking care of U.S. citizens who could not afford coverage.  If we do not know who is a citizen, that is a failure that must be fixed before we move forward.

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If you are trying to follow where we are in the real estate cycle you may want to check out “The Big Picture” at www.ritholtz.com and specifically read the recent post on the blog at http://www.ritholtz.com/blog/2009/07/why-housing-isnt-yet-bottoming/ it has some great arguments about why we are still headed down.  Sadly, I agree with his assessment.  He published the following chart on his site which dramatically displays just how bad things are historically:

As discussed on this site within other posts, there are some who believe that we will not turn around this mess without having housing prices stabilize and turn back up.  There are just too many people who will continue to hit deep negative equity water and dump more real estate onto the market.

I really don’t expect to see prices continue to drop at 32% or more per year, which has been the case here in Las Vegas.  The prices are likely to continue to decrease in price at a decreasing rate.  Las Vegas, unlike many other cities, is adjusting quickly to price drops and my expectation is that we will hit the bottom sooner than many others.  That could occur when home prices find their way below the cost of construction or below their expected or forecasted value based on historic trends.

At some point the psychological aspect of the housing market will change, and assuming credit is available, there will be more people willing to consider a purchase.  The fact that things have fallen so far is of course going to stigmatize the entire market for quite a while. 

When will it happen?  That’s the trillion dollar question that no one can answer.  In Las Vegas we are already seeing many properties sell below what it would cost to construct them.  When you get to about $ 70 per square foot for an average home here, you are near or below the cost of construction (which includes the lot and site improvements).

Popularity: 6% [?]

The unemployment rate in Nevada hit 12.3% the other day and I have read that it is at or near 15% in Michigan.  Nationally we have hit a 50 year unemployment high that is climbing, and there are nearly a million and a half people not counted as unemployed because they haven’t searched recently for work.

When you consider the fact that the unemployed are staying that way for a longer and longer period, you can begin to understand why polls are saying that there is an “erosion of confidence” in our economic system. 

The problem is that there are no real signs that things are turning around.  The Press wants to jump on anything.  If a dog barks, or home prices stabilize in Beverly Hills, it must be an economic recovery.  In reality things are likely to get worse in 2009 with continued housing market problems and a new wave of commercial defaults and foreclosures coming our way.

No one really knows if 2010 will end this down market or if it will take much longer.  Real estate cycles can last decades.  In Las Vegas we have been told that there is a 5 year supply of commercial buildings, condos and homes that will have to be absorbed in order for us to return to normal.  Unless we see a mass exodus from California, which is not entirely unrealistic, it will take much longer than most people are willing to admit.

I’m not trying to be negative here, just report some dire information about our economy and the direction in which it is headed.  I am looking forward to the time when things get better, but it appears that we have to prepare for more pain not less.

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The Wall Street Journal had an interesting article today authored by Stan Leibowitz entitled  New Evidence on the Foreclosure Crisis

it’s an eye opener because the article identifies negative equity as the main cause for mortgage foreclosure, not mortgage rate changes or unemployment, which many thought were the reasons. 

It is important to understand that foreclosure are happening because people are finding themselves in debt holes that are so deep that it would take them decades to get out of them, and rather than spend every dollar that they earn trying to make it right (pay it back), people are just walking away.

I imagined that most of the defaults were being made by individuals who were being forced into foreclosure because they could not make their mortgage payments, but negative equity foreclosures are made by people to proactively elect to default.  They are simply trying to better their financial situation.

I can identify with people who don’t want to be straddled with hundreds of thousands of dollars of mortgage debt.  It was fun buying the Mercedes and touring Europe, but when property values dropped and you find that you have to pay it all back, that is just downright brutal, right? 

Based on this new found knowledge, I will again speculate that the American people will elect to default on their large mult-trillion dollar debt in the next several years rather than pay for it via huge tax increases.  California is effectively defaulting its 24 billion budget shortfall via its I.O.U. program.  They should be starting from scratch with a zero based budget, and kill progarms that they just can’t afford, but in the American tradition they would rather default that accept the fact that they simply could not afford them.

Popularity: 8% [?]

I still do some business, but I’m not as active as I once was before the “bust.”  What I have seen in my limited sampling of the business world is a dramatic increase in slow pay no pay situations.  It seems like the guys who used to pay in 10 days are now paying their bills out at 45 days and the guys who did net 30 payments are paying in 90 days.  That affects me a bit, but I don’t have a huge number of invoices outstanding at any given time. 

The slow pay trend must be having a nasty impact on larger businesses with many outstanding  invoices.  If many companies are delaying their payments I could see how a slow pay trend could cause a great deal of pain.  This is kind of back to the “house of cards” argument that I talked about in some other posts on this site.  If enough companies start doing delayed payments, its could very well crash others by destroying their cash flow.

I guess that slow pay is better than “I.O.U. pay” that is planned, and may have started, in California.  Myu problem with their plan is that I can’t eat an I.O.U. and I can’t pay my grocery bill or power bill with an I.O.U. either.  I’m interested in seeing how the open market discounts California I.O.U.’s if they hit the street.  California gives you a paycheck for $ 3,000 and you sell the paper for what, fifty cents on the dollar?  Whatever the discount turns out to be, the people who receive them will still have to peddle the paper to buy groceries.

For all of the money that has been dumped into the economy of late by the government I’m not yet seeing a lot of it in circulation.  As discussed on this site, there is a lot of bank hoarding and investor hoarding of dollars.  I still think that it is just a matter of time and all of that money will start to chase hard assets.  We shall see.

Popularity: 10% [?]

The lines are being drawn for the Senate battle on Mr. Obama’s health plan.  I know that the government systems that I have seen overseas provided inferior quality, inferior to what most of us have come to expect from our system.  On the other hand, I have seen my health insurance increase to the point where it makes my mortgage payment look reasonable.

So part of the question is, do you want to continue down the path that you are on, with private health insurance companies taking huge profits and increasing premiums to the point of absurdity, or should things change?

The war of words going on in the press today has pitted the greedy insurance companies against inept politicians.  The insurance company representatives, usually highly paid Doctors, keep telling us that the government will turn out to be worse than they are.  I think that is rich, don’t fall for government control of the health care system because they will screw you worse than we have . . great defense guys. 

While there are some individuals who are lucky enough to have lifetime coverage, most of us will hit a point where we can no longer afford it.  I have read that you need $ 200,000 to $ 300,000 in savings just to pay health insurance premiums if you want to retire.  That means if you are not one of the lucky few who have paid lifetime coverage or who can pay the discussed premiums from savings you will also suffer the same fate, health insurance cancellation.

Personally I don’t think the argument that doctors will leave the industry in droves because they won’t be able to get rich is a farce.  If you provided even a portion of the excess that is going to insurance company profits you could increase what doctors received, and then maybe they could make more decisions based on what is best for patients and not on what is best for the Big Bucks Insurance Company profits.

I hate to see more government intrusion into the health care market, but if you talk to people who think the government is there as a last resort to help them, for example veterans or helpless elderly individuals, you will find that they are shunned if they can’t pay monster premiums.  Many people are fooled into thinking that existing programs help people when the help is minimal or non-existent.

The question, do you need health insurance, can more easily be answered with a resounding no than an impossible to achieve coverage yes.  If you can see in the relatively short term future that health insurance premiums, that now cost a typical family at or above $ 8,000 per year, may become unaffordable.  Then there really isn’t much decision making with regard to the changes being presented.

Popularity: 9% [?]

Three dollar a gallon gas is not a welcome sight at the pump, not when unemployment is nearly 12% and home prices are falling at 2% per month.  On top of everything else, we here in Las Vegas just got hit with a fat 7% electricty rate increase.  When you live in the desert and the temperature at times hits 115 degrees you don’t have a lot of choices about paying for power, you either pay or suffer the physical pain. 

Looking to the short term future I would say that things are going to get worse before they get better, and I consider myself to be a relatively optimistic person.  Las Vegas is seeing double digit decreases in sales tax income, visitor volumes are consistently down and have you checked to see just how far room rates have fallen?  You can stay in the Wynn Resort or the Belaggio this Summer for less that it costs to stay in a Ramada Inn in upper Michigan. 

I guess that the bargains are the upside to all of this insanity.  Fewer travelers means that you can play “lets make a deal” on a wide range of travel products and services.  Almost every cruise line has a major discounts going on their cabins and on their on-board credits.  The discounts are much larger for 2010 cruises than they were even for 2009.

I have seen flight / auto trip combo packages to Ireland that include airfare from NYC for $ 249!  That’s a bargain price even for those of us who are suffering through these slow times.

Local Las Vegas restaurants have joined in the discounting frenzy by offering $ 50 dining coupons at discounts of 20% to 50% off, and if you have shunned the shows like The Beatles or Jersey Boys, its time to take a second look.  Like everthing else, there are some great deals around.

Its not much of a silver lining, but maybe some of the bargain discounts will get you a vacation or a dinner that you thought you couldn’t afford.

Popularity: 5% [?]

I read an article by Martin D. Weiss, PhD entitled “California Collapsing” on the Internet, it is located at http://www.moneyandmarkets.com/california-collapsing-34271 and it is an eye opening report.  I knew there were some serious problems going on in the state but an 11.5% unemployment rate and a $ 24.3 billion dollar budget deficit were surprising numbers to discover.

With a mind numbing budget crisis, crushing debt, high unemployment, commercial real estate defaults increasing and a new wave of mortgage resets with 50% to 80% defaults likely in the home mortgage market, it is going to be a rough ride in the short-term future and in Dr. Weiss’s opinion there is ” a very HIGH probability that California will default.”

It has been my opinion that we would inflate our way out of our massive debt, but a default by a major state like California would solve their problem and possibly others much quicker.  Sure it would devastate a lot of people’s lives, but the government has already decided that a California bail out is not as important as the Wall Street bail outs since it has repeatedly turned California down flat after several requests for additional funds.

I have not been in favor of any bail-outs, so the near trillion dollars that was set aside for them has always seemed more than a bit unfair.  Many have asked, why bail out Wall Street and not states?  The default of a huge state government would bring with it an extremely bad precedent that may be followed by a number of smaller defaults.  I expect that the default of California would bring a number of other defaults, a virtual “house of cards,” that would be even worse for the general public than that which came from the Chrysler failure.

Popularity: 9% [?]

Just when we needed the government to recognize that their involvement in the private sector caused the current banking crisis and the subsequent recession, due to political pressure that caused funding to flow through Freddie Mac and Fannie Mae like it was water, we now have them meddling in the valuation business.

Nevada’s establishment of new Broker Price Opinion (BPO) rules that take effect on July 1, 2009 will allow about 20,000 real estate agents to express “price opinions” upon which decisions will be based by buyers, sellers, lienholders and third parties “making decisions or performing due diligence related to the potential listing, offering, sale, exchange, option, lease or acquisition price of a parcel of real property.”  In other words, for almost any purpose besides an application for a new loan.

One might ask, “are there any special qualifications required of an agent beyond the 1 or 2 weeks of real estate training required of agents for licensing to express such opinions?”  The answer would be no.  One might also ask, “is there any penalty for unqualified agents expressing opinions that are in error, and that may cost buyers, sellers, lienholders and others thousands or millions of dollars in losses?”  Again the answer would be no.

So what the Nevada State government has done with this law is allow the entry of thousands of untrained individuals into the valuation business at a time when valuing real property has become more difficult than it has been in the last 10 years.  Who exactly has this law been written to protect?

I have been a real estate broker for over 30 years and in 1991, after our country’s first financial fiasco with Savings & Loans, appraiser licensing was adopted based on a federal mandate.  The appraisal business has come a long way since then, and appraisers are so much better qualified than agents with regard to the valuation process that the professions have parted ways.  By allowing any real estate agent to act as a value expert is a giant leap backward.  

One wonders if this new law and its timing has anything to do with the fact that appraiser’s have not been willing to provide market value opinions high enough to support higher listings and the upward pressure on prices (see “Realtors Say Low Appraisals Sinking Deals“).

For those party’s buying “broker price opinion” products from real estate agents in Nevada, I guess the government has set up a situation for you where its “let the buyer beware.”  An army of unqualified real estate agents will be giving you a chance to purchase their opinion, but if it’s inaccurate you only have yourself to blame.

Popularity: 17% [?]

The auto industry in earlier times employed over 600,000 individuals and after the bust there may remain a force of only about 40,000 employed.  What does that mean for Michigan?  The State is looking at huge budget problems trying to meet the tax shortfall that will be created by the job losses.  Police, schools and emergency services may be hit hard.  Healthcare will suffer, retail sales will plumet, property values already down will become frozen and drop futher and a wide array of support jobs will vanish as the “multiplier effect” that comes into play when core jobs are created works in reverse as auto jobs are lost.

The liquidation of well over a million vehicles, in what has been a poor market for vehicle sales, will negatively impact Ford and foreign manufacturers.  Some have predicted that the sell off will cause massive layoffs as production is decreased, and that prices may increase on other vehicles in response to the disruption.

While no one knows just how bad things will get, it is clear that even under some of the most optomistic scenarios Michigan will be suffering over the next several years, and Michigan’s losses affect us all.  The black hole that will be created by primary and secondary job loss in Michigan will ripple through the State and adjoining states.  The job losses from the closure of hundreds of dealerships will hit many more states at a time when job retention is critical. 

There will be more waves in time as iron ore mining, steel, aluminum and parts manufacturing plants are hit.  Regardless of your ideology regarding the necessity for the market to allow such failures, expect the adjustment process will be painful for many.

Popularity: 10% [?]